Peter Wallison wrote a clearly expressed editorial in a recent edition of the Wall Street Journal explicitly identifying the GSE-provided subsidy to conventional 30-year, fixed-rate mortgages.
Wallison's point was that many people mistakenly believe that you can't offer an uninsured 30-year, fixed-rate mortgage, completely ignoring the existence of the jumbo-loan market. He went on to catalogue the mistakes Fannie Mae made in easing eligibility requirements for its mortgage guarantees, including downpayments of as little as 3%.
The editorial got me thinking about the reasons for such long duration mortgages. Wallison pointed out that they build equity value very slowly, maximizing the interest expense deductions available in the current tax code.
If I'm not mistaken, part of the reason for the lengthy duration was the experience Americans had with balloon-payment mortgages of shorter duration during the 1930s. When monetary policy brought about a severe contraction of the monetary base, money simply wasn't to be had. And many borrowers probably couldn't requalify for a mortgage during the Depression.
I'm familiar with the current existence of shorter-duration mortgages, but, of course, those leave a homeowner vulnerable to needing to refinance at an inopportune time. Those mortgages don't typically get the exposure that traditional 30 year fixed-rates do. However, many homeowners never come close to living in their home for 30 years.
Is it possible that the GSE's backing of selected mortgages stifled innovation in the field? Wallison concentrates on the dubious policy of government subsidies to conventional mortgages. But it occurs to me that another cost of those subsidies is to make it harder for other, more innovative mortgages to gain popularity. I'm not talking about lower downpayments but, rather, a homeowner choosing to take duration risk in exchange for a lower rate.
It would seem that, as is frequently the case, government-sponsored distortions in credit markets may have created unintended consequences which rob consumers of more choices in their buying behaviors. In this case, in choosing the duration of their mortgage, should they have reason to believe they do not need a 30-year funding commitment.
Showing posts with label Fannie Mae. Show all posts
Showing posts with label Fannie Mae. Show all posts
Tuesday, February 08, 2011
Monday, November 15, 2010
The Easy Way To Defund GSEs
Emil Henry, Jr., a former assistant secretary of the Treasury in the Bush administration, wrote an insightful editorial in last Thursday's Wall Street Journal regarding Fannie and Freddie.
According to Henry, Treasury has always had the power to rein in the GSEs. Here's what he wrote,
"But the Treasury doesn't need Congress or an academic assessment in order to tackle the most important reform goal: eliminating the GSEs and moving their activities to the private sector. Mr. Geithner himself can immediately reshape the mortgage markets—by withholding his approval of new debt issuances by the GSEs. That's the best way to begin curtailing the GSEs, and it can be done unilaterally.
Congress chartered the GSEs and in their charters required that the Treasury secretary approve all of their new debt. For decades, the Treasury exercised this duty, and the GSEs submitted each new debt issuance to the department for prior approval.
But the Clinton administration found this process cumbersome and a strain on Treasury staff. It established a new process that weakened the administrative approval process for GSE securities offerings. This hands-off approach represented an abdication of Treasury's essential oversight powers.
By the mid-2000s, the GSEs' process of debt approval had devolved to a simple notification of the Treasury, without any formal process of approval. The pace of debt issuance was so rapid that such notifications came to the Treasury weekly, typically on one piece of paper that simply listed proposed issuances without supporting data (such as income statements or balance sheets) upon which to make informed judgments.
I found these to be fairly stunning revelations. First, that Treasury has a legal ability to approve GSE debt issues- or not. Second, that this power had been abdicated to the point of the GSEs simply sending non-descriptive advisories of debt issuances.
Henry thus reasons,
If the Obama administration is serious about addressing the GSEs, it should re-establish a rigorous process to review all GSE debt issuance. That process should require the GSEs to provide Treasury with full financial data and justification for issuances, including statistics that show the creditworthiness of the agencies after each offering. In addition, the Treasury secretary should have to approve all new debt issuances personally.
