Mortgage Credit News by Louis S Barnes - June 25, 2021

“Ding-dong, the witch is dead!

In a week with nothing but Covid-distorted economic news, and no change in interest rates or markets... what is this happy singing in Mortgage Munchkin Land?

Here we are in the Age of Information. How would non-Munchkins know why we are dancing -- and that they should sing and dance, too?

The news broke Wednesday morning with a Supreme Court decision. A teenage Pennsylvania cheerleader had a potty-mouth episode on Snapchat, and her school threw her off the squad. She went to court and won. Right?

Nope. The eyeball-grabbing media gave over-the-top billing to the cheerleader, and ignored the second decision by the Supremes, a murky thing involving Fannie and Freddie. The two greatest American newspapers, today super-politicized... the NYT still has not covered, covers “business” only to complain, and wokenomics. The WSJ hates mortgages and housing, and especially Fannie and Freddie because they are government, and so buried the story under a sub-headline: “Fannie Freddie Stock Falls.” Snore.

BTW: the e-WSJ now has a little clock face under each headline to tell us how long it will take to read each story, the average about four minutes, the limit of our texting-compressed minds. Four minutes to comprehend the Gettysburg Address, or the 23rd Psalm... okay; but to grasp public policy, inflation, the Fed, or supreme Court? Dumbed-down. Might as well be little clay tablets, word-symbols poked with sticks.

So, if you’ve got a little more than four minutes, here is our joyous story.

“Which old witch? The wicked witch!”

Fannie was created in 1938 to secure an adequate supply of mortgage money. Joined by new Freddie in 1971 at the dawn of mortgage-backed securities, both “government sponsored entities” (“GSEs”) were public-private companies. Hybrids: each with a credit line at the Treasury, but owned by stockholders.

By 1980, after forty years of excellent operations the GSEs jumped charter for the benefit of Right-side stockholders and Left-side politicians. Earnings were bloated by growing huge portfolios of retained mortgages, $1.7 trillion at the 2008 end, and Leftie pols pleased by high-risk assistance lending to households not ready to be owners, but voters for the proper party. The post-1980 political machinations of the GSEs are still admired as the most extensive and relentless political bribery ever attempted, and successful. The “donations” to pols...

“Oh, my!”

Live by the sword, die by the sword. The GSEs in summer 2008 were on the edge of collapse, caught on one side as co-conspirators in the greatest Wall Street crime of all time, leveraged securitization of garbage, and on the other by millions of households going into foreclosure because of neutron loans (kill the people, preserve the houses).

The GSE political miracle then worked perfectly in reverse. Since 2008, everybody hates Fannie and Freddie. Except us, and buyers of homes.

Then several unusual results: re-regulation since 2008 has for the most part been excellent, retained portfolios sold. The GSEs have generated high-quality mortgages with very low defaults, paid back all government assistance and many tens of billions more, all profits surrendered to the Treasury, and no footsie with either party or the Street.

Since 2008 the GSEs have been wards of the state, and many people have tried to put together a GSE privatization plan, but none work except by sacrificing mortgage price and supply. As Ben Bernanke said of quantitative easing: “It does not work in theory, but it does in practice.” The GSEs’ corporate identity still exists, as do their stock certificates and stockholders (today, sleazy hedge-funders), but held in a suspended animation -- bankruptcy not proceeding because nobody knows what else to do with them.

The witch arrived in April 2019, when a conservative White House and Senate appointed Mark Calabria as director of the Federal Housing Finance Agency (FHFA), the regulator of Fannie and Freddie. Calabria is a Libertarian and government-hater, and the GSEs are government, and Calabria set out to kill them.

Calabria was making some progress, planning new capital rules impossible to achieve, but his sponsors lost the election. So in the last eight months he has used his regulatory authority to 1) slap a surcharge on all refis, and 2) progressively cut the supply of mortgages for rental housing and frequently rented second homes by three-quarters and headed for zero.

Enter the Supremes. The enabling legislation for the FHFA created a single director who could be discharged only for cause. The Justice Department argued, unconstitutional. On Wednesday morning, obscured by the cheerleader, the Court found that the FHFA director served at the pleasure of the president. And oh-by-the-way, it junked the stockholders’ disgusting claim for cash and control, now that the GSEs are back in the black. We need the GSEs, and so their corporate structure and stock certificates will be embalmed. You hedgies still own the GSEs, but ownership is not worth anything, not after the 2008 catastrophe, and your silly-dreaming “value” dropped by half on Wednesday.

Calabria himself did not survive Wednesday. Fired. Dropped a house on him.

Now we’ll see if we’ve learned anything. Democrats control the government, narrowly, but will get their FHFA director. Terrible damage has been done to households in the name of mortgage assistance -- will we do that again? Or be serious and compassionate at the same time, encouraging loans for borrowers ready to own, but not again set up your favorite voters for foreclosure?

And I hope the administration will study the strangest housing question of our time, before throwing money at it.

Why are we so short of housing? NARs new study says 5.5 million units short. Freddie says not so many, but concentrated in successful, high-migration cities. Since the Great Depression we have relied for supply on all-American foolishness: wildly overbuild during economic expansions, then stop and foreclose, but the supply tiding us to the next boom.

We can’t do that overbuild-bust cycle any more, not with credit-disciplined GSEs, and Wall Street fancy-pants who for generations will not be trusted to create and sell private-label MBS. Obama’s pathetic Attorney General (Mr. Holder) could not find a single Wall Street crime in the Bubble, but the Street’s customers will not forgive.

What to do about supply? No market function will produce adequate affordable housing, so how shall we subsidize? Then, is it too hard for market-housing developers to get loans for land, infrastructure, and construction? Could the Feds assist municipalities in rezoning commercial land to residential? Also obsolete uses, like retail centers abandoned in favor of Amazon? These are much more likely successes than trying to rezone single-family neighborhoods.

Witches are tough to get rid of. Use this chance well.

The 10-year T-note in the last year. This chart is “weak” -- technically easily broken going up or down. The last three weeks in the 1.40s has tiny support in brief trading at this level in March. Chair Powell has inflation worries on hold, so the market will hang on news of economic activity, and a slow patch could push 10s below 1.40%. Below there, no resistance in early-year trading all the way down to 1.20%.
On the other hand, it wouldn’t take much to push 10s up into the old range, 1.55%-1.75% and a test of the top. Such is bond market life in a once-a century adventure.

I don’t know for a fact that Calabria wore shoes and socks like this -- he was always behind a desk or podium: