Fannie Mae-No Politics (FNMA)

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Maloni blog 10/27/2014
Watt’s Speech, Cooper Brief, and More
There were two major developments this past week, weighty with meaning and worth reviewing, plus some related events.

First up is Mel Watt reviving 3% down payments.


FHFA Director Mel Watt announced his not well kept secret to allow (perhaps mandate is a better word, since neither can refuse) Fannie and Freddie to begin—again--securitizing 3% down mortgages, a previous practice that had been junked for safety and soundness reasons. (Link to Watt’s remarks.)


http://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Melvin-L-Watt,-Director,-Federal-Housing-Finance-Agency-at-the-MBA-Annual-Convention.aspx


While there were several welcoming comments for Watt’s action, it was far from universal. Some commentators expressed concerns about inviting back “subprime.” (See W Post editorial link below.)


http://www.washingtonpost.com/opinions/a-step-backward-for-the-housing-industry/2014/10/24/c4430ec8-5b80-11e4-8264-deed989ae9a2_story.html?hpid=z6


I disagree with those critics and don’t think these limited steps usher a new subprime era. Lenders, investors, and the government all are smarter and have better control over that unlikely development.


Where I agree with the Post editorial is that the federal financial regulators are making a mistake scaling back and lowering their Private Label Securities (PLS or non-F&F) “required skin in the game” rules, since that’s where the red ink hemorrhage and major problems originated before the 2008 real estate meltdown. (Yes, over $2 Trillion in faulty PLS mortgage bond creation, not by F&F but the big banks and investment banks.)


This latest regulatory caviling shows what happens when lenders whine, drag their feet, making borrowers suffer, and federal overseers quickly fold their cards and rush to accommodate the banks and mortgage companies.


Meanwhile at FHFA, Watt creatively is trying to use his regulatory authority to stimulate what lenders should be doing on their own, lending to lower income families, which—if they truly did—would be a man bites dog story.


Some reactions to Watt’s speech


Major lenders still expressed “buy back” worries (see link to John Carney’s WSJ article covering that), saying they might not do the new 3% down mortgages.


http://m.wsj.com/articles/dont-bank-on-easier-mortgage-credit-heard-on-the-street-1413836831?mobile=y


Guy Cecala’s Inside Mortgage Finance carried this from the MBA meeting, last week, on how some banks might react.



“The mortgage credit box contracted quickly as the housing market slid toward disaster in 2007, but it’s proving to be much more difficult to stretch it back to what used to be considered normal.”

“The subtitle to this week’s annual convention of the Mortgage Bankers Association could well have been access to credit, an idea that clearly dominated the conversation in Las Vegas. Despite the recent unexpected drop in mortgage interest rates, most observers believe originations in 2015 will track closely to this year’s sluggish level. Part of the problem is relatively weak home-purchase lending.”

“And don’t expect any of the megabanks to move quickly to loosen their underwriting standards to attract new customers. During one of the sessions at the convention, David Steckel of Bank of America said his institution has focused on capturing more of the customers who fit into the company’s credit box rather than making that box bigger.”

“About half of BofA’s mortgage originations in the first half of 2014 went to current bank customers, said Steckel. Still, the new lender-friendly representation and warranty framework unveiled this week by the Federal Housing Finance Agency may make the bank a little more interested in considering expanding its credit box than it was six months ago, Steckel said.”






The (stuffy) Economist weighs in on Watt’s call for lower down payment F&F lending. (Brits should be among the last people lecturing the US.)


http://www.economist.com/node/21627699/print


Ditto, the NYT.


http://dealbook.nytimes.com/2014/10/22/u-s-loosens-reins-but-mortgage-lenders-want-more-slack/


Vox criticizes new policies.



http://www.vox.com/2014/10/21/7027949/mel-watt-subprime-mortgage-fannie-mae-freddie-mac


What Maloni Thinks….


Most banks and mortgage banks will reveal themselves and frustrate Watt’s move, slow walking any new lending, citing the "possibility" of buyback requests—until Watt gives them something concrete so they don’t have to “worry” as much!


