Saturday, December 21, 2013

Mel Watt on Fannie and Freddie – I want to go back to 2008


When Harry Reid (D-NV) changed the rules on how the Senate votes for a Presidential appointment, he opened the door for a critical change in the leadership at the Federal Housing Finance Authority (FHFA). In short order, the Administrations’ pick for the job, Mel Watt, got the appointment that had been stalled for a year, and Ed DeMarco is out. Liberals hated DeMarco. And with good reason.

FHFA was formed when Fannie and Freddie went into receivership back in 2009. FHFA was tasked, by law, with one and only one mission:


Minimize losses to taxpayers from F/F


DeMarco succeeded in this mission. As of today, F/F have paid back virtually all of the bailout money they received in 2009 and 2010. By the end of 2014 the taxpayers will be in the black from the bailouts. How was this miracle achieved? Simple - F/F stopped making bad loans.

When I say ‘bad loans’ I mean mortgages that are not structured or priced right. A good mortgage loan is made to someone who has down-payment money and a job that pays enough to service the mortgage. The borrower must have a credit background that demonstrates that they are able and willing to make monthly payments. Not so complicated.

Mel Watt will take over the FHFA in January. But even before he finds where the bathroom is at his new job he is changing the rules. He stated on Friday that he wants to reduce fees to borrowers who do not have the 20% down-payment and for borrowers with lower credit scores.




Watt’s statement is payback for the liberals/progressives who want to take F/F back to the status quo of 2008 and who supported Watt to that end.  In 2008 the mortgage giants were agents of federal policy on housing. The ‘mission’ was to increase home ownership at any cost. As it turned out, the cost of achieving those goals damn near destroyed the global economy. And now Mel Watt wants to turn the clock back five years and make the same mistakes all over.

What is the intent of the fees that were scheduled to go into effect in March of 2014? The goal was to increase the costs of borrowing from F/F in the hope that private lenders would come into the mortgage market and take business away from F/F. The DeMarco plan was to shrink F/F over time, and get D.C. out of the mortgage business. His actions were consistent with his mandate – minimize taxpayer risks. Demarco’s words:


“those fees should rise in order to allow private investors, which target a higher rate of return, to compete.”


So this frames the political debate. The liberal side of the equation wants to subsidize the mortgage market and exclude private capital. They want to do this to achieve social objectives of home ownership and to make a small step toward wealth redistribution. Lofty and admirable goals. But the tradeoff is that F/F will get bigger and more dominant in the mortgage business. Their role in the economy will expand, not contract – and the USA is once again opening the door for another crisis. A crisis that will work completely contrary to the stated goals of leveling the economic playing field (as it did in 2008).

With Watt taking over, the die is cast. FHFA, Fannie and Freddie are turning a corner and headed in a new (old) direction. When Watt takes over on January 6 we will see a bunch of new measures that will confirm the change in strategy. Many will cheer those efforts. It will mean a bigger role for F/F. It means the USA is doing a u-turn back to 2008. And it means that someday we will have a problem again.



It’s not only liberals who hated DeMarco. Those who speculated in Fannie and Freddie common and preferred shares did too. DeMarco passed a rule (no votes anywhere) that 100% of F/F’s income would go to the government and not be used to pay off the borrowings that occurred in the bailout. DeMarco’s policy is now subject to suits from various hedge funds. DeMarco’s action put the holders of F/F stock behind a huge wall. In theory, those shares are worthless, as F/F were on a glide path to be wound-down to nothing.

Watt can’t deliver on his promises to those who got him his new job and at the same time continue with a plan to shutter F/F. If the companies do have a different future with Watt running the show, does that mean that the pref stock has a future too?

These are the actors on this stage:


The Speculators:



The Carlyle Group prepares to launch its IPO





How do the specs feel about Watt?






The Good Guys??









Embattled Rep. Maxine Waters (D-CA) Addresses The Media


Talk about strange bedfellows – this one takes the cake.  I wonder who will prevail in the end??






  1. The most important thing Mel Watt will do is to reduce the principal on home mortgages. This is important because it will be a statement of U.S. policy that housing enjoys a higher level of scrutiny than the “minimum scrutiny” accorded it under Lindsey v. Normet.

