Affordable Housing Institute : US

Something about real estate fuels the ire of rock-ribbed capitalists like Forbes, Fortune, and the Wall Street Journal, who can write breathy paeans to corporate titans even while sneering at grubby landlords who build property empires.  (My Fannie Mae archive can be found here.)  That antipathy is on full display in the Wall Street Journal’s latest dismissal (you have to be a subscriber and “search mudd fannie mae”subscription required, naturally):

 

WASHINGTON — Daniel H. Mudd, the former Marine captain who became chief executive of Fannie Mae about a year ago, has led the mortgage company on a strategic retreat. He shrank the company’s mortgage holdings by about $190 billion and renounced conflict with regulators in an effort to recover from an accounting scandal.

 

And a rather precipitous drop in market value, as the Journal’s price chart helpfully shows:

 

 

Now Mr. Mudd is plotting an offensive — even though the company remains under regulatory scrutiny.

 

Fannie Mae’s executives developing new business strategies.

 

Yellow journalism 102: when one cannot criticize the action, imbue it with the scent of skullduggery (”plotting … even … under scrutiny”).  What is Fannie Mae supposed to do, cower meekly in a corner too shell-shocked to consider the future?

 

Unfortunately, I cannot access the Journal’s scurrilous print cartoon of a pop-eyed crazed Mr. Mudd, his teeth clenched, gripping an automatic weapon surrounded by BAM POW BOOM! BLAM! captions reminiscent of Batman, a bit of visual calumny worthy of Charles Foster Kane.

 

 

“I built this empire on pulp.”

 

He aims to rally demoralized employees and investors with a vision of a company that can return to healthy growth without creating more controversy. Mr. Mudd promises to turn Fannie Mae into a nimble buyer and seller of mortgage loans, as opposed to the buy-and-hoard investor it was.

 

Hoard, another good sneer word.  Now, it’s true that Fannie’s rapid balance sheet expansion created substantial systemic risk, but ‘hoarding’?  Pfui.

 

He also is exploring the possibility of playing a bigger role in financing apartment projects and housing construction.

 

A six-foot-four marathon runner whose father is television newsman Roger Mudd, the 47-year-old chief executive is trying to shed Fannie’s reputation for being arrogant and spending too much energy bashing critics, resisting regulators and lobbying Congress to protect the company’s interests. He hopes to persuade investors and politicians that Fannie can be highly profitable while fulfilling its government-granted charter to channel funds into housing, particularly for low-income people.

 

 

Where the money flows, the housing grows

 

Friends of mine say that at one point, during the Journal’s endless editorial siege campaign against Fannie Mae, then-CEO Frank Raines (remember him?) personally journeyed up to New York to meet with the Journal’s editorial board, to inquire if Fannie could do anything to change the Journal’s mind.  I am told the answer was a flat No, to which Mr. Raines responded, at least we know where we stand.

 

In the past 13 months, the company has replaced more than a third of its top 50 executives — starting with the former chief executive, Franklin D. Raines.

 

Another reviewer might suggest that large-scale management turnover is good, but the Journal makes it sounds bad:

 

But Mr. Mudd’s efforts to focus on a brighter future are about to be interrupted by a reminder of the past. Within the next few weeks, a team of outside lawyers headed by former Sen. Warren Rudman is due to complete a report about how Fannie executives violated accounting rules to smooth out earnings volatility. Regulators have found that Fannie employees falsified signatures on accounting ledgers and made changes in database records without following proper procedures. The report from Sen. Rudman, hired by Fannie’s board 16 months ago, is expected to contain new details.

 

“New details.”  Can you hear the sounds of the Journal’s editorial hands rubbing?  Of course, the ‘false signatures’ story could return with a vengeance.

 

Fannie still faces continuing investigations by its main regulator, the Office of Federal Housing Enterprise Oversight, as well as the Securities and Exchange Commission and the Justice Department. To rectify the accounting violations and sort out its books, Fannie has hired about 1,500 outside accountants, lawyers and other consultants.  A restatement of results for the past several years isn’t expected to be complete before the second half of this year.

 

The Bush administration long has argued that Fannie and Freddie are so big that they could set off a financial crisis if they fail to hedge properly against the risks of gyrations in interest rates.

 

In our view, they are, and they could.  A year ago, we dodged a bullet.

 

The administration backs legislation that would limit their mortgage holdings, but Congress has deadlocked on whether to pass such a bill.

 

“Deadlocked”?  Again pfui.  Deferral for reconsideration is the essence of Congressional deliberation.  Of course there is a very large risk that Congress will not return to the subject, as other weighty events may intervene.

 

Peter Wallison, a longstanding critic of Fannie who is a fellow at the American Enterprise Institute, a conservative think tank in Washington, doubts the company will stick to Mr. Mudd’s buy-and-sell strategy. If the political pressure eases, he believes, Fannie would return to a full-time focus on buying mortgages “because that is a tremendous source of profit for them.”

 

Unlike the old days, when Fannie lashed out at critics, Mr. Mudd recently invited Mr. Wallison to lunch and, Mr. Wallison says, “listened respectfully.”

 

Truth be told, the GSEs, like any other business enterprise, will exploit their competitive advantages to the maximum.  As they should: to quote the cop in Body Heat, “it’s in their nature.” 

 

But the GSEs are not like any other business enterprise; Congress has bestowed upon them very substantial proprietary advantages that allow them to expose the Federal government to risk.  The challenge for government is to channel those motivations by prohibiting certain actions, compelling certain others, and bridling the beast with a combination of:

 

·         A strong and enforceable legal and regulatory scheme (the reins, not Raines), and

·         A highly capable regulator (the jockey)

 

 

One GSE, one regulator, one strong set of reins!

 

Many critics believe that the GSEs do far too little, in terms of increasing national affordability, with the resources we give them.  Perhaps Mr. Mudd does too?

 

Mr. Mudd has hired consultants to study how Fannie could expand its relatively small business of financing apartment buildings and other rental projects.

 

How he missed us, I have no idea J.

 

Mr. Mudd promises to limit the company to projects for people with modest incomes. “We’re not going to be doing the Trump Tower,” he says.

 

That, of course, is not enough. 

 

The GSEs should be focused on pushing down the affordability boundary, both in homeownership and in rental.  Every time the remaining market proves capable of handling an income band, the GSEs should vacate the space and go lower.

 

 

The proper relationship between regulator and GSE: note, they’re both smiling!

 

To do this requires both reins and jockey.

 

We need Congress to act, with strong statutory limits and mandates, and then a capable overseer including high-level active regulatory oversight.

 

 

The Romans knew how to build durable regulatory systems.

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