FHFA
is having a birthday party. They are one year old. There is not much to
celebrate. Not surprisingly, the speech by James Lockhart contained
nothing new. I doubt there were many Champagne bottles opened for this
occasion. There is one aspect to Mr. Lockhart’s presentation that I
found interesting. The following is a slide from the speech
There
is a message in this slide. The suggestion is that there are three
paths that FNM/FRE may follow in the future. The second and third
alternatives make no sense. Mr. Lockhart knows that.
The
“Improved GSE model” is dead. History will show that the GSE’s were/are
the largest systemic risk that we face. The losses at FHFA will far
exceed those that AIG will force us to accept. The GSE structure
allowed that to happen. A small and insufficient amount of private
sector capital coupled with private sector management abused the AAA
rating of the United States. The loss of capital by the investors was
small by way of comparison to the price the taxpayers will pay. To
recreate the structure that is at the heart of our problems is sheer
lunacy. If that is the direction that is taken we will deserve the
collapse that will surely follow. No foreign investor would trust us if
we made that mistake again.
The Private Sector Solution is just
a sound bite. The total share of the new mortgage market by all of the
D.C. lenders is currently 94%. Together with Ginnie Mae and FHA the
government share of the total market is more than 60%. While every
effort should be made to privatize as much of this as possible we have
to accept the fact that for a minimum of ten years Washington will be
substantially more than 50% of this critical market.
So if it is not #2 or #3 it must be #1. Nationalize the Agencies and merge them with Ginnie Mae.
It is interesting to note that Mr. Lockhart rains on that idea by
suggesting there is a "Moral Hazard" regarding government insurance
programs. Mr. Lockhart needs to be reminded that his Agencies have put
their guaranty on $3.8 Trillion of paper. To suggest that the FHA model
is flawed may be correct. But, the Agencies are the largest insurers of
loss in the world. We would not be in this mess if that were not the
case.
As the following slides show, the role of the Agencies is
already shrinking in favor of an increase role by Ginnie Mae. It would
appear that the Agencies are being put to rest in slow motion.
Part
of the FHFA Mission Statement is: Support affordable housing. While
that may sound nice, it is central to the problem of the GSE’s. Mixing
affordable housing and other social objectives inside of the GSE’s is a
bad mistake. Their narrow mission should be to support a stable and
liquid housing market and to insure that they are sound. To do that it
is necessary to abandon the objective of achieving Congress’s social
agendas. That must be separated from the credit standards that are set
by the surviving government mortgage agency.
We need to
re-establish the belief that the mortgage system works. 80+% of the
mortgage debt now outstanding is money good. We need to build a
gigantic Chinese wall around this and not allow the politicians to
pollute it with social objectives that have nothing to do with good
lending standards. That will be the challenge for the folks at Ginnie
Mae.
I, for one, am convinced that the days of the GSE’s are
numbered. The uncertain nature of their guaranty has made them more
expensive than they should be. There are redundancies between fre/fnm.
At one time they were independent competitors. Those days are over.
There are thousand of GSE employees who do an important job on a daily
basis. They had nothing to do with the problems we now face. It must be
hell for them to live with this uncertainty. That reality will probably
hasten and shape the outcome of this.
We would be much better
off if FHFA did not have a second anniversary. If they have a fifth
anniversary we are going to regret it.
The D.C. lender's share of the new mortgage market is 94%. Note that new mortgage issuance is drying up.
Strong support from the Fed.? About $2 Trillion worth.
These lines have no where to go but up.
The Federal Home Loan Banks aren't doing so well either.
This is the biggest risk that we face.
My favorite. They are reading the Blogs!