The administration should also announce that in 2012 the Treasury will begin to deny a portion of GSE debt issuances with the goal of reducing their debt 50% by 2015 and 100% by 2018. This eight-year period of adjustment would allow the private markets ample time to provide secondary market liquidity.
There will be a private market ready to absorb the securities currently held by the GSEs. Private companies won't be able to borrow as cheaply as the GSEs could (thanks to their implicit government guarantee), but there will still be plenty of profit left to capture in the market for mortgage securities."
This might not be expected action for the next two years. But a change in administration could bring this about, regardless of who controls Congress from 2012 onward. I think Henry is correct to believe that private conduits would re-emerge if Fannie and Freddie were limited by debt ceilings. And there certainly would be sufficient profit in private label securitization, once the GSEs are hobbled and have begun to shrink.
According to Henry, Treasury has always had the power to rein in the GSEs. Here's what he wrote,
"But the Treasury doesn't need Congress or an academic assessment in order to tackle the most important reform goal: eliminating the GSEs and moving their activities to the private sector. Mr. Geithner himself can immediately reshape the mortgage markets—by withholding his approval of new debt issuances by the GSEs. That's the best way to begin curtailing the GSEs, and it can be done unilaterally.
Congress chartered the GSEs and in their charters required that the Treasury secretary approve all of their new debt. For decades, the Treasury exercised this duty, and the GSEs submitted each new debt issuance to the department for prior approval.
But the Clinton administration found this process cumbersome and a strain on Treasury staff. It established a new process that weakened the administrative approval process for GSE securities offerings. This hands-off approach represented an abdication of Treasury's essential oversight powers.
By the mid-2000s, the GSEs' process of debt approval had devolved to a simple notification of the Treasury, without any formal process of approval. The pace of debt issuance was so rapid that such notifications came to the Treasury weekly, typically on one piece of paper that simply listed proposed issuances without supporting data (such as income statements or balance sheets) upon which to make informed judgments.
I found these to be fairly stunning revelations. First, that Treasury has a legal ability to approve GSE debt issues- or not. Second, that this power had been abdicated to the point of the GSEs simply sending non-descriptive advisories of debt issuances.
Henry thus reasons,
If the Obama administration is serious about addressing the GSEs, it should re-establish a rigorous process to review all GSE debt issuance. That process should require the GSEs to provide Treasury with full financial data and justification for issuances, including statistics that show the creditworthiness of the agencies after each offering. In addition, the Treasury secretary should have to approve all new debt issuances personally.
The administration should also announce that in 2012 the Treasury will begin to deny a portion of GSE debt issuances with the goal of reducing their debt 50% by 2015 and 100% by 2018. This eight-year period of adjustment would allow the private markets ample time to provide secondary market liquidity.
There will be a private market ready to absorb the securities currently held by the GSEs. Private companies won't be able to borrow as cheaply as the GSEs could (thanks to their implicit government guarantee), but there will still be plenty of profit left to capture in the market for mortgage securities."
This might not be expected action for the next two years. But a change in administration could bring this about, regardless of who controls Congress from 2012 onward. I think Henry is correct to believe that private conduits would re-emerge if Fannie and Freddie were limited by debt ceilings. And there certainly would be sufficient profit in private label securitization, once the GSEs are hobbled and have begun to shrink.
Friday, October 15, 2010
Franklin Raines On CNBC This Morning
It's difficult to decide which was more surreal this morning- CNBC for inviting disgraced former Fannie Mae CEO Franklin Raines as a guest, or Raines, with his inaccurate, self-serving comments.
There's little doubt the CNBC management made a significant error by lending credibility to Raines via his appearance this morning. By allowing Carlos Whathisname, the morning program's raging liberal, to begin the interview with Raines, a tone of fawning deference was set right off the bat.
