My 2 cents on Fannie and Freddie
I am just as adamant about Fannie Mae (FNMA) & Freddie Mac’s (FMCC) future as most everyone that works day-in/day-out, in the trenches of the mortgage industry. For more than a decade I have been a Loan Officer, Banker, and for the most recent 6 years - a Loan Origination Manager. Prior to that I was a licensed broker at UBS - (who coincidently) sold CDO’s among many other “safe” short term investments to institutions: including overnight repo’s, commercial/muni bonds, auction rate certificates, etc.
There is absolutely no question--FNMA and FMCC is the only real & absolutely critical liquidity in our US financial system for 85% of mortgages. Fannie and Freddie were cogs in the wheel leading up to the bust, but furthest from the multiple actual problems that caused our 2008 mortgage/housing crises.As many are aware, the government has been sweeping all of the profits from Fannie and Freddie in 2012, (as if) the 3rd amendment was lawful. Basically they used the GSE's as a scapegoat and cash cow. If the conservatorship does not end--we will see the GSE’s need to borrow from the taxpayers again, which seems crazy. They did not need any money to begin with.Matthew McGill, a partner at Gibson, Dunn and Crutcher, which is representing Perry Capital in its lawsuit against the federal government, said: "It is impossible to compare the public statements with Federal statutes, regulations, numbers and avoid the inference that a lot of high ranking officials at Treasury, the SEC and FHFA lied to Congress and to the public.”
When the Conservatorship does end (as it inevitably will…by court order), then the shareholders will be happy and life is good. But the battle is not over--because some congressmen naively believe the GSE’s are the devil that caused the whole crises. Here is the congress conundrum; (1.) They either stand paralyzed because they don’t know enough real detail about how paramount the GSE’s are (to the lifeblood of our economy and housing market liquidity), or (2.) more dangerously and aggressively they demand dismantling the GSE’s without considering the ramifications of such dramatic action. In fact, the result would be worse! The effects would reach much deeper than the 2008 meltdown ever did.
The reality is this: Fannie Mae just announces its 17th consecutive/profitable quarter. The REAL problem (as much as congress and Henry Paulson originally thought) is NOT (and never was Fannie and Freddie). In fact, they are the solution to the future…which has/ is already taking place. They are now backing more loans than before. Why? Because now the banks (more than ever before) refrain from servicing any loan not backed by one of the GSE’s, conventional guidelines, including FHA, VA, or USDA. That really is the truth. Not to mention the lenders have Frank Dodd compliance rules and regulations wrapped so tight around them, Loan Officers/Bankers (those who originate home loans) cannot go to the bathroom without looking down to see Franks ugly face looking up at them. The GSE’s are the key/ best protection to prevent home financing from becoming a mess in the future. Why?--because the majority of mortgage loans cannot be approved without Fannie and Freddie’s Underwriting approval (DO, DU, and LP respectively). They control the limits on a borrower’s approval to get a loan. They have very strict black & white requirements. For example: without Fannie or Freddie’s specific approval (which also requires documented evidence) from anyone seeking a home loan--here are just a few of those critical components.
DTI (debt-to-income ratio)LTV (loan-to-value ratio)Credit Score MinimumJob history RequirementsDown payment requirementsAmortization requirements
Yes, anyone can make (and follow underwriting requirements), but the underwriting machine in place is healthy and extremely profitable (and never was in trouble). That desktop automated system is already entrenched in all broker/banker/lender portals throughout the U.S. and can easily be watched and regulated when it comes to easing or tightening requirements. As time moves forward towards 2018 (when Fannie’s capital reserve is completely spent) 2 topics will accumulate/accelerate public awareness: First, it’s very clear when looking at the financials that Fannie and Freddie--they have the ability to stand-alone and be the viable & profitable company. Second, the GSE’s paid back every penny of the taxpayer’s bailout money back in 2012. So the obvious/assuming questions are this:
Where are the previous 3+ years & billions of dollars of profit really going…seriously, really!?If Uncle Sam is taking every dime of profit from Fannie and Freddie…shouldn’t they have at least a good justification for screwing over the shareholders? What is in the text of those 11,000 bail-out documents the government holds-back “for national security reasons”? Where is the financial transparency? Obama used to be extremely adamant about that.Why do the majority of shareholders of Fannie and Freddie continue to just sit there? Everyone should be questioning Washington and demanding answers…not just the few who have started law suites. After all, many were robbed from their life savings with no voice or vote (going on 7+ years). Since the GSE bailout money was from US tax dollars, is that decreasing our income tax rates? Nope. Okay, so is it covering the private banks debts (the ones they say were too big to fail)…yet still manage to pay their executive huge bonuses? Maybe they are buying drones? Or maybe it’s paying down the deficit? Where in the world is it going?
