Stunned silence initially greeted Tuesday’s post wherein I laid into Bill Maloni’s GSE Blog about GSEs, systemic risk, and the Bean-Neugebauer Amendment to the pending regulatory reform legislation. Well, just about the time I was sitting down to tea that morning, Doomer G started getting reports from the Wall Street Journal and elsewhere that the same debate had broken open in Washington among Fannie & Freddie, their regulator OFHEO, and assorted financial committee heavies in Congress. Before Wednesday was out, players all the way up to President Bush were weighing in, helping markets to gyrate wildly in late afternoon trading.[1]
Maloni in Washington tells Doom that the Capital is abuzz with the Fannie cap story, and media interest is intense.[2] So while Blogger Bill is putting on his TV makeup, or at least preparing for breakfast at Starbuck’s with The Canton Repository’s Washington correspondent, Housing Doom will try to gather up some of the pieces. The story is still as arcane as ever, but after yesterday a lot more people care.
Maloni nemesis and chief GSE regulator Jim Lockhart is the gatekeeper for the caps. He has been a consistent critic of GSE size, and as of Tuesday banking analyst Bert Ely didn’t think he’d budge.[3] On the other hand, the last few days saw an avalanche of support suddenly spring up for the viewpoint Bill subscribes to, that the GSEs need to be freed up to help manage the subprime crisis. Supporters who stepped up to lend support for easing the cap included Representative Barney Frank,[4] and Senators Christopher Dodd and Charles Schumer.[5]
Meanwhile, a senior Washington Post business columnist weighed in heavily [6] on the side of cap relief.
But the climax of the whole day was when President Bush and his HUD Secretary were quoted saying things [7] that seemed, well, songs not quite from the same hymnbook. Boy did that get everyone’s attention on Wall Street.
Doomers should take at least one thing away from this sudden flood of information: This issue is a big, hairy deal. The very fact that principal actors were speaking and the markets were jumping to their tunes shows just how much is at stake here. We’re talking about lots of money, so much that discussions of systemic risk from the decisions soon to be made are most emphatically on the table.
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Notes and References
[1]: "Stocks Surge", KWTX, August 8, 2007.
One analyst attributes the volatility to a rumor that the regulator for mortgage giants Freddie Mac and Fannie Mae will not be raising the cap.
[2]: "Five Things You Need to Know: Inflation: It’s the Fed’s Story, and They’re Sticking to It; Nuclear Option?; Mortgage Market Backed by Full Faith and Credit of Fannie Mae, Freddie Mac; Politicians Backed by Full Faith and Credit of Wall Street; Fore!", by Kevin Depew, Minyanville, August 8, 2007. highlighted items (##3,4) cover the topic; Bill’s reply is cited.
[3]: "Fannie, Freddie May Not Be Market Salve", Marcy Gordon, AP / Forbes, August 7, 2007.
Easing the investment constraints faced by Fannie Mae and Freddie Mac may not be enough to rescue homeowners and investors caught up in the mortgage market turbulence.
…By getting into the market in a crisis, Fannie Mae and Freddie Mac "would fulfill the mission for which they were created and bolster political goodwill," Morgan Stanley (nyse: MS – news – people ) analyst Kenneth Posner said in a research note. He put "high odds" on OFHEO lifting the caps, "lest it be blamed for exacerbating a housing market shock."
"We cannot imagine OFHEO or the Bush administration wanting to shoulder the blame for making a bad situation worse," Posner wrote.
Not so fast, said Bert Ely, a banking consultant based in Alexandria, Va., who is a critic of the two companies and longtime OFHEO watcher.
The agency’s director, James B. Lockhart, "hasn’t given any signal" in recent weeks, as the mortgage market’s woes deepened, that he could be amenable to raising the caps on the companies’ mortgage holdings, Ely said.
[4]: "Senior Democrat favors lifting cap on Fannie, Freddie", by John Poirier, Reuters, August 8, 2007.
"I am in favor of lifting the portfolio limits unless there is a safety and soundness issue," Massachusetts Rep. Barney Frank, a Democrat, said in a telephone interview. "Fannie and Freddie should no longer be penalized for past accounting mistakes."
