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Fannie, Freddie Summit Preview

Posted by Larry Doyle on August 16, 2010 4:03 PM |

In June 2009, I highlighted the expectation of massive losses within Fannie Mae and Freddie Mac in writing Uncle Sam’s Dirty Little Secret. Fourteen months and hundreds of billions of dollars in losses later, America awaits to see how our ‘wizards in Washington’ will look to deal with these housing ‘wards of the state.’ Tomorrow, the Obama administration hosts the “Conference on the Future of Housing Finance.”

In anticipation of this conference, this past April the Obama administration had asked for input as to how our housing finance system might work. I wrote then (and would like to resubmit now), Sense on Cents Responds to Obama Administration Request for Input:

President Obama wants input on the reform of the housing finance system. Given my career, I consider myself eminently qualified to give it to him. Despite this request, though, I still think he should focus on job creation (which he highlighted during his State of the Union address).

I welcome giving President Obama, Treasury Secretary Geithner, and the rest of the the White House economic team a very healthy dose of Sense on Cents. (My response is a little lengthy, but it is not everyday the President gives us this opportunity. Out of respect, I owe him my best effort.) I will let you know if they respond with anything more than a form letter, or if they do not respond at all. From the U.S. Treasury today:

Obama Administration Seeks Public Input on
Reform of the Housing Finance System

WASHINGTON – The Obama Administration today released questions for public comment on the future of the housing finance system, including Fannie Mae and Freddie Mac, and the overall role of the federal government in housing policy.  The questions have been designed to generate input from a wide variety of constituents, including market participants, industry groups, academic experts, and consumer and community organizations.  The questions will also be published in a Federal Register notice requesting public comments, and information on the process for submitting comments will be included in that notice.

“A well-functioning housing finance system is critical to the long term stability of the housing market,” said Treasury Secretary Tim Geithner. “Hearing from a wide variety of perspectives as we embark on this process is an important part of establishing a more stable and sound housing finance system for the American people.”

“This open process will help shape the future of our housing finance system,”said U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan “The Obama administration is committed to engaging the public as we consider proposals for reforming the housing finance system in the context of our broader housing policy goals, and the best steps to get from where we are today to a stronger housing finance system.”

The Obama Administration will seek input in two ways. First, the public will have the opportunity to submit written responses to the questions published in the Federal Register online at www.regulations.gov. (LD’s edit: This link is an absolute joke. It is anything but user friendly!! I’d bet money there are less than a handful of comments submitted nationwide via this maze!! How do you spell disingenuous?)

Second, the Administration intends to hold a series of public forums across the country on housing finance reform.  Together these opportunities for input will give the public the chance to deepen the federal government’s understanding of the issues and to shape the policy response going forward.

Are they serious here? The administration honestly thinks public forums will deepen the government’s understanding of these issues. Gentlemen, the campaign ended in November 2008. Has the 2012 campaign already officially begun? Perhaps it has.

This effort is both in keeping with this Administration’s commitment to openness and transparency and the President’s Open Government Initiative.  This initiative represents a major change in the way federal agencies interact with the public by making agency operations and data more transparent and creating new ways for citizens to have an active voice in their government.

Well it’s about time!!

Mr. President, I am deadly serious and totally credible, if you want to present your administration as promoting transparency, then start by mandating the SEC to order the Wall Street self-regulatory organization known as FINRA to fully open its books and records for the last 5 years. Why? So the American public can determine if FINRA engaged in insider trading and front running in the liquidation of its $647 million auction-rate securities position in 2007. That’s the transparency that I and thousands of ARS investors who can not access their $150 billion (that’s right, BILLION) want to see. Mr. President, if you want a wealth of info on this topic, go here.

While we’re talking about transparency, mandate your SEC Chair to answer the charge that she lied in the proxy statement used for the very formation of FINRA in 2007.  Thousands of Americans, especially those housed within smaller broker-dealers, are very interested in hearing from Ms. Schapiro on that topic. If you are looking for info on this charge, Mr. President, go here.

Let’s get back to your request for input. Sorry to digress, but that transparency topic is a big one for us.

Questions for Public Solicitation of Input:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

Sense on Cents: In all seriousness, a lot of what has transpired over the last twenty to thirty years, and especially over the last decade, should be thrown into reverse. In so doing, lose the idea that government is supposed to target a level of homeownership throughout the nation. A properly functioning and properly regulated housing finance system will do this just fine. The government’s primary role should be as the regulator, not as the financier. Why? The government has never shown an ability to properly price risk let alone understand it. Hire people into regulatory roles who: (a) know what they are doing, (b) are not hamstrung by red tape, and (c) can blow the whistle loud and long when they detect fraud. 

