Freddie And Fannie Reform – The Monster Has Arrived

Tyler Durden's picture

Submitted by Ramsey Su via The Acting Man blog,

Legal Mumbo-Jumbo

As promised, the Johnson/Crapo bill has finally arrived.  Here are the 442 pages of legal mumbo jumbo, guaranteed to cure all forms of insomnia and those suffering from low blood pressure.   

Allow me to provide a summary. 

The Bill calls for the elimination of FNMA and FHLMC.  It will be replaced by FMIC with a 5 member board appointed by the president.  There will be a 9 member advisory board to assist FMIC and the OCMA.  An internal OIG will be funded by the FMIC to inspect the FMIC.  The FMIC and the OCMA would update Congress on the MIF and audited by the Comptroller General.  FMIC can create any office but must establish the Office of Underwriting, Office of Securitization and the Office of Federal Home Loan Bank Supervision.  The OCMA would administer the Market Access Fund.  Of course, we cannot forget multifamily housing.  There will be an Office of Multifamily Housing.  As for regulations, FMIC starts with the Standard Form Credit Risk-Sharing Mechanism.  Then there will be rules for the Mortgage Insurance Fund.  FMIC would be exempt from SEC but there will be a Securitization Platform with a Platform Board.  Regulations to come include servicers, IDI, PMI and the authority to issue any regulation they desire ……… I am sorry, I need to stop here, I can't read any more.  My head is hurting too much, trying to compute the compliance cost.  (MND has a good summary for those interested.)


House Price Inflation and the Fed

Instead of wasting time on the details, I would like to approach Freddie and Fannie reform from a different perspective – the origination and loss recovery.  

In hindsight, it is clear that the agencies did not lead the sub-prime bubble but they were nevertheless dragged into the cesspool.  They never provided no-doc no-qualification NINJA loans, but cannot escape the simple maths of lending 95% LTV loans when the V (value) was artificially inflated by 40%-50%-or more, resulting in all the negative equity loans outstanding today.  Regardless of how qualified a buyer may appear to be at origination, if the property's value declines by, say 20%, all 95% LTV loans will be in trouble.  

Is double digit home price appreciation a reasonable expectation, when inflation (as imagined by the Fed) is non-existent, income growth is negligible and GDP growth is barely a couple of percent?  Is the bill going to prevent the new agency from insuring loans secured by inflated assets? 

It is unclear how the Fed justifies buying agency MBS when home prices are appreciating at an unsustainable pace and agency loans command 90% of the mortgage market.  Are they trying to use a housing bubble to rescue the economy?  Are the Fed's actions disregarding any consequences to the real estate market?  Is the purchase of agency MBS a real tool for monetary policy, or is it just something the Feds were allowed to do?  

Greenspan, Bernanke and Yellen all confessed that they were wrong about sub-prime.  They all underestimated the consequences.  Yet, they are still empowered to openly manipulate the real estate market, something they admitted that they know very little about.  For agency reforms to be meaningful, Congress should first remove the power of the Fed to buy agency MBS, allowing some type of orderly free market price setting mechanism to return.


Making Rules Up on the Fly

As regards loss recovery, there were Federal Laws, State Laws and local government ordinances, the rules and procedures that a lender must go through when a borrower defaults on a mortgage.  They have all been ignored during the aftermath of the sub-prime bubble.  Order has not been restored.  No one can really say what the rules will be if the industry suffers another down turn.  The Johnson/Crapo Bill adds to the confusion:

Sec.305. Authority to protect taxpayers in unusual and exigent market conditions.


If the Corporation, the Chairman of the Federal Reserve Board of Governors and the Secretary of the Treasury, in consultation with the Secretary of Housing and Urban Development, determine that unusual and exigent circumstances threaten mortgage credit availability within the U.S. housing market, FMIC may provide insurance on covered securities that do not meet the requirements under section 302 including those for first loss position of private market holders.

In other words, Section 305 explicitly states that if the Fed, the Treasury and HUD decide market conditions are "unusual and exigent", whatever that means, they can have taxpayers directly fund any bailout and change the rules as they see fit.  To have the gall to say they are protecting taxpayers is an insult to the intelligence of the taxpayers.  Hmmmm. "Intelligence of the taxpayers"?  I need to think about that one.

How can risk managers assess mortgage risk when the rules are moving targets, subject to changes that are dependent upon the prevailing political winds?

The agencies have been providing cheap financing to borrowers, courtesy of the Fed.  The agencies have been providing cheap and bullet proof insurance for bond investors, courtesy of the Treasury.  The Bill somehow expects some mysterious private capital will come in to insure the first loss position and the Government (including the FOMC) can gracefully exit its role in the mortgage monopoly. That is more than overly optimistic.  Can anyone quantify that in dollars as well as mortgage rates?



