Fannie Mae-No Politics (FNMA)

[lushka]

Words from Tim Howard at Howard on Mortgage Finance
Mnuchin probably now realizes that when he made his pledge to “get [Fannie and Freddie] out of the government…reasonably fast” he grabbed a tiger by the tail. As I believe he knows, the right solution to the unsustainable status quo of a “non-conserving conservatorship” for the companies is to make a few simple reforms to them (along the lines I’ve suggested in “Fixing What Works” and elsewhere) and then to release and recapitalize them. But there is intense political opposition to that from the large banks and their allies in Congress. A decision by the DC Court of Appeals remanding the Perry Capital case to the lower court would have given him a compelling reason to negotiate a quick settlement of the suits that included a proposal for how to restructure and recapitalize them. Now he has neither the “forcing event” nor the consequent excuse for urgency.
Yet he has made a public commitment to tackling this problem, and he knows what the right thing to do is. I don’t think he’ll endorse something like Corker-Warner as a safe way out–as much as the banks might wish him to–because I think he knows it won’t work, and that he would be blamed for its failure. And he still has to deal with the plaintiffs in the lawsuits.
After having given a good deal of thought to yesterday’s appellate ruling, I’ve come to the reluctant (reluctant because it does not reflect well on our judicial system) conclusion that Judge Ginsburg switched sides on this issue for political rather than judicial reasons. I have three reasons for thinking that. The first is the weakness of the legal argument made by the majority (Millett and Ginsburg) compared with the argument made by Judge Brown. Second is the fact that, based on my reading of the April 2016 transcript, Ginsburg started on the right side of the argument but by yesterday ended up on the wrong side. The third reason–which I only learned of yesterday–is the connection Ginsburg apparently has with individuals and institutions that historically have passionately opposed Fannie and Freddie. (A tip-off to the access people with this point of view had to the judges was that even the one who ruled in favor of the companies, Janice Rogers Brown, cited the made-up AEI figures for Fannie and Freddie’s alleged holdings of subprime mortgages in her historical summary; she didn’t find that non-fact herself– it found her.) As other commenters on this site have said, yesterday’s majority decision read like it started with a conclusion, then used the best (although still not very good) legal arguments available to justify it.
With the DC District Court of Appeals ruling, the focus now shifts to Judge Sweeney’s Court of Federal Claims, where the same net worth sweep that Judges Millett and Ginsburg opined was legal under their interpretation of the law is being contested as a regulatory taking. Judge Sweeney already has concluded in this case that the facts matter, and the facts do not support the government. And we still have the case in Delaware, that maintains the net worth sweep is illegal under Delaware State law, as well as a likely appeal of the DC Court of Appeals decision to the Supreme Court.
So Mnuchin can’t ignore the lawsuits in whatever he decides to do on mortgage reform. I also don’t see why he would feel any need NOT to benefit existing shareholders with what he does. The reason the big banks haven’t succeeded with legislative mortgage reform in eight years is that they insist on staying as far away as possible from anything that looks like Fannie and Freddie. But Fannie and Freddie have, by far, most effective and efficient secondary market credit guaranty model. Mnuchin knows that, and if you’re going to do something LIKE Fannie and Freddie, it’s folly not to start with the two companies that already exist.
That’s the dilemma Mnuchin now finds himself dealing with. He knows where he wants to go, but he has powerful forces telling him he shouldn’t try to go there, and now he’s got the legal winds in his face rather than at his back. It will be very interesting to see how he responds to these circumstances.
https://howardonmortgagefinance.com/2017/01/30/a-one-year-retrospective/comment-page-2/#comment-2613
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