Leaders Inciting Dissent – A Dangerous Path

I worry about our nation. It’s never been like this for me since as a teenager in the Nixon years. Yes, we Americans have a history of deep divide on topics ranging from social issues, the environment, to the economy, but in the end we have rarely been fully engulfed in a national rage like I am seeing today.

It’s hard to succinctly capture what is causing the stark divide, and more importantly the anger leading to the brink of violence as we have seen this week with explosives being delivered to a variety of democrat politicians and media outlets.

For some sources, the effectiveness of media influence is fueled by asserting contrarian views in an effort to attract viewers. The news as I grew up with no longer exists. And while my news in my early years was likely whitewashed to an extreme, clouded in hidden or not so hidden assertions about the flag, love of country, and other leanings of the “moral” leadership of its day, today seems far more incendiary. The evening news has been replaced with an incessant 24 hour news cycle where competition for views, clicks, followers, and advertisers has changed this nation. We are pummeled with news continuously delivered by pundits and often a “panel of experts” who seem to be there solely to drive a contentious debate even further into the blood stream.

Depending on the reader, you might likely point to your most concerning news source based on your political leanings, but at the extreme this is happening on both sides. What’s worse, the need to remain current in live media means moving quickly to the newest story leaving us little time to absorb the last one before being shocked by the new one. In many ways, this is our fault. We drive the behavior by watching, reading, and listening to these sources. We drive advertisers to funnel more money into this exact behavior. But we cannot seem to stop even when decency and truth are left in the wake of factual reporting.

We are on the brink I fear. Chanting crowds at rallies for this President are fueled by rants about the “angry mob”, “radical immigrants” marching to the border, and socialist rebels driven by gays or minorities and arrogant elites trying to destroy their view of the nations fabric. This tirade from the right is met by an equally outraged populace on the left in shock at what they believe are the embrace of false statements against fact, intolerance to this growing diverse society, brutal and raw attacks against core structures of our government and free press. Calls for impeachment are met equally with calls to “lock her up”. The angry mob, nationalism, globalism, Islamic terrorism, and more are all bait lines to feed the polarized extremes on both sides.

Presidential Candidate John McCain’s race for office exposed to all of us this deep seated unrest in many communities, especially with the recruitment of Sarah Palin to the race. Her rallies were perhaps the blueprint for what the current President has pursued with more fanfare and purpose. But it was Senator McCain himself who kept the tone in check at some level. “No Ma’am”, he said. Those words at that single town hall reassured many of us that the America we know, the one where debate and discourse is encouraged but in the end we are still Americans and will defend truth, was evidence that this democracy was still in check. In the end Senator McCain congratulated the newly elected President as did other Presidents before and after. But something has changed.

In his inaugural address to the nation after defeating Herbert Hoover in 1932 President Franklin Roosevelt, in an effort to calm the nation at a most unstable time of economic depression and global uncertainty said these famous words, “The only thing we have to fear is fear itself”. What did Roosevelt mean by these words? By saying this, FDR was telling the American people that their fear was making things worse. He went on to say in the same address, “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

I have spent the last 6 weeks in Western Europe in England, France, Spain, Portugal, and Germany. I write this today from a small city in Eastern Germany, a former soviet controlled area until 1990 minutes from a former concentration camp that housed nearly 300,000 prisoners in World War 2 and murdered over 55,000. Jews, artists, and journalists all died here. Surprisingly, today their regional elected officials favor a renewed right wing nationalist spirit that some locals refer to as the new nazi’s. No matter where I traveled in Europe I heard concerns about immigration and the left. I heard equally from others concerns about an angry, uneducated, revolt from the right pushing back in hopes of protecting their view of the community they grew up in. The divides seem to be more than just a US problem.

What’s different? The United States is a very young nation from a global perspective. Our experiment has been victorious perhaps mostly because we had excellent timing. A young nation with huge access to natural resources and a spirit of adventurism with the benefit of being separated by a large ocean to allow us to leverage distance in our fight for independence helped us become who we are. But we are not insulated. We have our own history of slavery, suffrage, and lack of care or concern for the environment or people who are different from the majority that conquered the land in the first place.

What we did have was a succession of leaders who, in almost all cases, sent messages of unity and calm to the people. While all had imperfections, they often called to a higher purpose especially during the most conflicted times. Whether it was the calm, solemn addresses of Franklin D. Roosevelt, the plain-spoken calls to patriotism of George W. Bush, or the precise, professorial speeches of Barack Obama, Americans often have looked to presidents for moral clarity in critical moments.