In summary, the Bill is going to increase mortgage compliance costs.  It will confuse, rather than clarify, the mortgage application and approval process.  It is a disaster.  Fortunately, I opine the Bill has no chance of passing in its present form.



Alan Greenspan and Ben Bernanke – Clueless, but intervening anyway …

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Dr. Engali's picture

Johnson/ Crapo.... Lol....... You just can't make this shit up. I just took a Crapo in the Johno, and out came this shitty bill.

Manthong's picture

 5 member board appointed by the president, trillions of dollars to control..

 442 pages of lobbyist legal conniving  

What could possibly go wrong?


ParkAveFlasher's picture

Johnson/Crapo is just a defanged version of Pecker/Dumper, which didn't get bipartisan support.  Ever since Penis/Sphincter, it's been tough to get anyone to reach around the aisles for support.  Hopefully, this'll get everyone on the same team to circle up.

Manthong's picture

I think this is more a reworded version of the old Wiener-Assapple bill.

ParkAveFlasher's picture

Which itself, was based on Wart/Hemmoroid, but not nearly as poignant in the details, and couldn't get by the abcess, I mean the recess.  Truly, after Cunter/Browneye, really, what more needs to be said?

NoDebt's picture

Cleveland Steamer still needs to be said.  And I just said it.  This whole damned mortgage world is one giant Cleveland Steamer.

And guess who it's coming down on.

ParkAveFlasher's picture

Steamer...oh right, the Democrat from Ohio.

wmbz's picture

Nothing can or will go wrong for the board or lobbyist. The ass pounding will be resevered for the taxpayer.

new game's picture

sooooooooooo simple -people buy a payment vs rent. yellen tellen rate will rise-hmmm, short end already reacting.

they are inflating prices by financing only to have buyer locked out by their own admission. stuuuuuuuuuupid!!!

peak to valley with a whole lotta strife and broken dreams; yea they just don't get it.......

StychoKiller's picture

Just don't get any Crapo on yer Johnson!

icanhasbailout's picture

Why is it fortunate that it won't pass? This country desperately needs a real, full crash in housing prices so that the next generation can afford to buy in. We're getting that crash one way or another anyway, as if the next generation can't afford to buy in, the demand side collapses and prices go with it.

ParkAveFlasher's picture

The rock and the hard place, is the next generation's wages and the prior generation's second mortgages.

N2OJoe's picture

Because it gives the gov even more power to pound the Taxypayers Crapo with their Johnson...

Shad_ow's picture

It would give more power to the Obama regime to determine who gets a mortgage (you get to pay for it) and inject minorities in neighborhoods without the income to justify it.

buzzsaw99's picture

If the Corporation, the Chairman of the Federal Reserve Board of Governors and the Secretary of the Treasury, in consultation with the Secretary of Housing and Urban Development, determine that unusual and exigent circumstances threaten mortgage credit availability within the U.S....

Should read, If JPM determines that totally predicatable circumstances threaten their bonuses...

rqb1's picture

Yes, this version is just turn over fnma business to ny banks. 

Let The Wurlitzer Play's picture

What this really means is that if broke minorities with poor credit cant buy the home they are ENTITLED to the government will step in and help them purchase one.


FLHRS's picture

Where is the bill that gets the Feds out of the morgage industry and brings back smaller, local banks that know the markets and have some skin in the game.  Just another giant monkey, football and jar of vaseline.

ghostfaceinvestah's picture

News flash for you - the small, local banks are not interested in the least in holding mortgages on their books.  They are more than happy to originate and sell (to the government).

Corporate welfare is no different than personal welfare - once hooked, it is near impossible to get the constituents off of it.

mumbo_jumbo's picture

There are 442 pages of legal mumbo jumbo


i've been called a lot of things but NEVER 442 pages!!

Dr. Engali's picture

" Fortunately, I opine the Bill has no chance of passing in its present form."

Then why even bother writing about it?

FieldingMellish's picture

They will have to pass it... to find out whats in it.

RabbitChow's picture

Anyone applying for a loan or mortgage right now knows how much of a mess the process is (and has been for over a year now).  Most lenders and underwriters have no idea what they are doing, but they do it all under the guise that 'buying a house now is more complex than it used to be'.  Nothing is standardized, so we have multiple requests for forms, waivers, disclosures, all kinds of things.  Buying a house right now is a disaster.  Don't worry, the governmnet is going to fix things.

asscannon101's picture

"...Fortunately, we suspect the Bill has no chance of passing in its present form."