Carlos earnestly asked Raines what should be done about the mortgage foreclosure process faux-issue, and whether major banks could be hurt by it. Of course, Raines wouldn't have any special knowledge, having been gone from Fannie Mae for six years. But that didn't stop him from pontificating on the situation while ignoring facts.
For example, Raines alleged that you need Fannie Mae because no private conduits are willing to securitize mortgages.
That's a lie, of course. The truth is that Fannie and Freddie pressed for ever-higher mortgage value ceilings to be eligible for them to buy and securitize, thus crowding out most private mortgage securitizers.
Of course nobody bothered to ask Raines if he's yet complied with the federal court order to return his $90MM bonus payments from his days as Fannie's CEO. Bonuses found later to be unwarranted and unearned, because Fannie engaged, under Raines, in questionable accounting, and overrreached itself, resulting in subsequent losses and, now, 'conservatorship,' a federal equivalent of Chapter 11.
When the more conservative Joe Kernen took his turn with Raines, things got more surreal.
Kernen didn't touch the bonus issue, either, to my regret and disgust, but he did at least challenge Raines on his management of Fannie and its subsequent failure. Raines then said something that you'd have to actually hear to fully comprehend.
He first took credit for Fannie's role, as a former CEO, then, when accused of having set it up to fail, defended himself as only 'one of thousands of employees.'
Pricelessly arrogant.
Raines then went on to declare that, flawed and ruined as Fannie may well be, since all competitors had vanished, the US had to support it now, because there is no alternative. To further the inanity of his responses, he impugned one of Kernen's questions by implying that the co-anchor was misstating the facts. A surefire tactic to attempt to discredit uncomfortable allegations.
All pretty bold and brazen words from the guy who almost single-handedly wrecked the nation's mortgage industry.
Oh, and somewhere in all the questions, Raines naturally tarred the country's commercial and investment banks as the real culprits, contending that they all threw caution to the winds for profit. Technically, his statement is true, but grossly out of context. Fannie and Freddie started the party by buying, guaranteeing and securitizing questionable mortgages to begin with.
To add insult to injury, retiring Indiana Democratic Senator Evan Bayh continued the charade, feeding Raines softball questions to advance their mutually-embraced liberal agendas.
Sadly, this entire episode conferred unwarranted credibility on Raines. The CNBC co-anchors' bowing and scraping to this charlatan only reinforced the impression that he was somehow blameless for starting the mortgage-related excesses that led to the financial sector meltdown of 2007-08.
It provides yet another example of how one must be very wary of what one sees on CNBC as having much resemblance to the truth.
There's little doubt the CNBC management made a significant error by lending credibility to Raines via his appearance this morning. By allowing Carlos Whathisname, the morning program's raging liberal, to begin the interview with Raines, a tone of fawning deference was set right off the bat.
Carlos earnestly asked Raines what should be done about the mortgage foreclosure process faux-issue, and whether major banks could be hurt by it. Of course, Raines wouldn't have any special knowledge, having been gone from Fannie Mae for six years. But that didn't stop him from pontificating on the situation while ignoring facts.
For example, Raines alleged that you need Fannie Mae because no private conduits are willing to securitize mortgages.
That's a lie, of course. The truth is that Fannie and Freddie pressed for ever-higher mortgage value ceilings to be eligible for them to buy and securitize, thus crowding out most private mortgage securitizers.
Of course nobody bothered to ask Raines if he's yet complied with the federal court order to return his $90MM bonus payments from his days as Fannie's CEO. Bonuses found later to be unwarranted and unearned, because Fannie engaged, under Raines, in questionable accounting, and overrreached itself, resulting in subsequent losses and, now, 'conservatorship,' a federal equivalent of Chapter 11.
When the more conservative Joe Kernen took his turn with Raines, things got more surreal.
Kernen didn't touch the bonus issue, either, to my regret and disgust, but he did at least challenge Raines on his management of Fannie and its subsequent failure. Raines then said something that you'd have to actually hear to fully comprehend.
