Wednesday, August 18, 2010

Housing Finance Conference: A Case of Extremes

by Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.


Yesterday I went to the Conference on the Future of Housing Finance, held in DC, and hosted by the Treasury. Washington, DC this time of year can be brutally hot and humid - and yesterday was no exception - but the air conditioned conference rooms did little to keep me from getting hot around the collar over the temporizing and equivocating that went on. I guess if you're into photo ops, political peacock preening, media hype, and assorted horse and pony show tactics, it could be considered an entertaining way to spend the day.

But all is not lost. There were some interesting and timely suggestions.

Of course, I was glad to meet friends and acquaintances. But this was not a social event; it was a deadly serious attempt at understanding the deficiencies of the housing finance system, with the goal of seeking ways to prevent future crises. Maybe it's somewhat naive, but I actually expected more from the gathering of such a prestigious and experienced group of industry people, some of whom I have worked with over the years and do admire. There were two large group sessions and several break-out sessions. Sometimes, though, too many powerful vested interests can ruin a good thing!

I want to share with you some observations about the conference in general and Fannie and Freddie (GSE) in particular. In my previous Commentary, I listed a set of core questions that should be considered in any discussion these days about the GSEs. I did not leave the Conference with a strong sense that these questions were answered, or, in some instances, even considered. But it is a worthwhile exercise to highlight some of the suggestions made and the positions staked out by certain participants, if for no other reason than it lets us know the potential direction things may go in the future.

Secretary Geithner stated that the Administration is going to advocate for "fundamental change." High on that list, it seems to me, is the fate of Fannie Mae and Freddie Mac (GSE). Geithner said, and I quote, "We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support."

Of course, this begs the question by not affirmatively stating that it is the implicit guaranty of the government's support which is (1) factored into secondary market pricing, (2) a determinant of securitization values, and (3) at the core of housing policy for the 75 years of the GSEs' existence. Geithner did say that "the challenge is to make sure that any government guarantee is priced to cover the risk of losses and structured to minimize taxpayer exposure." But I find this view to be an equivocation, because it does not adequately consider actual market forces. It is also an indication of the difficulties in harmonizing these competing interests.

Michael Heid, co-president of Wells Fargo Home Mortgage, realizes the central role the GSEs play in establishing a market. In his view, "the maximum use of private capital is essential, but we also believe that an explicit government guarantee will be required to ensure that there's reliable flow of mortgage credit." Spoken like a true mortgage banker!

One suggestion - made by Bill Gross, co-founder of Pacific Investment Management Co. (PIMCO), the world's biggest bond fund - was for the government to provide a "new refinancing program" for GSE mortgages. In this view, the refinance becomes a stimulus to the tune of $60 billion and perhaps an increase of 10% in housing prices. An interesting suggestion. Based on my conversations with some pretty savvy conference participants, it's not going to happen. In my view, this is clearly a position that suggests much greater government involvement.

Mark Zandi, the Chief Economist of Moody's, was a panelist. He took an odd middle-of-the-road view between the extremes of privatizing most aspects of housing finance and nationalization. He pointed to government subsidies, such as the mortgage interest tax deduction, and said that the housing market is "over subsidized." So, he wants to reduce or eliminate some subsidies, while also looking to the government to play a "large role." Is it me, or does anybody else find a contradiction here?

Next to me sat an old friend and client, whose firm handles MBS trading in significant volume. He leaned over to me while Zandi was speaking and said, "do they have any clue, when they talk like this, that this extreme thinking of nationalizing versus privatizing is going to be priced into the market?" We met later in a break-out session, and he was still shaking his head.

On the extreme end of privatizing, Alex Pollack, of the American Enterprise Institute, would like government to be removed from support of housing finance, or so it seems, except for specific programs related to affordable banking such as those available through HUD. Compare that to the suggestion of panelist Lewis Rainieri, the pioneer of securitization and mortgage-backed securities, who noted that there are over 2,000,000 units now on the market and the government should consider supporting rent-to-own financing for qualified borrowers.

I guess things might be more clearly focused if the Dodd-Frank Act had properly addressed the fate of Fannie Mae and Freddie Mac in the first place. But it didn't. Maybe their fate was just too politically hot to handle in that legislation. Maybe having reached 2319 pages, the legislators had to stop somewhere. In any event, the task of saving or re-inventing the GSEs is clearly one of the most important domestic issues now.

In a future Commentary, I will provide my view of the grand plan - or Faustian bargain! - that seems to be emerging about the future structure and role of the GSEs and other housing finance issues.

I would welcome your questions and comments.
Please feel free to email me at any time.

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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.