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.

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.”


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.


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.”


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.


FDIC Steps Up

February 26, 2010

Since I wrote and posted the piece that follows, Barry Ritholz at The Big Picture blog has also posted a thoughtful note on this titled “Underwater Homeowners:  Demand Principal Reductions.”  Commenting on the FDIC move described in my post below, Ritholz notes

It only requires basic math skills for all parties to recognize that it is in the banks interest to avoid foreclosures. Underwater borrower with this knowledge — and the cojones — should let the bank know they understand simple math: Foreclosures = 50% bank loss.

They can then “engage in an arm’s length, Wall Street style negotiation.” Not precisely a threat, but simply laying out clearly what the mortgagee’s options are.

He finishes up by observing that, 

My guesstimate is that of the 5 million probable future foreclosures, this mod would be applicable to about 20% of them. Note that a recent report from the Office of the Comptroller of the Currency implies that banks have figured this out: In Q3 of 2009, 13% of loan mods included a principal reduction, up from 10% in Q2 ‘09.

Of course, if Congress didn’t force FASB tio eliminate mark-to-market on holdings, the banks wouldn’t be able to, Japanese style, wait the whole mess out over the next decade or two.

As others have noted, this is how commercial borrowers and lenders negotiate all the time. Somehow, our concerns about the “moral hazards” of renegotiated debt seem to apply only to individual owners, and not the big boys and girls who play chicken with each others’ money all the time.  Some of you who have commented on my earlier posts about principal reduction have strongly supported such bilateral negotiations, but decried the notion of government paying for some or all of a reduction.  

Seems like Ritholz agrees with you.

Balance of Power

In reality, individual borrowers are not like Tishman Speyer or other commercial borrowers who have real loan officers with whom they deal and whose liabilities jeopardize the lender as much as themselves.  

In the real world of mortgage modifications, borrowers are still reduced to trying to break through 800 customer service numbers where they are likely to speak to a different staff person every time they call.  Documents are still provided by fax, sometimes to overseas fax centers.  

Trying to negotiate even a HAMP loan mod is proving to be difficult enough for individual borrowers.  A bare-knuckled negotiation with the lender to force a cram-down seems out of Everyman’s reach.

This imbalance of power and influence between the borrowers and the debt holders in the securitized system that we are living with is one of the root problems in getting to a swift resolution.  The lenders hold most, if not all, of the cards.  Individual borrowers on their own have scant power to negotiate, and servicers have small incentives to accommodate them with radical moves like principal reductions.

Hence, having the government step in on behalf of these borrowers seems to me to be an ideal use of government of, by and for the people.  

As proposed back in March, 2009 in recommendations to incoming HUD Secretary Shaun S. Donovan, government bulk purchases of the mortgage assets behind private label securities at discounts that reflect reality as Ritholz has described would enable it to follow with an orderly disposal of the assets with tools that could include steep writedowns reflective of the discount.


Once again, as it has so many times in this crisis, the FDIC has stepped up and announced it will launch a pilot effort to test ways to reduce principal amounts for overwhelmed and underwater borrowers.  

Under Chair Sheila Bair, the FDIC has been a strong and sometimes lonely voice for consumers’ interests and practical solutions.  She’s proof that the phrase “bipartisan policy making” is not always a euphemism for “food fight.”

According to the Feb. 26 Washington Post,

Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. The performance of those borrowers would be compared with borrowers given more traditional mortgage relief packages, such as those that cut the interest rate on loans.

“We’re thinking about it in terms of earned principal forgiveness. If you stay current on your mortgage, you would earn a principal reduction. It would only be for loans significantly underwater,” said FDIC Chairman Sheila C. Bair

This comes a week after the Obama Administration announced a $1.5 billion pilot funding program to encourage innovation in the five states with the steepest housing price declines—California, Arizona, Nevada, Florida and Michigan.  This was a welcome initiative, as well.  But the amounts available will make only a slight difference in these beleaguered state economies, take months to get up and running with the gauntlet of submissions and approvals it includes, and take years to provide any useful data that could move them from state to national approaches.  Not reasons to stop, but reasons that it falls far short of what needs to be done.

As I’ve noted in other blogs here, principal reductions are emerging as perhaps the only reliable way of modifying mortgages for long term success. The FDIC initiative is a welcome break in the logjam that is keeping so many borrowers from getting a break that can help them keep their homes and keep paying on at least some of what they owe.  


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