Please read and comment on the entries that follow. The most current one will be highlighed on this page; earlier entries can be found under the archives link below.
March 19, 2013
The Bipartisan Policy Center’s housing commission on which I served over the last year released its report in late February, and it’s been getting a lot of play in the press, Washington, DC., and elsewhere.
Commission co-chair and former HUD Secretary and FL Republican Sen. Mel Martinez testified earlier today before the Senate Committee on Banking, Housing and Urban Affairs on the commission’s secondary market reforms. He was joined by Janneke Ratcliffe, a senior fellow at Center for American Progress, who outlined the mortgage system reform plan drafted by the Mortgage Finance Working Group that CAP sponsored starting in 2008. AEI’s Peter Wallison rounded out that panel.
Meanwhile, outside the Beltway, I was participating in Minnesota Public Radio’s Daily Circuit in a discussion about housing in MN, the nation, and the BPC commission report. Tomorrow I head out to the ULI meeting in Seattle to join a panel with fellow commissioners Ron Terwilliger and Renee Glover to discuss the report on Thursday, and on April 4 I’ll be in MN meeting with a variety of groups and board and staff of the MN Housing Finance Agency. A highlight will be joining MN Democratic Rep. Keith Ellison at a forum from 10-12 CDT hosted by the MN Housing Partnership.
If you missed the Daily Circuit broadcast you can listen to it here.Read More...
January 17, 2013
The Consumer Financial Protection Bureau (CFPB) issued new rules on January 10, 2013, putting in place important protections for mortgage borrowers. The so-called "ability to repay" rule implements provisions of the Dodd-Frank Act that require lenders to underwrite mortgage loans with a reasonable belief that the borrower can repay the loan on the terms at origination.
Seems like common sense, right? But we learned during the mortgage boom that when regulators fall asleep at the wheel, and lenders are given free rein to compete in a race to the bottom, really bad things happen and common sense is the first thing to go out the window.
I discussed the new rule and its implications for lenders and consumers on Minnesota Public Radio the morning the rules came out. Enjoy.
September 23, 2012
Eight years after leaving Fannie Mae under a cloud of accusations that he manipulated earnings and knowingly violated accounting rules to enrich himself and others at the expense of shareholders, Judge Richard J. Leon of the US District Court for the District of Columbia cleared former Chairman and CEO Frank Raines of the allegations by granting a motion for summary judgment to dismiss the shareholder class action led by the Ohio Public Employees Retirement System and the state's Teachers Retirement System. In dismissing the suit, Judge Leon wrote that
"There is not only no direct evidence that Raines intended to deceive Fannie Mae's investors, there is no evidence that he even knew his statements were false....Additionally, plaintiffs fail to offer sufficient evidence to conclude that Raines's statements that they specifically identify as misrepresentations are even false. Instead, plaintiffs merely carve up Raines's statements to fit their story."
The judge's acerbic and detailed dismissal of the accusations leveled against Raines -- and in companion suits that have not yet been resolved, against former CFO Timothy Howard and Controller Leanne Spencer -- is a great relief to him, of course. But it is also to those of us who worked at Fannie Mae when the company's accounting rules were questioned first by our regulator, OFHEO, and later ruled improper by the SEC. To be clear, those facts are not in dispute: the company misapplied generally accepted accounting rules in a number of areas. The resulting earnings restatement cost millions of dollars, upended the company, ended careers, tarnished many reputations, and brought on significant changes in senior leadership, culture and focus within the company. But the company had made a mistake. It had to be rectified. It was.
It's just a shame that the company's mistakes became the center of a feeding frenzy in which the integrity of everyone in the company -- from Frank on down -- was questioned. Fannie wasn't the only large US company forced to restate earnings because of accounting rules. It won't be the last. But the eagerness with which the errors were blamed on deliberate attempts to manipulate earnings stands out. Many of us spent long evenings trying to explain the intricacies of the actual accounting problems to friends and colleagues. All of you said you hadn't heard them in the media. Some of you were gracious and accepted that the errors were real, but the motivations ascribed to Frank and others were not. Many others simply dismissed the explanations and concluded the worst about Frank and the company.
Leon writes in his decision that
"At bottom, plaintiffs make much ado about earnings management, but plaintiffs present no evidence that Raines was ever aware that these transactions may have violated GAAP or, more importantly, were being used for an improper purpose....plaintiffs have not identified any evidence that Raines knew or, indeed, had any reason to know, that Fannie Mae's accounting violated GAAP. Further, plaintiffs have not identified any evidence that Raines intentionally misled investors through his statements concerning the implementation and operation of these accounting policies."
Leon has yet to rule on the other class actions involving other Fannie Mae executives. I look forward to reading them when published, and I hope for the best for all of them. But the dismissal of the class action against Raines hopefully offers strong caution against leaping to conclusions or attributing evil intent when people or organizations make mistakes or misapply complicated rules. Raines released a statement after the ruling in which he noted that
“Today’s decision puts to rest unwarranted allegations that I have spent eight years refuting. These reckless charges have wreaked untold damage on me, my family, my career ,and my reputation. But I cannot help but echo the question asked by former Labor Secretary Ray Donovan when he asked ‘which office do I go to to get my reputation back.’”