He first took credit for Fannie's role, as a former CEO, then, when accused of having set it up to fail, defended himself as only 'one of thousands of employees.'
Pricelessly arrogant.
Raines then went on to declare that, flawed and ruined as Fannie may well be, since all competitors had vanished, the US had to support it now, because there is no alternative. To further the inanity of his responses, he impugned one of Kernen's questions by implying that the co-anchor was misstating the facts. A surefire tactic to attempt to discredit uncomfortable allegations.
All pretty bold and brazen words from the guy who almost single-handedly wrecked the nation's mortgage industry.
Oh, and somewhere in all the questions, Raines naturally tarred the country's commercial and investment banks as the real culprits, contending that they all threw caution to the winds for profit. Technically, his statement is true, but grossly out of context. Fannie and Freddie started the party by buying, guaranteeing and securitizing questionable mortgages to begin with.
To add insult to injury, retiring Indiana Democratic Senator Evan Bayh continued the charade, feeding Raines softball questions to advance their mutually-embraced liberal agendas.
Sadly, this entire episode conferred unwarranted credibility on Raines. The CNBC co-anchors' bowing and scraping to this charlatan only reinforced the impression that he was somehow blameless for starting the mortgage-related excesses that led to the financial sector meltdown of 2007-08.
It provides yet another example of how one must be very wary of what one sees on CNBC as having much resemblance to the truth.
Wednesday, August 18, 2010
Bill Gross' Self-Serving Advice On Fannie & Freddie
Yesterday's business news was filled with various reports concerning the federal government's big Fannie/Freddie conference.
Perhaps the most misrepresented and self-serving of all the comments on the event belonged to PIMCO senior executive Bill Gross.
Appearing on CNBC in the afternoon, after apparently making his views known at/to the conference, Gross, almost alone among financial market participants and pundits, declared that the feds must do more in mortgage finance through Fannie and Freddie, not less.
At least Susan Wachter, whom I remember from my days at Wharton, acknowledged that a GSE-free mortgage market was preferable. But she simply contended it was, for at least the next half-decade, simply no longer feasible.
But Gross went much, much further.
As the guy who is primarily responsible for PIMCO's reportedly huge inventory of GSE paper, he went all in to protect his career and investors, insisting that government guarantees of Fannie and Freddie paper be ironclad, continuing and even more generous in the future.
The amazing part is how reverentially CNBC's anchors treated Gross during his appearance. They lobbed softballs at him, carefully avoiding mention of how he is simply lobbying to protect his book, nevermind the overall health of the financial markets. Instead of exposing this bias, they treat Gross as some sort of expert pundit on the matter.
Why? Probably access. If anyone on CNBC ever really challenged Gross' comments and positions for being as self-serving as they are, he'd likely never return. Then CNBC would be shut out of interviews with the most senior guy at what is arguably the largest, or one of the largest, fixed-income holders of all institutional investors.
So, to retain access, CNBC's on air staff turn a blind eye to Gross' obvious biases when he comments on the structure of the US residential finance sector.
Perhaps the most misrepresented and self-serving of all the comments on the event belonged to PIMCO senior executive Bill Gross.
Appearing on CNBC in the afternoon, after apparently making his views known at/to the conference, Gross, almost alone among financial market participants and pundits, declared that the feds must do more in mortgage finance through Fannie and Freddie, not less.
At least Susan Wachter, whom I remember from my days at Wharton, acknowledged that a GSE-free mortgage market was preferable. But she simply contended it was, for at least the next half-decade, simply no longer feasible.
But Gross went much, much further.
As the guy who is primarily responsible for PIMCO's reportedly huge inventory of GSE paper, he went all in to protect his career and investors, insisting that government guarantees of Fannie and Freddie paper be ironclad, continuing and even more generous in the future.
