ZIGAS & ASSOCIATES
INNOVATION - LEADERSHIP - STRATEGY

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Please read and comment on the entries that follow.  The most current one will be highlighted on this page; earlier entries can be found under the archives link below.


Mind Boggling Factoids

April 04, 2010

If, like me, you are intrigued by random statistics about technology, population growth, and comparisons among nations, you will enjoy this video from YouTube.

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GSEs On Deck

March 22, 2010

When House Financial Services Committee Chairman Barney Frank (D-MA) bangs the gavel down on the next round of congressional action on Fannie Mae and Freddie Mac on Tuesday morning, March 23,  those interested in the future of US housing finance will be listening carefully to what Treasury Secretary Timothy Geithner says, and perhaps more importantly, what he does not say.

Geithner is the star witness in the committee’s opening hearing on the future of the secondary mortgage market system.  When parsing his testimony, I’ll be listening carefully to how he treats my five top questions about any future system:

• Will it support the availability of long-term, fixed rate mortgages for consumers? • Will it offer access to capital by as wide a variety of institutions as possible, from small community banks and credit unions to large money center institutions? • Will it foster and spread innovation in mortgage products to insure that helpful and sound new products can be made available widely in the marketplace? • Will it fulfill a significant duty to serve underserved populations and communities? • Will it provide financing both for affordable single family homeownership and rental housing?

House Republican “Principles”

Republicans on the House Financial Services Committee last week fired an opening salvo in these discussions by publishing a set of goals and principles for the mortgage finance system.

The goals are listed as follows:

Goals • Reestablish a housing finance market that has long-term stability in which private capital is the primary source of mortgage financing. • Restore stability and liquidity to the secondary market for residential mortgages, and prevent significant disruptions to the financial market. • Encourage innovation and diversity in housing finance that provide choices for consumers. • Protect taxpayers from further losses and future bailouts. • Require that taxpayers be made whole on outstanding loans, guarantees and capital infusions made by the government.

What’s most startling about these is how closely they track the goals of progressive and moderate housing advocates.

But the principles that follow lack specific policies or structures through which these goals might be achieved.

Item one in the list of principles is “Wind down the operations of Fannie Mae and Freddie Mac within four years, ending once and for all the disastrous government experiment in privatized profits and socialized losses.”

Except for supporting a “regulatory structure to support covered bonds,” there is nothing in the following principles that suggests how Fannie Mae and Freddie Mac might be replaced to assure the outcomes the Republican principles espouse in their goals.

Covered bonds are used in some European countries, and Rep. Scott Garrett (R-NJ) has introduced legislation that would promote their use.  But as a total solution to how to generate the massive amounts of capital needed to support affordable homeownership and rental housing in the next decade, or to replace the more than $5 trillion in outstanding mortgage financing in Fannie and Freddie MBS, they are a sorry and inadequate substitute.

First Do No Harm

Liberals and conservatives, Republicans and Democrats, big government advocates and Tea Partiers all probably can agree that the GSEs made serious errors as the real estate asset bubble expanded.  They probably also can agree that the balance between public and private benefits got woefully overbalanced in favor of the latter, leading to behaviors more suitable to a Wall Street trading firm than a government chartered enterprise.

But if this crisis has taught nothing else, it should be that allowing unregulated markets to rapidly expand and compete for worldwide capital using nearly infinite leverage through derivatives and third party insurance contracts is a recipe for disaster that led to severe and unexpected consequences.  And when the subsequent overheated reality overwhelms the models that monoline institutions like the GSEs use to price credit risk and reserves, a government backstop may prove necessary to forestall even more calamitous results.

Before and after the GSEs required the government to step in and validate the “implicit guarantee” that undergirded their charters the Treasury and Fed had to take unprecedented actions to extend “GSE status” to financial firms that had no charters and no claim other than “too big to fail” to merit the interventions.  The size of their bets and the web of interrelated dependencies that followed were so big and complex that they threatened the system’s very foundations.  These firms took those risks without any underlying expectation of government bailout.  But in the end they got it because they’d put too much at risk not to.

The Republican principles fail completely to address this reality.  What Geithner will conclude remains to be seen.

As woeful as the current conservatorship for Fannie and Freddie is, the arrangement has achieved its principal objectives.  Mortgage markets have remained stable, long term credit is available at the lowest rates in 50 years, and more than 5 million households last year were able to buy or refinance their homes because of the government’s intervention. In contrast to the GSE-like interventions in Citi, Goldman, Bank of America and others, private shareholders got wiped out.  The Fannie and Freddie management teams that led the companies off the cliff were replaced, as were the boards.  The government holds warrants for a super-majority of their stock, and is reaping a healthy 10 percent dividend on their investments.