As Leon concludes,
"A failure to understand, or even negligent behavior, is not the equivalent of the necessary intent to deceive or conscious disregard of obvious risks."
In this season of increasing hyperbole and name-calling, it's judicial advice worth keeping in mind.
August 22, 2012
It must have seemed like “Freaky Friday” to the Treasury Department last week after it announced that the government is replacing the 10 percent quarterly compounding dividend it’s been charging Fannie Mae and Freddie Mac with a sweep of all of Fannie Mae’s and Freddie Mac’s profits. Republican congressional leaders attacked the move, the conservative commentator Peter Wallison lauded it, and Democratic congressional leaders ignored it.
It’s not every day that the US Government effectively takes over private companies. The Administration actually has worked very hard to avoid it in the case of auto companies and other failed financial services companies that got bailed out. But Fannie and Freddie are now working 24/7 for the American taxpayer. And the change greatly reduces the likelihood that they will need further capital infusions to cover their guarantees, further protecting taxpayers.
Think of this as the part in the gangland movie when the loan shark informs the hapless borrower that they’ve run out of time to repay and the Mob is now taking over their business.
You’d think that those who have been the fiercest critics of the GSEs and the rescue of their MBS investors through Treasury capital infusions would be ecstatic. No more capital infusions. All profits flowing to the taxpayer. No qualification that the sweeps will end when the total principal already invested is paid off. Plus a clear statement that the Administration is committed to winding down the companies and an acceleration of the mandated run-off of their portfolios.
But that’s not how it worked out on Freaky Friday.
Instead, Republican congressional leaders attacked the decision.
“The reduction of the dividend payments for Fannie Mae and Freddie Mac will ensure the American taxpayers remain on the hook for the bailout of these two failed institutions for the foreseeable future,” said Rep. Scott Garrett (R-NJ) in a press release. The chairman of the Capital Markets Subcommittee of the House Financial Services Committee continued, “The crony-capitalism that has become a centerpiece of the Administration’s failed economic policy must come to an end.” His colleague Rep. Spencer Bachus (R-AL), Chairman of the full House committee, added in his own release that “Eliminating the dividend that is owed to taxpayers irresponsibly benefits speculators and pre-conservatorship GSE stockholders at the expense of the American public.”
“Crony capitalism?” The only cronies this move benefits are taxpayers, for whom the two companies are now working full time. “…benefits speculators and preconservatorship GSE stockholders…?” The Administration’s move actually finishes off any hopes speculators might still have had. Common shares of the companies remain around $0.25, about where they were before the announcement and down from around $80 per share in 2004. Their perpetual preferred stock, privately held mostly by speculators hoping the companies would eventually be rebooted as private entities, fell 55 percent on the announcement. The companies are dead meat for investors until a “final solution” is crafted. Even then, the Administration has made it clear that Fannie and Freddie as they existed before the financial meltdown are dead and gone.
Garrett’s and Bachus’ central complaint, that the Administration has not offered a comprehensive exit strategy and new mortgage finance system design, can’t be denied. The Administration said as much themselves calling the change an interim step on the road to a full decommissioning of the companies. Although these members are in the House majority, Republicans there also have failed to produce any legislation at the full Committee level to move past the current situation.
Meanwhile, over at the American Enterprise Institute (AEI), the deep well of conservative thought and anti-GSE advocacy from which House Republicans usually drink heartily, senior scholar Peter Wallison was singing a different tune. In an interview with BloombergBusinessWeek.com, Wallison said,
“The most significant issue here is whether Fannie and Freddie will come back to life because their profits will enable them to re-capitalize themselves and then it will look as though it is feasible for them to return as private companies backed by the government. What the Treasury Department seems to be doing here, and I think it’s a really good idea, is to deprive them of all their capital so that doesn’t happen.”
Meanwhile, House and Senate Democrats, and Senate Republican leaders on the Banking Committee have been shrouded in radio silence. I searched their websites and Google News for quotes or reactions and found none. Even the normally irrepressible Sen. Chuck Schumer (D-NY) took a pass on the issue.
Freaky Friday, indeed.
The biggest driver of the Treasury’s changed policy was the looming cap on new capital infusions that takes effect at the end of this year. Market fears that this cap might erode the effective government guarantee behind GSE mortgage backed securities had widened spreads between GSE bonds and Ginnie Mae bonds. The latter carry an unambiguous full faith and credit guarantee. The Treasury strategy seems to have worked, at least initially. BloombergBusinessWeek.com reported on August 17 that spreads had narrowed, albeit by only a small amount, in the immediate wake of the announcement. An analyst quoted in the article speculated that some buyers who have been wary of the GSE bonds because of the potential cap on Treasury support would be more likely to return after the announcement.