Tag: fannie mae and freddie mac

Random Thoughts on Obama’s New Mortgage Plan

In case you missed it, President Obama gave a big speech out in Las Vegas about both his “jobs” plan and a new plan to help underwater borrowers re-finance their mortgage. First, let’s recognize that it is not really “his” plan. The proposal is being issued by the Federal Housing Finance Agency (FHFA), an independent regulator that the President is supposed to have no control over. Frankly, I find it troubling for a president to be so involved with an independent agency. If a president was out giving speeches when the Federal Reserve changed interest rates, we would all call that bizarre. It is no different here. As someone involved in drafting the law that created FHFA, I can say Congress considered, and rejected, the option of having this agency accountable to the president.

On to the substance. Perhaps most striking is that this plan does nothing for the housing market. Does it increase demand for housing? No. Does it reduce the supply of excess homes or help move the massive shadow inventory? Again, No. Does it even help those most in need? No. It is available only to those who have already had a mortgage for over two years, are current on their mortgage, and have missed no more than one payment per year. Basically helping only those that do not need any help.

The logic of the plan is that by reducing mortgage rates, you reduce monthly payments, which would increase consumer spending. The flaw in that logic is that while a mortgage is one person’s liability, it is another person’s asset. So you are simply making one party wealthier while making another poorer. It is not clear that the impact on aggregate spending should be anything other than zero.

Most troubling about the the plan, is that the program it is based upon, HARP, is likely illegal. Both the Fannie and Freddie charters require that if a loan is above 80 percent loan-to-value, it must have mortgage insurance. Yet the heart of HARP is a waiver of this requirement. Apparently FHFA claims these are not “new” loans, but just modifications. In that case why in the world would you modify a loan that is current and does not appear in any danger of default. Sadly one of the many things lost in the financial crisis is a basic respect for the rule of law. Our financial regulators have too often embraced a culture of lawlessness in name of saving our financial system (with little to show for it).

Exit Interview with Sheila Bair

Sunday’s New York Times Magazine has an interesting exit interview with Sheila Bair, who until this past Friday served as Chair of Federal Deposit Insurance Commission (FDIC). While I haven’t always been her biggest fan, I did find it refreshing to hear a bank regulator state the obvious:  we should have let Bear Stearns fail. As she puts it:

Bear Stearns was a second-tier investment bank, with — what? — around $400 billion in assets? I’m a traditionalist. Banks and bank-holding companies are in the safety net. That’s why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they are supposed to fail.

I’d be hard-pressed to say it better. Assisting the sale of Bear to JP Morgan created the expectation that anyone larger, like Lehman, would be assisted as well. Perhaps the most interesting part of the interview is that Bair gets right to the heart of the matter: the treatment of bondholders. ”Why did we do the bailouts?” Bair states “It was all about the bondholders.” Again she couldn’t be more correct. If there was anything Dodd-Frank should have fixed it was this, ending the rescue of bondholders and injecting market discipline back into bank.  It is also refreshing to hear her admit: ”I don’t think regulators can adequately regulate these big banks, we need market discipline. And if we don’t have that, they’re going to get us in trouble again.”

Where I disagree, besides her misguided take on mortgage re-sets, is whether Dodd-Frank will actually impose losses on bondholders. Bair expresses some optimism that such is the case, but there are just too many holes in Dodd-Frank to make that believable. Plus you pretty much have the same set of rules in place for Fannie Mae and Freddie Mac, yet the last time I checked the bondholders are still being protected at the expense of the taxpayer. If we don’t impose losses on Fannie creditors, even now after the panic, what makes anyone think we will do so to Citibank. Section 204 of Dodd-Frank is quite clear that the FDIC indeed retains the power to rescue creditors. Something that Bair was willing to do during the crisis, even if pushed to do so by Tim Geithner. Despite some errors, the interview is really a worthwhile read and has some real lessons for avoiding the next financial crisis.