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

Sense on Cents: A healthy and viable housing market needs to price risk appropriately and allocate capital accordingly. Our housing market is certainly not doing that now. Stop allowing Fannie Mae and Freddie Mac to be a backdoor bailout for Wall Street banks laying off bad mortgages and the individuals who borrowed the money. Blank checks to off balance sheet entities such as Fannie and Freddie is no way to run a country. Allow GNMA to continue to guarantee FHA and VA insured paper (although you have to stop with the backdoor bailouts provided by the FHA, as well. Allowing FHA borrowers to get mortgages with next to no money down is not a good business practice. So let’s stop that, too!) while Freddie and Fannie should merely bundle, securitize, and then deliver MBS (mortgage-backed securities) into the secondary market.  Freddie and Fannie should get out of running what amount to private internal hedge funds via their portfolios. Let the private market set the mortgage rates, not Uncle Sam via Freddie and Fannie. If mortgage rates go up, so be it. We’ll survive, but risk will be priced appropriately. In regard to market discipline, put in a strong independent regulator who is not beholden to anybody!!  

3. Should the government approach differ across different segments of the market, and if so, how?

Sense on Cents: Understand that when the government enters a market as an investor or financier, they screw it up. Get out!! Allow the private market to appropriately price the risk. Are we clear on this? Where need be, the government can be an owner of housing for low-income families in areas lacking housing. That’s it.

4. How should the current organization of the housing finance system be improved?

Sense on Cents: Please see above where I mention to reverse almost everything done over the last twenty years. While you are at it, read 13 Bankers (by Simon Johnson and James Kwak) and break up the large banks which are now nothing more than an oligopoly supporting the Washington oligarchy. Bold move, perhaps, but you called yourself the agent of change. Let’s see it.

5. How should the housing finance system support sound market practices?

Sense on Cents: Transparency and integrity across all products and business practices. Stop listening to the crowd on Wall Street. While you are at it, tell your friends and your enemies to stop taking money from their Wall Street cronies, as well. This crony capitalism is not killing us, it has killed us!!

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

Sense on Cents: Make sure the consumers read Sense on Cents. After they promise to do that, make sure that mortgage and consumer products lay out cash flow obligations under a variety of scenarios. Make sure all reps and warranties on mortgage and consumer lending products are fully publicized. Hold mortgage brokers and originators, along with other providers of credit, to a fiduciary standard. Hold the executives of these companies accountable by throwing the book at them for unfair and usurious lending practices. You may actually have to start with that right now. Transparency is the great disinfectant.

7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

Sense on Cents: Mend your relationship with Canadian Prime Minister Stephen Harper and have him give you and your administration a lesson in fiscal discipline.

You know, though, you really need to lose this whole idea of ’spreading the wealth around.’ That’s not America.

This country needs to embrace the virtues of hard work, discipline, thrift, personal responsibility, and family.

In any event, I thank you for the opportunity to share my insights. I look forward to hearing back from you.

Think we might be able to have a beer in the White House backyard? I’ll bring for both of us!! You know, I really need to talk to you about Mary Schapiro. Please review those links.

LD

P.S. Mortgage modifications are really just postponing the inevitable housing meltdown while laying the costs off onto our kids. It is truly not fair.

Mr. President, please subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook. Have your administration sign up, too.

In the spirit of full disclosure, neither Barack, Tim nor anybody else from Washington contacted me regarding my initial response last April. Who knows, maybe they will call me this time, although I’m not holding my breath given my answers.

Larry Doyle

  • Pinto

    Edward Pinto, former vice-president and chief credit officer at Fannie Mae in the late 1980s writes,

    How should we go about repairing this dysfunctional housing finance system?

    The goals should be larger down payments, stricter underwriting standards, reliance on the private sector and private capital, and the removal of affordable housing mandates. If there is to be an affordable housing policy, it should not be implemented by hidden subsidies and loose lending standards, but instead made transparent and funded on budget by the government.

  • fred

    Larry, why don’t you tell us how you really feel!

    • fred

      Let’s attack this issue from a different direction. What does the government need to do to facilitate the housing market w/o getting directly involved and w/o backstopping the market with gov’t guarantees?

      1. Establish and enforce underwriting standards for securitization. ie. prime subprime.

      2. Monitor securitization market liquidity soas to facilitate trading.

      3. Establish and enforce standards and practices within the mortgage servicing industry for securitized mtgs.

      4. Establish and enforce a putback mechanism for non performing mortgages to the originator.

      Premise: Fully functioning securitization markets are necessary to ensure banks continue to underwrite mtgs in high interest rate risk environments. Gov’ts role should should be limited to regulation and enforcement.

