March 5, 2008: Jeez. The Clinton Obama show is killing comedy. Great jokes are getting lost in the sauce. Did you hear the one about Federal Reserve Chairman Ben Bernanke? Ben walks into a bar. A pair of antlers on his head. “Been cuckolded, mister?” asks a chippy, trying for a pickup. The bartender (a squirrelly guy with no chin) answers for Ben. “Nah-- he's just worried about stagflation.”
On February 28th, Fed head Ben told the Senate Banking Committee “I don't anticipate stagflation”* and conveyed his willingness to keep cutting interest rates and inflating the price of food, fuel, and clothing, “I think you have your priorities straight” said Senator Even Bayh (D. Indiana). OK OK. Bayh only said good dog re the rate cuts, not the other stuff. Going for quick fixes and ignoring long term consequences is standard shtick in Congress. From the same trick bag: pushing the government-sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac as a housing bubble bailout machine.
Fannie Mae and Freddie Mac check into a motel. “Did you bring protection?” asks Fannie. “Aw Baby” sez Freddie “everyone knows taxpayers have our risk covered.”
Fannie Mae and Freddie Mac's government-sponsored mission is to buy mortgage loans from lenders. The loans are held in the GSE portfolios, or securitized and sold to investors. According to New York State Attorney General Andrew Cuomo (more on Andy in a minute) the GSEs buy nearly 80% of USA home loans. Though the GSEs aren't pure government agencies, they benefit from an assumption that taxpayers have their back. Despite Fannie and Freddie's massive exposure to mortgage debt, official policy on the degree to which taxpayers would be tapped to avert a GSE disaster is unclear.
In 2007, defaults on mortgages purchased and securitized by Fannie and Freddie produced billions of dollars in losses. Both say 2008 is slumping the same. Yet the GSE regulatory agency, the Office of Federal Housing Enterprise Oversight (OFHEO), recently lifted the cap on Fan and Fred's mortgage-based portfolios, allowing them to acquire more more more. OFHEO (a sub of the US Department of Housing and Urban Development aka HUD) will also be easing a mandate on GSE capital requirements. The mandate was slapped on Fan and Fred due to accounting scandals and required the GSEs to hold 30 percent more than before their book-juggling was discovered. But too much capital reserve means not enough GSE action. And as President Bush and Congress demonstrated with the Economic Stimulus Act, action is everything.
While most famous for one-shot tax givebacks, the Stimulus Act also authorizes the GSEs to buy and securitize larger loans than previously allowed, in hopes that a jolt of liquidity implicitly backed by taxpayers will revive inflated real estate markets and securities based on outsize mortgage debt.
Speaking of artificial enhancement, the specter of appraisal fraud inflating loans bought and securitized by the GSEs was dealt a blow in early March when OFHEO, in tandem with Fannie Mae, Freddie Mac, and New York State Attorney General Andrew Cuomo (a former HUD head) announced an agreement to “combat” appraisal fraud with a new Home Valuation Code of Conduct. Alt moniker: the "New Home Valuation Protection Code". Among other things, the code prohibits interested parties from coercing appraisers. Since coercion can be hard to prove, code enforcers will have to look sharp. Complaint hotlines, funded by lenders and monitored by their totally independent Chief Compliance Officer or General Counsel, should prove helpful. As will a new national hotline. Anyone who's ever rung up HUD or any of its subs knows how effective whistle-blowing by phone can be. The only thing better is a letter.
Also verboten by the code: lenders accepting appraisals “completed” by appraisers selected and compensated by certain third parties. To paraphrase Heidi Klum, mortgage brokers and real estate agents are out. Correspondent lenders and appraisal management companies are in. Albeit behind strictly defined Chinese Walls. Which could get a redo. The Home Valuation Protection Code doesn't go into effect until 2009. In the meantime, agreement by federal banking agencies is being sought and comments by market participants will be considered. (Maybe the new prez will weigh in...?) And while the code won't kick in till next year, the Economic Stimulus of jumbo GSE is a done deal. As is OFHEO's cap lift on Fannie and Freddie's portfolios, and the easing of their capital requirements. Not to worry tho. OFHEO Director James B. Lockhart will be “closely monitoring” the period in which the Home Valuation Protection Code does the Limbo.
Anyone who has checked out GSE history knows how effective OFHEO can be. Only a letter is better. Such as the one Andrew Cuomo sent Fannie Mae and Freddie Mac in November, 2007. Bearing news of subpoenas and a demand for an independent examiner to review all appraisals and mortgages purchased by Fannie and Freddie from Washington Mutual (WaMu), the nation's largest savings and loan. GSE transactions with other lenders would also be examined as part of what a Cuomo press release called an “industry wide investigation into mortgage fraud”.
The mere thought gave Wall Street ajada. But the big look-see is past tense. Put to bed by the agreement to establish the Home Valuation Code-- and to create an Independent Valuations Protection Institute. The $24 million price for the institute to be paid by Fannie Mae and Freddie Mac. (Who don't acknowledge any wrongdoing, but do support sound appraisals.) The Protection Institute will monitor lenders doing GSE business for code adherence; the board of directors will be approved by, and answer to, Andrew Cuomo. And oh yeah, OFHEO.
New York State Attorney General Andrew Cuomo strides into Washington, DC. He helps himself to a hefty hunk of regulatory power over a linchpin of the US economy. One implicitly backed by taxpayers. “Hey Bud” comes a voice from the peanut gallery “who died and made you king?”
Carola Von Hoffmannstahl-Solomonoff
*U.S. is not falling into stagflation: Bernanke, Greg Robb, MarketWatch, 02/28/08
Sources include but are not limited to:
OFHEO, NY Attorney General, Fannie Mae and Freddie Mac Sign Agreements To Combat Appraisal Fraud, Press Release, OFHEO, 03/03/08
Cuomo strikes deal with Fannie, Freddie, Forbes, AFX News Limited, 03/03/03
Freddie and Fannie Promise To Play Nice, Forbes, 03/03/08
Risks seen for growing Fannie, Freddie, Marcy Gordon, AP & Kansas City Star, 03/01/03
Freddie Mac's Quarterly Loss Widens, Reuters & New York Times, 02/29/08
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