We Don’t Need No Art in Kansas

At POLITICO this morning we find a long opinion piece by Matt Stoller, “Public Pays Price for Privatization,” summarized as “The real infrastructure trend in America today is privatizing what is left.” If that weren’t enough to give you the flavor of the piece, the bio line tells us that “Stoller worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues as a staffer for Rep. Alan Grayson (D-Fla.). He is currently a fellow at the Roosevelt Institute.” Say no more – except, there’s more to say.

Stoller notes, among much else, that Kansas Gov. Sam Brownback just turned over arts funding to the private sector, making Kansas the only state without a publicly funded arts agency.” Don’t reel in horror; the cited Los Angeles Times article has already done it for you: “The governor erased state funding for arts programs, leaving the Kansas Arts Commission with no budget, no staff and no offices.” One imagines there will now be no art at all in Kansas.

Not surprisingly, Stoller extols the giant public works of the New Deal and after, which petered out in the 1970s, he says, after which “international competitiveness and environmental costs drove the logic of cost reductions into our political order. Today, we are still living in the Ronald Reagan-Paul Volcker era of low taxes, low regulations, low pay, low spending and high finance.” It seems not to have occurred to Stoller that perhaps the prior absence of “the logic of cost reductions” in our political order might have contributed to why, as he says, “the New Deal coalition melted in the 1970s.”

Art aside – that’s an easy case for defunding – Stoller does go on to criticize much of the “privatization” that’s taken place since – starting with Fannie Mae and Freddie Mac. He’s right there: These “private-public partnerships” are fraught with peril, not least by giving privatization a bad name, something he doesn’t consider. The idea of “public goods” is not meaningless, but the definition has to be strict, as economists know, and the means for privatizing ersatz “public goods” have to be clean. Given the vast public sector before us, we’ve got years of privatization ahead. Let’s hope it’s done right.

A Message From The Ivory Tower’s Friendly Neighborhood ‘Reactionary’

There is a reason “ivory tower” has a negative connotation, evoking images of effete snobs walled away in ivory opulence as they look down on the commoners and demand outsized respect. The image, unfortunately, is occasionally accurate for individual academics, and almost always so for the whole of academia, which is funded by massive subsidies taken from taxpayers, but walled off by claims that no price can or should ever be affixed to the “public good” it produces. Add to this its professorial residents often demanding limitless freedom – and job security – to say whatever they want about such evil pursuits as “big business” that generate the tax dollars that keep the tower cushy and its jobs secure, and disdain for the tower is well deserved.

The distasteful side of academia is on display in an article by journalism professor Robert Jensen, in which he responds to a recent Texas Public Policy Foundation conference that he attended, and in which I participated. And by “I,” I mean Neal McCluskey, a “reactionary” ideologue suffering from “libertarian fantasies,” to use the good professor’s insightful and even-handed characterization of me and my positions.  He also throws in a guaranteed lefty applause line about the free market causing the recent economic downturn – who the heck are Fannie and Freddie? –  and in so doing displays why many people see academia not as a haven for objective truth-seekers, but a castle for axe-grinders who want to place themselves high above the people and institutions they just don’t like.

This would perhaps be palatable if our betters sought to fund their lofty positions through the voluntary contributions of others. But many don’t. No, they insist that they should be able to do and say whatever they want using money extracted from taxpayers – including taxpayers they plan to rhetorically assault – whether those taxpayers like it or not. In an equal society – which so many of them, including Prof. Jensen, say they’re defending – they insist that they should be most equal of all.

Perhaps the most ironic part of Prof. Jensen’s commentary is that in his apparent haste to ignore my message and demean the messenger, he missed that he and I are likely in agreement about whether No Child Left Behind-esque rules and regulations should be applied to colleges and universities. It seems he just infers that my arguing that ending subsidies is the key to meaningful accountability means that I support such efforts as those being pitched by TPPF to impose transparency and accountability on public Texas colleges. I offered no such support, and though I would like to see TPPFs proposals tried in some schools, I would never demand that they be imposed by government. Unfortunately, it appears Prof. Jensen just didn’t do due journalistic diligence by researching what I’ve written on these topics before branding me a bad guy, including taking in my opposition to standardized testing proposals that emanated from the Spellings Commission, or, for that matter, reading my writings on NCLB.