Thats the best part about being a smarmy despot, in that Obomba will just sign it in as an Executive Order... On Christmas Eve when nobody is watching... From the 15th tee of a golf course... on the island of Hawaii... using your tax dollars... nice.

slightlyskeptical's picture

This is the stipidest shit I have ever seen. It changes nothing except who makes the profits. The way it reads, all the crap loans from the housing busts still would have ended up in this same pool.FMIC is no better than Fannie or Freddie. They both enslave homeowners to private interests.

We need a Federal mortgage program financed with public money. Underwrite all loans under sound principles. 20% down, documentation, right of government to sieze social security payments on default, annual appreciation limits, etc. It shouldn't be easy to buy a house on finance. It should be a struggle to save up a down payment. It is also unfair to make that struggle only to eventually have to pay lenders outsized profits.

If we want to have a sound housing industry in this country we need to get the blood suckers out of the mortgage business. It makes no sense that we have to pay bankers billions in riskless profits each year so that we can have the American Dream come true.

Fuck anyone who thinks our housing markets should work in the fashion they do now or how these traitors propose.

Turin Turambar's picture

LOL, what a mess.  Oh well, not my problem any longer.  I went John Galt and shut down my mortgage companies.  One too many phone calls demanding that I fly in for a body cavity search.  No thanks.  No more hoops for me to jump through.  Life is very good unencumbered by bureaucratic BS.

WhyWait's picture

How will this bill affect all the failed, illegally originated, illegally transferred loans, loans that are unrepayable with mortgages that will prove unenforceable on property whose title is now hopelessly clouded, that they have quietly and off the record taken ownership of?

NoTTD's picture

How can we trust this bill?  It has the word "crap" right in the title.


On the other hand, that could be truth in advertising.

catch edge ghost's picture

It's just a mini-Fed for mortgages. A root node for the 'other' class of money. Will fit hand in glove with mandatory savings.

ebworthen's picture

There are more acronyms, boards, committees, offices, and bureaucratic bullshit in this bill than there are flies on a dung heap.

If they really wanted to fix things it would be a one page bill along these lines:

  1. 20% down, issuing Bank holds loan for life.
  2. No Federal backing of any mortgage whatsoever.
  3. Mortgage securities, derivatives, or any other form of speculative instrument are forbidden.

It is simple , moral, ethical, and fiduciarily sound  - which is why it will never happen.

slightlyskeptical's picture

No loans would ever occur unless at extremely high intrest rates. The only reason they are loaning at all is because the government backs it all. Since the government backs it all and also will under this new proposal (90%), I don't see how this is much better.

We need to cut out the middlemen and just have the government loan straight to the people.

Unknown User's picture

Perfect! Now how do we get rid of the most powerful and ruthless cartel in the world?


LostAtSea's picture

well, this is what one gets in a banana republic.  There has been no real rule of law for nearly a decade now.  They make up whatever the fuck they want.  Think it won't pass?  Thnk again.


Sokhmate's picture

Can the tylers illustrate the new bill in a graph utilizing Tomasulo's algorithm? similar to Chart_0.jpg ?

22winmag's picture

I bet this one makes Dodd-Frank looks like a brown stain on the mattress.

FreeNewEnergy's picture

Surely, nobody wants their Johnson to get stuck in the Crapo, so this bill will take a dump in the lower house (isn't that a great visual?).

On another note, American Tax Funding Services just sent me a notice of IMMINENT LEGAL ACTION, just like they did last year as they purchased my tax lien at a 56% discount from the City of Rochester (NY). I spoke to them last year, laughed in their face and they did not foreclose, probably because they figure the house is worth maybe net $7-8K after all the repairs that need to be done, and, since they have tax liens on something like 40,000 other properties just in Rochester, the legal costs, etc., that it just isn't worth it.

If and when this vulture company decides to foreclose upon my rental property (yes, Sec 8 tenants and a check every month from the County), they will be met with a countersuit against them and the City of Rochester for unjust enrichment and all other sorts of stuff that will take a judge and/or jury three years to get through court.

Seriously, I am amused and at the same time dismayed that the City of Rochester would sell my tax lien at less than half value before offering me, the homeowner and taxpayer, the same deal. It's obvious to me - since I haven't paid taxes on the property in five years - that this is just a game and the winners and losers will be separated by how hard you want to play.

The housing market in many parts of this country is an absolute disaster and prices should be 33% lower. Back of envelope calculation says a home should be 2 1/2 times annual household income. Median price right now is 188,000. Median income $48K. Median house price should be $120,000.

Reversion to the mean is going to be a biatch! Bitchez!

yellowsub's picture

Because all it takes is 3.5% down...