The status quo is unsustainable in the long run.  But until a firm consensus has developed around what can and should replace it, acting out of spite or ideology to unravel the firms would be the worst possible course of action.

House Republicans have taken their first shot on this.  It’s a remarkably tame and incomplete one.  Tomorrow’s hearings will give us the first glimpse of the Administration’s thinking, and through the questioning, that of Democrats.  Hopefully everyone will key their words and actions to the Hippocratic Oath to “first, do no harm.”

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Stand Up Guy

March 18, 2010

Has political discourse in the Congress deteriorated to new lows in our fractious time?  Are the brickbats Republicans are throwing across the aisle at Democratic leaders worse than the severe caning meted out by Rep. Preston Brooks, SC in 1856 to Massachussets Rep. Charles Sumner?  Probably not. But there’s something depressing and creepy about the coarse behavior we’re coming to take for granted these days.

So I was pleased to see Mass. Democrat Barney Frank take issue with recent comments by Ohio Republican (and potential Speaker of the House) John Boehner this week.  Boehner was quoted derogating congressional staffers involved in the financial services reform legislation as “punk staffers.”  Frank took umbrage and fired off a literate, thoughtful and scolding letter.

Bravo, Barney.  Real leaders don’t belittle the folks that are doing the hard work.  They stand up for them as Barney did.

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Any Easy Answers? Not So Far

March 05, 2010

Any Easy Answers? Not So Far

With the housing market showing continuing and unwelcome weakness as the effects of the home-buyer tax credit flush out of the system, it may be that lenders and others are slowly but finally coming around to recognizing that the current approach to failing loans and underwater borrowers may not be enough to lift the heavy load of unsold or unsellable properties off the market.

Mortgage Technology Magazine had a March 4 online article that covered the chatter at the Mortgage Bankers Association annual Servicing Conference held recently.  Summarizing the conference, MTM editor Anthony Garritano wrote that

At the Mortgage Bankers Association National Servicing Conference and Expo here, attendees were very interested in how short sales can be more automated and technology vendors were ready to deliver solutions. The same way they were ready to automate loan mods last year. However, 54% of respondents say industry recovery will take more then short sales and loan mods.

The Making Home Affordable program has been expanded to include new features to help beleagured borrowers with short sales, the article notes, and this may move more lenders and borrowers down that path.  But he also notes that “many if not most financial institutions are not adequately set up to approve short sales in a timely fashion, leading to a very low success rate for short sales to date.”

A conference participant, surveying the very modest success rate of the HAMP loan mod program, said 

“The combination of loan modifications and short sales will not be enough to lead the industry into recovery,” answered Greg Hebner, president of MOS Group. “While the current efforts to modify existing loans and streamline short sale transactions will likely provide a level of support for the residential mortgage market, these measures are only slowing down the inevitable correction that’s needed in current property values and their outstanding mortgage amounts. With these factors combined with what I believe will be a long, slow recovery in the general employment market, I foresee a much longer road to recovery, particularly when we consider the volume of problem loans that have yet to be uncovered and addressed, and the continued fundamental weaknesses in nearly all core housing drivers.”

Another opined that, 

“There just is no single solution set — whether it’s a combination of loan mods and short sales or outright foreclosures — that will resolve the current crisis,” concluded Lee Howlett, president of ISGN’s Servicing Practice. “We do know that the status quo is unacceptable, and is leaving borrowers locked into ‘zombie loans’ where they can never recover into a positive equity position in their lifetimes. This will only exacerbate the moral hazard risk and growing propensity for strategic default. The real answer is a cascade of options that create a best fit for the borrower and lender with each acknowledging the shared nature of the problem. In a tactical sense, this means more effort must be applied to the communication of all available options, much like the industry would do in the origination cycle. If we can reset the underlying loan based on re-underwriting current collateral and credit conditions, then we can identify the gap between the new and original loan and begin a dialogue where each party can accept responsibility through such tools as principal forgiveness, shared future equity, consensual short sales, sale-lease backs, and the like. The key is for both parties to acknowledge they are partners in resolving the crisis rather than adversaries.”

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Once a President…

March 03, 2010

Ron Howard directed this very funny video about a very serious topic.  Please enjoy it, and pass it along to all your contacts.

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