President Lincoln made it clear in perhaps his most famous address, “our common heritage is that our forefathers came upon this continent and created a new nation, dedicated to the proposition that all men are created equal”. President Bush calmed the nation after September 11, bringing political and religious leaders together and advocated to the nation that this was not an event brought by Muslims and demanded decency. “Women who cover their heads in this country must feel comfortable going outside their homes,” Bush said. “Moms who wear cover must not be intimidated in America. That’s not the America I know.”

What seems different to me is the demeanor of Mr Trump. From applauding body slamming, calling the media the enemy, attacking many of his predecessor Presidents, berating his own attorney general and other law enforcement, exaggerating the plight of immigrants fleeing torture and murder in their own countries, and his ongoing public red hat wearing rallies that only add fuel to the hostile environment, this President has decided to take a different path as the head of the nation. He has determined for now that his role is not to be the moral compass or unifying leader. Maybe it began back when he became branded as the voice of the “birther” movement questioning President Obama’s citizenship. But this was made strikingly clear in Charlottesville Va when just after three days of the violent clashes between white nationalists and counter-protesters he insisted that “both sides” were to blame. He was immediately applauded by former KKK leaders and others from the extreme right and equally attacked from those on the left. It was a major point of division in this nation that he only made worse by his own actions.

Hitler rose to power amidst uncertainties and anger amongst disenfranchised portions of society that look in many ways like we are seeing today. I know many repulse at these analogies, but as I sit here in Weimar Germany, and spend my time looking at the history here there are many similarities. His political party was formed and developed during the post-World War I era. It was anti-Marxist and opposed to the democratic post-war government of the Weimar Republic and the Treaty of Versailles; and it advocated extreme nationalism and opposition to immigrants especially Jews. He attacked immigrants, journalists, and treaties. And, most ironically, he became dictator through parliamentary process. It can happen anywhere if the collision of circumstances is met with the wrong leader.

Our nation needs voices of leadership now to say clearly that this behavior is wrong and to stand up to this President to demand more. I oppose this President more than any in my life because of his own personal immorality, his lies, and denial of facts. Yes, I worry about the environment, the economy, social justice, and international affairs, to which I think he is putting our nation at risk. We can debate those points and agree or disagree and back up these discussions with facts in seeking the right answers. But it’s the gap in leadership and this one mans role in inflaming divisiveness that cannot be overlooked. This President is putting his own self aggrandizement ahead of the nation and now risks this democracy which, while flawed, is the best model in the world comparatively and one I will work to defend in order to protect our ability to engage in fact based discourse in search of compromise in the best interests of our nation.

As President Lincoln once said and is so true today, “If the great American people will only keep their temper, on both sides of the line, the troubles will come to an end, and the question which now distracts the country will be settled..”

These are dangerous times for our nation. I hope that more of our leaders can find a political backbone and a way to calm and unify unlike what is happening today.

Let’s Continue To Protect FHA For The Long Term

Each November HUD releases it’s FHA Actuarial Report to Congress. This is a congressional mandate based on a history of FHA finding itself under capitalized risking draws from its “permanent and indefinite” authority as provided to draw funds from the Treasury should it have insufficient reserves in place to cover forecasted losses on it’s book of business. This years 2018 independent Actuarial Report on the health of the MMI fund continues to affirm my concern that we stay committed to not weaken the fund despite calls from some to reduce premiums or modify the premium structure.

As a former FHA Commissioner, I excitedly await these releases each year having walked into that role in 2009 when the fund was already destined for trouble. As a matter of fact, and to remember this history, I testified to to this concern in my confirmation hearing in front of the Senate Banking Committee in April of 2009 and asserted what we all knew – that the MMI fund was in trouble, “FHA has not been immune to the adverse conditions of this market. Default rates and foreclosures exceed prior estimates.“, was one of my statements to this point.

To be clear, the FHA is unlike any private or other government sponsored provider of credit. It is a massive insurance company that guarantees reimbursement to GNMA MBS investors for the full value of loss associated with an FHA default. This guaranty is backed behind loans that have higher risk characteristics than loans backed by the GSE’s. FHA loans combine higher debt to income ratios, lower credit scores, and higher loan to values than their other government sponsored counterparts. And as you can see by the report issued by Isaac Boltansky of Compass Analytics it is trending worse. As shown below, the trend in both credit score and DTI in the FHA portfolio is weakening:

FHA is unique and important in the single family housing market in other aspects. It serves minorities and first time homebuyers in manner unmatched by any other credit provided in the US. It is the largest provider of reverse mortgages for seniors in the nation. And lenders that help distribute FHA loans across the nation are dominated by non-bank, independent mortgage bankers, primarily because the major bank lenders have backed away from the program due to concerns related to indemnification risk that may obligate them to severe financial penalties in the event of default, a subject that I have been vocal about for years.