If lenders followed the F&F automated underwriting rules--and didn't try screwing mortgagors or investors manipulating the underwriting criteria--they would have very few buyback requests. They get into trouble when they cut corners, hoping that nobody will catch them.


Go forward Mel with your not so new changes, but watch the lenders closely—maybe increase the GSE post purchase review procedures—noting carefully the loan quality lenders ship to F&F.


More Action on Third Amendment Cases


There are several “third amendment takings” law suits, working through three separate courts.

I discussed Lamberth’s and Sweeney’s initial (and questionable) decisions last week.


Judge Royce Lamberth ruled to dismiss an Administrative Procedures Act (APA) claim against the government that will be appealed. Judge Margaret Sweeney’s opinion only rejected Fairholme Capital’s hiring Tim Howard to view certain information under the document “discovery’” she granted Fairholme lawyers earlier this year.


In an earlier Iowa federal court action, Judge Ross Walters heard a third case--brought by plaintiffs Continental Western Insurance Company---and like the Lamberth opinion, dealt with the Administrative Procedures Act (APA) as well as the Housing and Economic Recovery Act (HERA).


As predicted, the government circulated Lamberth’s ruling, urging other courts (Iowa and presumably Sweeney) to embrace that finding.

Fairholme’s law firm, Cooper and Kirk—a party to the Perry suit on which Lamberth ruled--filed a brief with Judge Walters last week in Iowa, in response to the government’s courts’ call to “follow Lamberth.” It contains many items—see below--likely to be in Cooper’s non-lead plaintiff’s appeal of Lamberth’s original decision, supporting the US government.


I. The Perry Court’s Boundless Interpretation of Section 4617(f) Is Wrong. ........................4


A. The Net Worth Sweep Exceeds FHFA’s Powers and Functions as


Conservator. .............................................................................................................4


1. As conservator, FHFA has no power to take the Companies’


profits for itself or to give them to its sister federal agency. .......................5


2. As conservator, FHFA must work to preserve and conserve the


Companies’ assets and to place the Companies in a sound and


solvent condition. .......................................................................................10


3. As conservator, FHFA must exercise its independent judgment and


cannot make decisions at Treasury’s direction. .........................................11


4. As conservator, FHFA may not take steps to wind down the


Companies..................................................................................................12


5. As conservator, FHFA may not make arbitrary and capricious


decisions.....................................................................................................14


B. HERA’s Jurisdictional Bar Does Not Shield Treasury’s Unlawful


Conduct. .................................................................................................................15


Here is a Value Walk article on this matter, plus a link to the entire Cooper filing.


http://www.valuewalk.com/2014/10/fannie-mae-continental-western-points-lambreth-ignored-supreme-court-precedent/


Also another document link without commentary.


http://online.wsj.com/public/resources/documents/fannie1021.pdf



I am a bit shocked these two judicial decisions seem so far off the mark of statutory and legal reality.


Certainly, Lamberth’s which is far more significant than Sweeney’s, makes even veteran lawyers wonder what the Judge was thinking in ignoring various court precedents and finding “arbitrary and capricious” protection for Treasury which doesn’t exist in law.


The Lamberth ruling will be appealed and much of what Copper and Kirk will say then is reflected in the report (above) sent to Iowa Judge Ross Walters.


Part of me still is pissed/outraged at how many people—including jurists who should know better—seem inclined to believe the worst concerning Fannie and Freddie, and that no mistreatment or abuse of them, their officials or shareholders is beyond the pale.


All of which supports David Fiderer’s belief that the “F&F Big Lie” (evil and responsible for the 2008 financial meltdown) is so ingrained it may never get washed out of our national consciousness.

Yet a national mortgage market, without Fannie and Freddie and the affordable fixed rate financing they insure, would be an ugly consumer-unfriendly system. GSE critics never seem to make that critical connection.

When the Administration, in the form of Mel Watt, goes to Las Vegas to tell the Mortgage Banker’s that help is on the way, what principals did they employ to stimulate conventional mortgage finance—Fannie and Freddie? And he didn’t even offer an Obama, “Thank you very much and excuse me for dumping all over you.”
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