The amazing part is how reverentially CNBC's anchors treated Gross during his appearance. They lobbed softballs at him, carefully avoiding mention of how he is simply lobbying to protect his book, nevermind the overall health of the financial markets. Instead of exposing this bias, they treat Gross as some sort of expert pundit on the matter.
Why? Probably access. If anyone on CNBC ever really challenged Gross' comments and positions for being as self-serving as they are, he'd likely never return. Then CNBC would be shut out of interviews with the most senior guy at what is arguably the largest, or one of the largest, fixed-income holders of all institutional investors.
So, to retain access, CNBC's on air staff turn a blind eye to Gross' obvious biases when he comments on the structure of the US residential finance sector.
Friday, May 07, 2010
Some Eye-Opening Data On Fannie Mae
On Wednesday, I wrote this post comparing Fannie Mae and Freddie Mac to the Second Bank of the United States of the early 1800s.
Yesterday, two sources provided some absolutely eye-opening numbers on Fannie.
On CNBC, a reporter noted that the last eleven quarters resulted in, I believe, a $30B loss, which was itself equivalent to the GSE's profit of the prior 30 years. The occasion of this report was yesterday's "earnings," meaning loss announcement by Fannie, of $8B for the first quarter of 2010.
The Wall Street Journal noted, in its lead staff editorial, that Fannie and Freddie were leveraged twice as highly as Bear Stearns.
The Journal piece also stated,
"By concealing how much they (Fannie and Freddie) were gambling on risky subprime and Alt-A mortgages, these companies sent bogus signals on the size of these markets and distorted decision-making throughout the system. Their implicit government guarantee also let them sell mortgage-backed securities around the world, attracting capital to U.S. housing and thus turbocharging the mania."
No private company could sustain this behavior. It would have been bankrupt several years ago, if it looked remotely like either GSE now does.
Of course, it's also evidence of what happens when a government-underwritten entity "competes" in the economy. It drives out all private sector competitors. In the case of mortgage conduits, no private conduit could remain in the broad, mid-market space occupied by the GSEs. Only the jumbo-loan high end could support private conduits, and they dried up in the mortgage meltdown.
As it now stands, Fannie and Freddie have lost $126.9B through the end of last year, and have no limit on the amount of losses we, the taxpayers, will subsidize going forward.
It's a stunning account of horrible management being propped up, and a money-losing strategy being bankrolled with no limit.
How can any economy prosper with business models like these funded in perpetuity?
Yesterday, two sources provided some absolutely eye-opening numbers on Fannie.
On CNBC, a reporter noted that the last eleven quarters resulted in, I believe, a $30B loss, which was itself equivalent to the GSE's profit of the prior 30 years. The occasion of this report was yesterday's "earnings," meaning loss announcement by Fannie, of $8B for the first quarter of 2010.
The Wall Street Journal noted, in its lead staff editorial, that Fannie and Freddie were leveraged twice as highly as Bear Stearns.
The Journal piece also stated,
"By concealing how much they (Fannie and Freddie) were gambling on risky subprime and Alt-A mortgages, these companies sent bogus signals on the size of these markets and distorted decision-making throughout the system. Their implicit government guarantee also let them sell mortgage-backed securities around the world, attracting capital to U.S. housing and thus turbocharging the mania."
No private company could sustain this behavior. It would have been bankrupt several years ago, if it looked remotely like either GSE now does.
Of course, it's also evidence of what happens when a government-underwritten entity "competes" in the economy. It drives out all private sector competitors. In the case of mortgage conduits, no private conduit could remain in the broad, mid-market space occupied by the GSEs. Only the jumbo-loan high end could support private conduits, and they dried up in the mortgage meltdown.
As it now stands, Fannie and Freddie have lost $126.9B through the end of last year, and have no limit on the amount of losses we, the taxpayers, will subsidize going forward.
It's a stunning account of horrible management being propped up, and a money-losing strategy being bankrolled with no limit.
How can any economy prosper with business models like these funded in perpetuity?
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