In the end, all I want is for professors to be on the same starting level as the average person: having to get the voluntary support of others to do their vaunted work. But too many academics, like Prof. Jensen, don’t seem to care for that deal. They want to take your money whether you like it or not, lest they lose the ability to tell you how terrible you are.

Thursday Links

  • “If financial institutions are indeed better than consumers at managing interest risk, then those companies should be able to offer consumers attractive terms for doing so — without the moral hazard of an enormous taxpayer backstop.”
  • We should be thankful that the president is spending time on his golf game.
  • After all, he recently reinstated military tribunals at Guantanamo Bay and has continued the use of extra-constitutional prisons in the U.S. after the Bush era.
  • It’s odd that debate here centers on a no-fly zone, a form of military intervention that shows support for rebels without much helping them.”
  • Does Haley Barbour really want to cut defense spending? Or is he just really politically astute? 

The Cost of Delaying Foreclosures

With State AGs and the Federal Government pushing to further extend the mortgage foreclosure process for late borrowers, one might assume that these government officials believe that further delay has no costs, and is at most a transfer from the lender to the borrower.  Judging from the results of a recent working paper, by economists Shuang Zhu and Kelley Pace at Louisiana State, they would be wrong.  Further foreclosure delays impose significant costs, not just on the economy and lenders, but also on other borrowers.

Zhu and Pace start with the observation:   “The longer the period between first missing payment and foreclosure sale, the more valuable the default option becomes. The borrower preserves the option to either keep defaulting or cure the default in the future. Since this option value grows with the foreclosure period, longer expected foreclosure periods increase the propensity to default on mortgage loans.”

As state and local law govern the foreclosure process, the authors examine differences across areas to see if such differences in delay impact the rate of foreclosures.  Interestingly enough, they do find that the longer are delays, the greater is the foreclosure rate. 

Given that lenders understand that delays are costly, this is likely to show up in the price of the mortgage.  Zhu and Pace find that with each additional six month delay in foreclosure, mortgage rates increase by 10 basis points.  As delays are running an extra year or so now, mortgage rates are higher by about 20 basis points due to government efforts to extend the foreclosure process.  This might seem small, but its also the amount many claimed Fannie Mae and Freddie Mac lowered rates by.  Clearly the costs of delaying foreclosures are not borne just by the banks, but by anyone hoping to get a mortgage.  For those who would respond “but mortgages are cheap” - they are only cheap due to cheap money.  The spread of mortgage rates over Treasuries is actually about 20 basis points above its historical norm.

Also of interest is that Zhu and Pace, using S&P/Case-Shiller house price futures, find that in cities where borrowers have lower future home price expectations, they default at a greater rate.  I believe this lends some support to the notion that we should stop trying to hold up prices and let them hit a point where up is the only direction.    The paper is full of interesting findings, and also includes a useful literature review of the default literature.

Administration Playing Both Sides on Fannie Mae

On Friday the Obama Administration released its report on “reforming America’s Housing Finance Market.”  The report claimed that the Administration would work toward “winding down Fannie Mae and Freddie Mac on a responsible timeline.” 

While the report was silent on what a responsible timeline would be (surprise, no details); I assumed, perhaps naively, that a reasonable timeline would be 5 to 6 years.  So you can imagine my surprise while reading the Administration’s budget proposal (see Table S-12 of the summary tables), released Monday, that the Administration is projecting that the government will be receiving, between 2012 and 2021, $89 billion in dividend payments from Fannie Mae and Freddie Mac.  In 2021 alone the White House projects $8 billion in dividend payments.  But here’s the rub, for Fannie Mae and Freddie Mac to be paying dividends in 2021 requires that they still be around.

So would the Administration please be straight with us for just a minute: are you or are you not proposing that Fannie Mae and Freddie Mac disappear; and if so, when?

Another odd thing from the budget, again Table s-12 lists the net equity position of Fannie and Freddie as negative.  Well that’s obviously true, but it also raises the question of why they are still in conservatorship, as the law requires them to be taken into receivership once they’ve reached negative equity.  Then perhaps OMB and Treasury have different definitions of net equity.