CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

We need to get on with it.  There are already lots of good ideas in circulation.  We’re not going to get any smarter.  We do not need more symposia. Official leadership just needs to get out of the “I’ll think about this some day” box and into the “do today” box.  When your pants are on fire, stop worrying about the tailoring!

A few things seem obvious to me.  First, there will be a private securitization market again.  That market, when not crushed by a giant securitizer with zero cost of funds and no need to make a profit, will re-flate.  Simply and syllogistically, the need for credit will be met by supply.

Second, the government is going to continue to fill the role of guarantor of last resort.  Okay, some countries, many with much larger governmental sectors than ours, seem to have done pretty well without a government role in housing, but that train has left the station.  There’s a notion that government needs to remain a final bastion of defense against the next housing apocalypse.  That is received wisdom and will be part of Housing Finance 2.0.

Third, we have two great organizations full of bright and hard-working people who can and should be part of the solution.

So let’s stop kicking this can down the road.  The outlines of the solution are apparent.  Freddie and Fannie need to be re-launched using some variant of a good bank/bad bank structure.  A private tranche of guaranty capital must be developed with some ultimate governmental backstop bought and paid for.  Paying a premium for a federal backstop, at least on some type of mortgages, will even-out the playing field and open the tap for private money and conventional securitization.  We need that.  Otherwise, housing will continue to be starved for capital and, simultaneously, suffering as a political football.  I personally think some sort of co-op structure, such as can be found today in the federal home loan bank system, seems appealing.

The problem is, of course, politics.  The GSEs have been a third rail. Fixing them will take courage. Within a week, the election will be over and perhaps we’ll get down to business.  The Treasury, the GSEs and the business community should be able to sit down and sort this out.  Fundamentally, it's not that hard. And it’s hugely important.

By Rick Jones.

Which leads me to Jerry Brown filing a lawsuit against Fannie Mae and Freddie Mac last month for refusing to refi mortgages that carry liens relating to PACE bonds.  Mr. Brown, in the midst of a bid for the Governator’s seat, claims the GSEs’ actions are wrecking his State’s ability to grow a green economy and is pushing for the President to step in.  PACE bond programs give grants to homeowners for energy-efficient home improvements, for which the homeowner pays a tax-like assessment.  The economic benefits of the energy improvements – nebulous cost savings over the long term – are questionable at best. And as you’d expect, the liens associated with the assessments prime a lender’s mortgage.  This makes the bonds salable for the municipalities – but places the burden of paying for those improvements on the mortgage lender in a default scenario, causing Fannie and Freddie to balk.  So now, and without any visible sign of irony, Candidate Brown wants the Obama Administration to bully Fannie and Freddie into lowering their underwriting standards.

Now, I might suggest that there are better places to put your money than any debt issued by the State of California.  And I also might say that, at least here in the Commonwealth of Massachusetts, it’s considered rather rude to campaign against a Kennedy relative.  But let me instead end with this: the really interesting story that will develop around green improvements in coming years is the retro-fit of existing commercial real estate – most significantly, office buildings – and who will pay for it.  All industry constituents – banks, developers, government agencies and lawyers – are trying to figure out a viable way to finance energy-efficient improvements to existing buildings.  The biggest obstacle facing lenders is how to translate the cache of LEED certification, the promise of marketing “green” space to politically-conscious tenants and the possibility of reduced operating costs over the long term into cash flow that can service the lender’s debt.  Not so different than figuring out the right windows to buy, really.  One thing is for sure – the first to figure it out will make a good deal of money on the estimated $520 billion expected to be spent on green retro-fits over the next 8 years.
 

The reality is, the private markets would provide enough credit to support the housing market if they could. When and if the GSEs are scaled down, they will. Will that result in 65% of the adult population owning a house? Maybe not. But who says that’s the measure of success? Historically, it’s an anomaly.

I served on the MBA’s Committee to Enhance Liquidity, which developed a thoughtful white paper on the future of the GSEs. We will now weigh in to actually try to help our legislators and regulatory constituencies to craft a solution. On Tuesday, the Treasury, together with the Department of Housing, invited a cross section of experts and industry representatives, including the MBA, to talk about the future of the GSEs. Secretary Geithner kicked off the meeting with a speech that seems to support the notion that private capital should fundamentally fund the housing market, but that the federal government has an important ongoing role. That sort of sums up the tension at the heart of the debate. There are a lot of good ideas out there, both in the MBA and elsewhere, on what to do about these two wayward economic wards of the state, but some fundamental policy decisions need to be made before the hard work of developing an executable plan can follow.

Here’s a modest solution. Let’s do a test case and spin off the GSEs multifamily business into something new and see if it works. The multifamily businesses are small businesses in comparison to Fannie and Freddie’s single family business, but nonetheless significant. Create cooperatives for these businesses. There is a long history of cooperatives in this country and, in fact, the Federal Home Loan banks are cooperatives (OK, maybe that’s not a good example since they are mired in problems as well). But the multifamily businesses could be easily and simply spun into a cooperative in which the members are the existing GSE mortgage banking outlets as well as major depository institutions. In the cooperative structure, the members would provide capital support to the enterprise in proportion to their use of the enterprises. The co-op’s service would be as a conduit for securitization of these loans, and perhaps as a vehicle to provide warehouse financing to the members to accumulate loans on a modest scale in advance of a securitization. The co-op would not become a bloated hedge fund chock full of mortgages and thereby avoid the failed policies of the past. A government guarantee may still be necessary (though I personally wonder whether it really is), it could be bought at a fair price, and a guarantee fee would be paid to the Treasury. This would allow the business to size the value of that guarantee, engage in price discovery, and perhaps over time it could be weaned from that federal teat. There was a lot of talk on Tuesday at the Treasury / Department of Housing meeting about re-sizing the federal guaranty as some sort of backstop guaranty, with a layer of private insurance in between. The thinking being that government ultimately owns the tail risk of another complete and utter market meltdown. This may be a good idea too, and could easily be annealed to my cooperative idea, but let’s not let the perfect drive out the good. Let’s experiment with the multifamily business and see if we can begin to find a way towards a healthier and sustainable private enterprise based market place.

By Rick Jones.