…"My staff has been in contact with OFHEO, Freddie and Fannie," Frank said.
[5]: "Democratic Senators urge GSE investment cap relief", by Patrick Rucker, Reuters, August 7, 2007.
The regulator for Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) should consider easing a cap on the companies’ investment holdings so they can buy more loans in the troubled mortgage market, two leading Democratic senators said on Tuesday.
Such a move would "allow Fannie Mae and Freddie Mac to provide needed stability to the secondary mortgage market," said Sen. Charles Schumer, chairman of a Senate subcommittee on housing.
…Sen. Christopher Dodd, chairman of the Senate Banking Committee, said in a statement, "It may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie’s mortgage portfolio."
An OFHEO spokeswoman, Stefanie Mullin, said "We are reviewing the concerns expressed in Chairman Dodd’s statement and Chairman Schumer’s letter to us and will respond to them shortly."
[6]: "Missed Opportunities", by Steven Pearlstein, Washington Post, August 8, 2007.
Equally surprising has been the administration’s Katrina-like response to the meltdown in the mortgage market, which has spread well beyond sketchy subprime loans.
As it happens, the one part of the mortgage market that continues to function somewhat normally is the one where modest-size mortgages are insured and packaged by Fannie Mae and Freddie Mac. This is precisely wh
y Fan and Fred were created, to provide liquidity to the mortgage markets when others fear to lend. So you would expect the Bush administration to work with them to expand their purchase of mortgages, and invite them temporarily into other areas, such as jumbo mortgages, where private markets are failing.Unfortunately, that would require the Fed and the administration, after having spent six years demonizing Fan and Fred and trying to reduce their size and influence, to eat a heaping serving of political crow. They would have to admit they were wrong when they said private banks could be relied upon to set lending standards and provide a reliable source of mortgage financing, in good times and bad. And they would have to acknowledge that giving Fan and Fred access to the government’s backing might, in some instances, actually reduce the chance of a financial market meltdown, rather than increase it, as they so often predicted.
For weeks now, Fan and Fred have been talking to their regulator, James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, about getting permission to step up their activity. So far, no answer. But, hey, what’s the rush? The big wave of foreclosures probably won’t happen until next year. And, anyway, the president thinks "Locky" is doing a heck of a job.
[7]: "HUD Says Fannie, Freddie Asset Limits May Be Raised", by James Tyson, Bloomberg, August 8, 2007.
U.S. Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae and Freddie Mac in order to increase liquidity in the mortgage market.
Jackson said today that he and Fannie Mae Chief Executive Officer Daniel Mudd talked about the government-chartered company’s request to be allowed to buy mortgages beyond a current $722.5 billion federal limit.
…President George W. Bush told reporters that his priority is ensuring that Fannie Mae and Freddie Mac complete their overhaul following $11.3 billion in accounting errors. While stressing that his priority is for remediation at the companies, Bush didn’t reject the idea of raising the portfolio limits.
“First thing we back is reforming these entities,” Bush said. “Let’s get them reformed first. Now is the time to get it done.”
Shares of Fannie Mae pared gains after Bush’s comments. Fannie Mae was up $2.32, or 3.6 percent, to $66.75 at 2:58 p.m. in composite trading on the New York Stock Exchange. Freddie Mac was up $1.82, or 3 percent, to $63.46. Fannie Mae has risen 18 percent this week and Freddie Mac is up about 14 percent because of the prospect for more business.
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A Doom reader sent along the link to this valuable backgrounder. Text selection and emphasis courtesy of the same reader.
“Any Bailout Of Home-loan Mess Would Be Limited, Experts Say”, Dow Jones / CNN Money, August 2, 2007.
The president talks about whether or not he will bail out those in distress…
http://www.housingwire.com/2007/08/09/bush-no-bc-bailout/
MikeC-
I’d feel better if the President sounded better informed. I’m hoping that’s a sign that he really won’t meddle with the market. After all, if you were going to meddle, you’d try and figure out what’s going on?????