  • coe

    LD – I think Ed has the right idea and I also believe you touch on many of the key points as well. Here’s my take for what it is worth:
    First of all, let’s not waffle about the criticality of this initiative. You have long pointed to unemployment and housing as the two centerpieces of the consumer’s condition and hence at the heartbeat of the country’s economy. That means the stakes are pretty high. Second, let’s recognize this affair today for what it has turned out to be heading toward – a media circus and another symptom of best intentions gone horribly wrong. You might well know that the original call was for the Administration to gather a smallish group of knowledgeable and experienced people to DC to have a robust discussion about Freddie and Fannie and housing (let’s not forget the other sleeping giant in our debate – the FHLB system and its mission and problems) in a forum where they were free to share their critical observations with the President and with each other. Suddenly you have cameras, TV, canned pre-screened questions, prepared remarks – it’s almost as if Obama can say in January when the decision for him to re-engineer yet another aspect of the capital markets and our American way of life is likely to be revealed that he has checked this box. I think the steps that should be implemented are as follows:
    o – Let the capital markets operate more freely – what this means is to pour our energies into the much needed resuscitation of the securitization factory – high on my list among the things that need to be re-engineered is the disproportionately central role of the astonishingly flawed rating agencies (Why have they essentially skated free despite their awful performance in precipitating this crisis?);
    o – Lower the conforming loan limit back to $400 or $500K (I’m sure the policy wonks could find the right index and structure a formula that would take care of this) – this would allow banks to profitably originate to hold many more mortgages in a sweet spot that has been usurped by the GSEs – while at the same time actually offering banks a path they might follow to originate quality assets and earn a fair margin for the risks they are assuming;
    o – Return the GSEs to their earlier quasi-public/quasi-private structure…btw, keep them both operating in order to avoid a monopoly and encourage ongoing development and checks and balances;
    o – Take them out of the leveraged bond portfolio business – housing policy is best served with them as mortgage bankers and mortgage insurers – NOT as hedge funds;
    o – Go back in time to more conservative underwriting standards – proper affordability ratios, larger down payments, lower LTVs, mortgage insurance requirements – bag and discard the dangerous mortgage types and simplify life – fixed rates and simple adjustables – it’s all that is really needed…learn to live with lower delinquencies and foreclosures that will inevitably result;
    o – Do not, under any circumstances, unilaterally refinance America to a 4% coupon – the moral hazard is clear and evident, and the costs (to government, taxpayers, investors, banks, global market participants…)far outweigh the purported benefits;
    o – Get the FHLB system fully away from the mortgage intermediation table – but have them accept ALL well underwritten paper as eligible collateral for their advance funding at fair prices and with fair haircuts; and
    o – Reserve some focus and government support for the truly marginal folks in terms of affordable housing – but make sure there is a shared sense of accountabilities therein – the idea that housing falls into the category of yet another of Obama’s “entitlements” is dangerous and unworkable in the long run.

    Furthermore, at the risk of being labeled politically naive, get the politicians and lobbyists out of the GSE discussions – fire the current political appointees that are running these places if they don’t really deserve their jobs. And do the same with the FHFA – i.e. strengthen the quality and import of the regulatory framework in a meaningful way. And don’t forget you have to tackle the ineffectiveness of the asymmetrical accounting systems somewhere along the way to finish the job correctly!

    By the way, all these steps are viable – not some pie in the sky wish list. All it takes is conviction, clarity, and credibility – i.e good leadership! Let’s see – who falls into that category – Obama, Geithner, Dodd, Frank, Pelosi…you be the judge…too bad…the stakes, as I said earlier, are high!

    • Lou

      Coe,

      Are you one of the speakers or presenters at today’s conference?

      If not, you should be. America deserves your sage wisdom and voluminous ‘sense on cents!!’

  • Hello Larry and thank you for the article. I agree that the revamp of fannie and Freddie needs to be a return to the basics for all mortgages. We also need to stop the push for an all electronic mortgage. This is the biggest investment that ordinary people make in their lives, doing it electronically without the benefit of explanations and reviews will just create a bigger mess than last time. Why is it harder and requiring more info to get an auto loan than a mortgage?
    Another fallacy that Fannie and Freddie bought into was “Risked Base Pricing”. What was considered risked base in the past was to charge a higher interest rate for the same loan amount. This is counter intuitive, as it means those you expect to have a harder time making the payment, you make it even harder by raising the cost. That is “Yield Base Pricing”. Risk based pricing would be to say to a person, you qualify for $100k but because of your risk, I am only going to loan you $80K and you can put $20K down or you can buy a house that only costs $80 K with a 1% higher interest rate.
    As to Fannie mae I also want to refer to the Caroline Herron story. We were the company that was referenced in the original article from the Center for Public Integrity.There is even more to the story that did not come out. When we submitted our web portal which is used by a majority of the loan servicers, we offered it to Fannie and Treasury for FREE, because we are paid by the loan servicers for each submission. We had been in existence for over a year and we were the ones pointing out the problems with the RFQ. Treasuries response to Rep. Geoff Davis of Kentucky was a farce by Herb Allison. It said they felt the Portal (a high priority from last summer’s summit) needed more functionality, yet in the 9 months since we offered it, they have yet to have any initiative on a more expansive portal.

    • LD

      Joseph,

      Thanks for the insights. Wow!! Your color as to how Fannie Mae stymied your efforts on the portal are remarkable. Regrettably, Fannie’s response is all too emblematic of a broken system.

      Thanks again for writing. Please share your sentiments and comments whenever you can. Knowledge is power!!






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