The MMI fund also backs the far riskier reverse mortgage program (HECM), a product that has whip-sawed the reserves significantly over the years and in this years report reflects its ongoing concern to taxpayers as shown in Isaac’s analysis comparing the forward and reverse books.

In short, the concentration of credit attributes in the FHA portfolio contain more risk factors across the spectrum than loans created by Fannie Mae or Freddie Mac or most other private lenders. The good news is that this year the actuarial shows that the capital reserves continue to grow above the base minimum of the 2% legislated floor, standing at 2.76%. But risk remains and we have learned through history that the reserves held today still may underestimate the true loss exposure in a nationwide recession. In an economy with virtually full employment, low interest rates, and stable house prices, it would be ludicrous to forget the realities of economic cycles as we have seen in the past. Yes, FHA has rebuilt its financial resources. But holding 3.89% in capital resources on it’s massive $1.26 trillion portfolio is minimal on a risk adjusted basis.

Recently some of my industry colleagues have called for either an outright reduction in premium or an elimination of the lifetime premium. I oppose either move at this juncture. In fact, as commissioner I made several moves to protect the fund including raising premiums with congressional support, establishing a credit score minimum, and installing life of loan MIP, and would argue against moves to the alternative until we see more improvements in the HECM program and understand the economic cycle we may be facing in the years forward.

I installed the life of loan MIP for one key reason. FHA, unlike the MI elimination policy in the GSE program, still remains on the hook for losses even if the premium is cancelled. Just as you pay for auto, health, or other insurance as long as you are under its protection, FHA needs to do the same. In 2009 after home prices dropped nationally over 20% and in some regions between 30%-40%, we found that we were obligated to pay for losses on homes where the MIP was not being collected due to previous elimination based on equity, and yet many of these homes were not underwater due to the price corrections in the recession. Because there is always risk in HPI forecasting it was our view that a premium must be paid as long as the insurance is in place. Not only does this add significant economic value to the fund, it protects the integrity of its administrators to make certain that appropriate premiums are applied to all insured borrowers. While some might argue adverse selection in interest rate rallies or periods of property value appreciation for better qualified borrowers who refinance out of the program, I would argue that the math does not offset the down side forecast risk to home prices as projected in any actuarial.

Look, I am not saying that FHA should never consider reducing premiums. But keep in mind that all net earnings are booked as reserves for future losses and without getting into the confusing explanations of federal budgeting and spending, these reserves are critical to keep FHA well supported during down markets. We are in the best credit cycle seen in decades. We have had low interest rates, record low unemployment, and nearing a decade of home price gains. FHA has insured the best credit books perhaps ever seen its history. But the HECM program remains a huge problem and we have not tested mortgage performance in a down cycle yet. With both credit and LTV drift, some counter parties facing potential capital and liquidity concerns, and many forecasting a weakening economy in the next couple of years, this is the time to remain vigilant and continue to build the reserves until there us unanimous confidence in this ability to withstand a negative cycle.

I applaud the fortitude of my friend FHA Commissioner Brian Montgomery in holding back on any MIP changes and I would suggest that most former commissioners would have a similar view. All stakeholders in housing and mortgage finance need to protect FHA from future scrutiny due to short sighted acts that could jeopardize its long term role in serving homeownership. Let’s protect the FHA.

Let’s Continue To Protect FHA For The Long Term

Capital View

Each November HUD releases it’s FHA Actuarial Report to Congress. This is a congressional mandate based on a history of FHA finding itself under capitalized risking draws from its “permanent and indefinite” authority as provided to draw funds from the Treasury should it have insufficient reserves in place to cover forecasted losses on it’s book of business. This years 2018 independent Actuarial Report on the health of the MMI fund continues to affirm my concern that we stay committed to not weaken the fund despite calls from some to reduce premiums or modify the premium structure.

As a former FHA Commissioner, I excitedly await these releases each year having walked into that role in 2009 when the fund was already destined for trouble. As a matter of fact, and to remember this history, I testified to to this concern in my confirmation hearing in front of the Senate Banking Committee…

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The Moelis Plan – Putting The Cart Before The Horse