I am optimistic that the increasing investor lawsuits and news coverage will increase public awareness as 2016 progresses: Accurately portraying that Fannie and Freddie paid back 200 billion (in record time) even though they did not need the money. All the while, being robbed of the ability to do business like the very profitable and successful (Fortune 10) companies they are.
Fannie and Freddie regulate what loans, exactly, get approved as a sound mortgage; they guarantee mortgages for the banks that originate them. They have such a dramatic presence and enormous influence, that If Fannie and Freddie disappeared tomorrow--the ability to borrow money for a home purchase would disappear (pretty much immediately, paralyzing mortgage lending for months….probably years). I hate to think of all of the other immediate and residual effects that it will cause on the economy. N ot to mention the general spirit of the American dream.
In regard to suggestions involving dissolving/dismantling Fannie and Freddie: Even if there were several large banks willing to take on a platform of lending to match Fannie and Freddie’s volume: (1.) it will take decades to accomplish, unwinding the GSE’s and getting the people who actually originate the mortgages on board (2.) Unfortunately I believe the cash holding requirements (not to mention Frank Dodd's overwhelming and never ending regulatory authority) would prevent the majority of banks from originating mortgages for their own balance sheet. Either they will choose to stay clear of home lending (which will seriously halt lending)…or eventually create a new product that may (or may not) become the beginning of the next big problem. (3.) The banks that are actually willing take on the risk will require much stiffer lending requirements than Fannie & Freddie do…only because their balance sheet will only allow for so many mortgages. Therefore they will require the best-of-the best. That sounds economically smart at first read, but when I say "stiffer", we in effect cut the ability for half of Americans to buy a home. For example: 50% down payment and additional collateral on top of that. In essence, the richest people will be the only ones able to buy homes at a decent interest rate. The highest middle class will still have an opportunity with a 30% down payment and perfect credit, albeit a much higher interest rate. Then the middle class with 20% down will be the bottom of the barrel…with the worst rates. Everyone else--forget about it, they will rent from the wealthy.
Once the conservatorship ends & the public becomes more informed that Fannie and Freddie were not the problem to begin with—releasing them back to business (as usual) makes the most sense. Why recreate the wheel? The wheels on the GSE’s were never broken. Indeed, the brakes were lost (and lending spun out of control) in the public sector, involving but not limited to: the rating agencies, Wall Street, and private banks, etc. They all jumped on the same bandwagon--creating higher profit margins, by developing progressive/riskier underwriting guidelines. All the while home values kept inflating due to some very unique mortgage loans where homeowners could pay less than interest only (causing the principle balance to increase every month). Ultimately the “risk vs. value” on Wall Street seemed to be a mirage, inconsequential.
The mortgage giants never needed a bail-out; they were merely a scapegoat & fat piggy bank for Congress. The government abused their privilege to the 3rd amendment. The Obama administration stole from the American people—many of those who had invested their life savings into the GSE's (because of their profitability and reliable dividend returns). The Treasury stepped way out-of-bounds, purposely bleeding a healthy/viable fortune 10 company near broke.
Long live Fannie and Freddie!
Disclaimer: I am long Fannie.
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