I never understood why cheap mortgages are supposed to "make housing affordable". All they seem to do is help send property prices rocketing way beyond what people can really afford. Wasn't that really the problem?
yes, they abused the cheap funding given to them. contrast their performance with the FHA. not that the FHA is a saint, but in terms of underwriting, the FHA has always been known as a tough underwriters, whereas during the boom, frannie would routinely waive documentation requirements via DU/LP for 75% or more of applicants of "conforming" mortgages. brokers knew how to work those systems to push through all kinds of crap that looked nothing like conforming mortgages of the past. frannie competed with subprime with "expanded approval" programs that were subprime in a weak disguise, and when the subprime market imploded, they didn't have the sense (or desire?) to pull those programs back. these companies are failures and should be put into runoff ASAP, the FHA can pick up the slack.
GSEs are very inefficient and bureaucratic. I would be more than happy to see them go.Their employees are also worth shit in the market. If any other organization had this cheaper source of funding, they would have managed risk far better than GSEs. Have you seen the amount of money spent by these companies for their Restatement? They have acted recklessly. I have no concerns for them or their employees as the quality of risk management and execution is very poor.
Let them die. They dont deserve to exist.
I suggested folding folding Fannie and Freddie into Ginnie last year.
http://alephblog.com/2008/07/11/in-large-red-friendly-letters-it-reads-d...
and
http://alephblog.com/2008/08/18/a-way-to-make-money-off-of-fannie-and-fr...
Buying the long agency debt was a real winner prior to the bailout.
Great post!
"Mr. Lockhart rains on that idea by suggesting there is a "Moral Hazard" regarding government insurance programs."
There is the risk of moral hazard with any insurance program. It comes with the territory. He should know that, given his background.
"It would appear that the Agencies are being put to rest in slow motion."
That is my impression as well. Note the increased visibility of Donovan - for example, he announced Fannie and Freddie's 125LTV increase, not Lockhart.
"There are thousand of GSE employees who do an important job on a daily basis. They had nothing to do with the problems we now face. It must be hell for them to live with this uncertainty."
I feel sorry for the rank-and-file, but note that many executives have already left.
One thing you don't touch on - the massive amount of new dollars that are being printed by the Fed to support these failures. Without the Fed, the agency MBS market would have failed months ago. There would have been a death spiral. (Many in my industry don't agree with me, but most of them can't see the forest for the trees.) You are right in that foreign investors don't believe in the model anymore, and are flat out unwilling to buy agency MBS.
But, Fannie and Freddie still pump out MBS every day. YTD, the Fed has bought almost all of the new issuance, and printed dollars to do so. The Fed will never be able to sell that debt at anywhere near par. In fact, they can't even stop buying - the moment they stop buying, MBS spreads start shooting up in a death spiral (and drag Treasuries up with them via servicer selling). (Ginnie MBS can still find a decent bid in the market, since it has full faith and credit backing.)
These monsters are not only continuing to infect the housing market, but they are threatening their stability of our currency.
This is a huge issue, and is of course missed not only by most of the MSM, but most of the blogs as well (Bruce notwithstanding, of course).
These monsters need to be shut down now.
Yes, I wonder how many people realize that the 1.25trillion of MBS that the Fed is buying, is largely a buy-back from foreign SWFs and foreign private investors, who were lapping this stuff up.
If we were going to default, writing down Fannie and Freddie paper would have been a good start.
I'm not sure at the point at which the GSEs were doomed, but 'stepping up to the plate' and sucking down all the Countrywide paper was definitely a very very bad move.
Not just Countrywide, they sucked up a lot of garbage, from the likes of IndyMac, WaMu (Freddie in particular has a lot of Option ARMs from WaMu), Bear/EMC, Lehman/Aurora, etc. Lots of Alt A garbage. btw, this was all enabled by their MI partners; once the MIs stopped insuring this crap, the GSEs were forced to stop buying it. it is really the mi industry who allowed the gses to go down this path, and now the gses are paying them back by continuing to buy their insurance even though they are mostly BB (and witness TGIC if you want to see the claims-paying ability of this industry once it goes into runoff - claims paid 60cents on the dollar). The whole system is a scam, and needs to be shut down and steered towards the FHA.