The team from Moelis has unveiled a new and somewhat improved version of their plan to return the Government Sponsored Enterprises to the shareholders. Before turning to the substance, much of which is quite good, it’s important to note up front that they have the interests of their clients, who are major shareholders in the GSEs, foremost in mind here. This is not a criticism of Moelis, which is doing what it is being paid to do, and admirably I must say, but something to keep in mind in understanding the effort, as some key features only make sense in that light.
What Moelis gets right:
1. It is important to appreciate what pushed the GSE’s into conservatorship in the first place. Moelis makes the point that it was not the core TBA guaranty book but rather the actions taken with the portfolios of both firms in purchasing lower quality and riskier PLS, subprime, and alt-a mortgage product. In leveraging their implicit federal backstop, they had an almost unlimited execution advantage in disrupting the non agency markets.
2. The principles set forth by Moelis appeal to most stakeholders. This includes a list of items including protecting the taxpayer, leveling the playing field permanently for all lenders regardless of size, and affirming the affordable lending regime that currently exists today. It references the joint trade association letter and endorses the calls made in that document to lock in many of the reforms that were made by policy under Director Watt and his team. Frankly much of that was initiated under then Acting Director DeMarco.
3. Moelis lays out a pro-forma outlook at the future financials and how the taxpayer might profit from their proposal. While I will leave the details of this to others with more expertise to debate, I will note that it is at the very least counterintuitive. Today all profits from both institutions go to the taxpayer, so it is difficult to imagine how the taxpayer would manage to reap greater returns by selling its position. I’m not saying it’s fair or good policy, but as a matter of taxpayer math, it’s hard to see why this is a positive.
 4. Moelis goes to great lengths to diminish the GNMA operational model proposed by the recent discussion draft released from Congressman Hensarlings’ office. To this point I am in complete agreement about the understaffed, overwhelmed, undercapitalized aspects of GNMA today and the stark comparison to the capabilities of the GSE’s in their current form. There is simply no comparison and the false belief that GNMA can serve this role is far fetched at best. Moelis adds some key points that others have made in the past especially the value to small lenders that would be likely lost including access to a cash window and the ability to buy defaults out of pools. The GNMA model likely increases concentration risk on large banks, not the opposite.
What Moelis Gets Wrong:
1. The plan starts with recapitalization. In essence, they are putting fuel back into the tank of the car before it is fixed. This poses the very real risk that we never fix the car adequately before it’s entirely refueled and ready to drive off. This makes no sense at all as a matter of public policy, as it increases the odds that we skip reform altogether. But it makes a great deal of sense for shareholders, as it increases the odds that they recoup dramatically with or without reform. Assuming we should think of this from the perspective of the nation and not the shareholders, the focus here must be reform first. If we cannot get the structure and framework right, we sure as heck better not have them on the edge of release. Frankly, the housing system might be better off retaining the current structure than letting free market capitalism with a government backstop back out in the open before insuring that they are framed in with the appropriate policies and a commitment behind them and to the markets for safety and sustainability first.
2. While agreeing that an explicit federal backstop is needed, Moelis explains that this requires legislation. And, while recognizing that this would help MBS pricing and likewise lower interest rates for borrowers, it does not seem to make this a cornerstone event. In the absence of a congressionally authorized explicitly guaranty behind the MBS, investors in a forward looking global market will ultimately have to believe that the US Government will bail these entities out in the future just as they did a decade ago. Sovereigns would have to determine whether their institutions could trust this model and consider its risk weighting in the same manner as they do today. This could have meaningful impact to interest rates and consumer access to credit.
3. This leads to the next critical point. The plan leaves in place the duopoly model. Unless we end the system’s reliance on a TBTF duopoly we are simply not addressing the fundamental flaw in incentives that got us into so much trouble. You can do that by increasing the number of guarantors so that any one can fail, or collapsing them into one that is treated like a market utility. But you’ve got to do one or the other to have any real reform.  The duopoly model would be the worst of all outcomes, resulting in too much risk and too little competition.
4. Moelis argues that the regulator can protect the level playing field, continue the affordable housing goals, and frame in the charter creep concerns. The reality is that the effectiveness of any regulator varies by regime and leadership. We have seen that stark contrast in other regulators just in the past two years. The confidence in relying on regulatory infrastructure that is subject to change versus the more concrete and permanent changes established by legislation are important decision points. With the view about getting this right before we march to recapitalize and monetize speculative shareholders, I continue to advocate that reform before recapitalization must be protected in this debate.
Conclusion: The conservatorship has lasted too long and ending it will take political will that thus far we just haven’t had. The alternative presented by Moelis is tantamount to giving up, putting Fannie and Freddie on a path to re-privatization. But it makes no sense from a matter of public policy, as even conservatorship is better than a return the system that has failed us already. Indeed, it only makes sense from the perspective of the shareholder. But surely the needs of the housing finance system must come first.
Let’s avoid putting the cart before the horse. Let’s continue to pursue legislation and unite around the need to establish an explicit guaranty, prohibit pricing for market share, establish more rational and effective affordable housing measures, frame in the permissible activities of the future entities, and implement a capital regime that will stand the test if time. Any other action at this point leave open the slippery slope back into the abyss that resulted in the bailout to begin with.