Housing Doom Housing Bubble Blog

My post from earlier today was a critical response to this timely effort [1] by fellow blogger Bill Maloni. Twist and I always enjoy Bill’s passionate and insightful opinions from a GSE-centric perspective. He’s been posting take-no-prisoners articles at his "Bill Maloni’s GSE Blog" since early spring. Highly recommended, even though I for one agree with almost nothing he says. Bill was good enough to respond to my criticisms of his Monday article via e-mail as follows.

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Tuesday, 10:47 AM EST

John, I always enjoy reading your stuff and Housing Doom.

As you know, I am new at this blog game and merely see it as an extension of my nearly 40 year career in Washington, advising, counseling, and lobbying. That includes my 20 years at Fannie as their top lobbyist; at the Fed (for Paul Volcker) and the old Home Loan Bank Board; and originally, 11 years on Capitol Hill, working for a Pittsburgh Democrat, who was a senior member of the House Banking Committee. That first job in DC, working in the Congress, was where my perspective, network and instincts were developed.

I am retired (from Fannie Mae) and don’t work for Fannie, Freddie or any financial services or housing interest or their law or consulting firm.

Trust me, the GSE senior officials don’t talk to me, unless I bump into one at the grocery store and then we discuss the price of breakfast cereal!

I was surprised by Fannie’s call, yesterday, but not shocked, since it makes so much sense.

My challenge to the Administration to remove Fannie’s and Freddie’s portfolio handcuffs, as well as for the Hill Democrats to support that action, was based on several reasons.

• First, I believe that the current limit is totally a political creation of the GOP, which never has supported the GSE, institutionally, and a decision that was fueled by the Greenspan "systemic risk" allegations. It just was an attempt to stop GSE growth and to put unusually high capital requirements (30% over and above their current risk-based capital standards).
• Secondly, Fannie and Freddie WERE CREATED to do what needs to be done, i.e. providing liquidity to lenders and investors, especially when others can’t or won’t.
• Fannie and Freddie can’t be blamed for an illiquid "non-conforming market" (e.g. loans above the F/F $417k single family limit), since they are not permitted to operate there, by law. So, look at the big banks and their subs when you want to ladle blame.
• If there is no crisis, then the lenders will keep their loans and manage those risks or find other buyers. If there is a problem then F/F doing what they do best is the fastest, most seamless, efficient way to ease the market pressure.

Yes, it will grow the companies and make them more money, but–in the interim–it’s a far safer regulatory move than other options.

You cited Bob Blakely (whom I don’t know), as a stand up guy and real professional. Fannie announced that its books would be ready for public consumption by the end of the year, only four months away. I suspect that’s spot on.

And OFHEO has the capacity–since they have employees on site in both companies–to monitor portfolio growth, daily, if they choose to employ the GSEs to help in the market now.

As far as Peter Wallison and the AEI, they represent professional GSE antagonists.

I can share with you studies done by Nobel prize winners and other prominent economists who worked for Fannie, who reached the opposite conclusions from the AEI.

And, don’t forget, the original Fannie Mae risk based capital model, was designed–in part–by Paul Volcker, in 1991, after he left the Fed and was working in New York with Jim Wolfenson.

So, when you look at the question of the GSEs portfolio and how they are managed, either consider all of the studies or none of them.

My best/Bill

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Yikes! It was a bull stampede through the markets all day Monday, and cordial Housing Doom antagonist Bill Maloni was in the thick of it. The electrons had barely cooled down on his call to unleash the GSEs [1] when Fannie Mae’s stock went nuts following a WSJ report [2] [3] that the company was formally asking for a bump up in its portfolio limit. By the end of the day Fannie had rocketed up 10 percent, with Freddie not far behind. For both big GSEs, the daily increases were the biggest in years. Mr. Market affirmed Bill’s viewpoint fast and hard. If nothing else, this has got to be the blogosphere post timing achievement of the month!

But are relaxed portfolio limits a good idea? This blogger has serious reservations. Peter Wallison’s old team of financial analysts at the neo-con American Enterprise Institute studied GSE retained portfolios for several years, and my distinct impression is that their conclusion that they’d grown too large and should be curtailed had merit. Fannie’s debt position compares to a good sized European country’s and the sum total of GSE assets isn’t too different in magnitude from America’s public debt. Indeed international markets regard F&F’s senior bonds to be practically equivalent to treasuries, although the government insists this "agency debt" is not backed by the full faith and credit of the US. Something like a Reader’s Digest version of the AEI findings is a regular feature of speeches by James Lockhart, Maloni nemesis and head of OFHEO, the present regulator of the top two GSEs.

The chaotic state of Fannie’s financials is a case for concern — and optimism. On the one hand, the company has less than 5 months before a New York Stock Exchange deadline to file their ‘06 10-K annual report with the SEC or face delisting. On the other, interim CFO Bob Blakely may well be America’s number one financial troubleshooter. He is confidently expecting to meet that deadline. He is probably the one person who could confirm whether Fannie’s financial state could stand the strain of an increased portfolio. It’s unthinkable that the company would have approached OFHEO for the boost without Blakely’s blessing, so one must assume that he judges the project to be possible.

One reason Fannie’s retained portfolio in particular gives me nightmares like the old Sci Fi horror movie The Blob is because it may well constitute the world’s largest stack of off-balance-sheet assets. As Calculated Risk blogger Tanta has just described in her post "SFAS 140: Like A Bridge Over Troubled Bong Water," such deals are coming under increasing scrutiny in the mortgage finance sector. This is the principle reason I firmly hold that the new GSE regulator must be mandated to carefully monitor systemic risk. I am distressed that there hasn’t been more debate on the Bean-Neugebauer amendment, that proposes to strip this necessary direction from the new regulator.

The GSEs don’t just do AAA-rated agency debt. Will some of the bump be financed in their subordinated debt? That stuff isn’t covered by Congress’s implicit guarantee, and as I noted in yesterday’s post, the Fed is working hard to remove that too-big-to-fail guarantee that backs risk in the subordinated debt space.

And speaking of AAA debt, those bond ratings are beginning to look a bit different from the same letter grades with corporate ratings. In view of recent events, the ratings agencies are just starting to tighten up their standards.[4] That’s yet another thing to watch out for, especially if the retained portfolios will end up with more high rated tranches of subprime and Alt-A securities as a result of the boost.

Yes a world where Fannie and Freddie start buying more mortgages is going to be a brighter one for the originators. We must be careful not to destabilize the Enterprises or the larger economy while we’re doing this, though.

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