    For many decades, an argument was made (and is still made by lawyers such as Cass Sunstein and Laurence Tribe) that the “scrutiny” regime instituted by West Coast Hotel v. Parrish and U.S. v. Carolene Products, stands for the proposition that “social” facts such as housing, belong in the political system and not in the court as rights. The thought is that if people have an individually enforceable right to housing, the court will be placed outside its sphere and become a super-legislator. This point of view ignored the factual test you must meet for a fact to become a right (moving it out of the political system and into the court). The factual test was set down in the most important case in U.S. law, West Virginia v. Barnette. If the fact is

    1. a fact of human experience
    2. which history demonstrates
    3. is unaffected by assaults upon it

    then it is a right, and is in the court. That is, is the fact a robust, resilient and recurrent fact of human experience–does it “bounce back” from assaults upon it? If it does, it is informally called an “important” fact and has moved from the political system, where individuals have no direct rights to it, into the court, where individuals have absolute rights to it. It is a difficult test to pass, and requires a great deal of historical research and sophisticated analysis, because often assaults on facts seem to be quite successful (for example, government suppression of protected speech or exercise of religion, SEEMS to work–but look closely, dig deeper into the facts).

    This was the test used by both advocates of a right to gun ownership (the Heller-McDonald cases) and Ruth Ginsburg when she argued a woman’s right to legal equality. It is not a liberal or conservative, Democratic or Republican test, it is a test which even predates the Constitution. Once the U.S. reduces principal on mortgages it controls through FHFA, it will be saying that housing is at the same level of scrutiny as property.

    In the recent Koontz v. St. Johns River Water Management decision, Alito (hardly what you would call a liberal), writing the opinion for the Court, raised the level of scrutiny for property above minimum scrutiny. We don’t know whether it was raised to intermediate scrutiny or strict scrutiny (the other two levels of Constitutional scrutiny). However, intermediate scrutiny is much closer to strict scrutiny than it is to minimum scrutiny, and very few policies survive strict scrutiny. Elena Kagan, in her dissent, recognized explicitly that property now enjoyed “heightened scrutiny.” There is no doubt anywhere that property now enjoys a level of scrutiny ABOVE minimum scrutiny. And it is property AS property (that is, all the indicia of property) which enjoys that higher level of scrutiny. As Kagan stated in her dissent, there is no logic supporting the restriction of the Court’s holding to the facts of Koontz. Just as in the gun cases, the individually enforceable right to property is here: cope with it.

    And the moment Watt reduces mortgage principals, Lindsey v. Normet is no longer good law and the same thing applies to housing AS housing (not restricted to homeowners, or even renters–ALL housed individuals, and those who are not housed as a result of an assault upon their housing). Note that there is nothing unconstitutional about government itself applying the Barnette test to facts, and then establishing an individually enforceable entitlement in the general public with respect to a fact which government determines has passed the Barnette test. FHFA principal reduction will be that individually enforceable entitlement.

    By the way, this is not the only way the level of scrutiny for housing is currently being raised. Efforts by municipalities to use eminent domain to acquire mortgages and reduce the principal, ALSO raise the level of scrutiny for housing. Justice Roberts acknowledged in NIFB v. Sebelius that the Affordable Care Act raised the level of scrutiny for housing. He stated that Congress had gone ahead and raised the level of scrutiny for medical care when he stated the policy as follows: “Everyone will eventually need health care.” This is saying that medical care has passed the Barnette test. “Everyone will eventually need housing”–that is what Mel Watt will be saying once mortgage principals are reduced. Note that there was long list of cases during the 1970s and 1980s which basically said that “social” facts could not be rights (for example, DeShaney v. Winnebago County). This long line of cases is certainly no longer good law.

    Raising the level of scrutiny for housing will make it impossible to evict anyone from any housing for any reason. Why? Because a policy of housing eviction will have to meet heightened scrutiny, that is, it will have to “further an important government interest by means that are substantially related to that interest.” That is the intermediate scrutiny test. It is designed to MAINTAIN the fact by giving people an ongoing right to mandate policy. Note that the Supreme Court said in Lindsey that one of the reasons it was keeping housing at minimum scrutiny, was this consideration: “Nor should we forget that the Constitution expressly protects against confiscation of private property or the income therefrom.” This subordinates housing to property at a time when property itself enjoyed only minimum scrutiny–it said that housing enjoyed a level of scrutiny even lower than minimum scrutiny, or indeed, that housing was not even recognized by the Constitution.

    In a system in which property and housing both enjoy intermediate scrutiny, the two rights will have to be harmonized–rights under the Constitution are not permitted to conflict with each other. But however that shakes out, housing eviction is not an option to resolve the dispute. Intermediate scrutiny means that the Court will have to look at exactly what the government is trying to accomplish when it is proposing to evict someone, and the Court will demand that alternatives be explored. And alternatives will be found, as principal reduction shows. Also, note that the policy of principal reduction is to keep people in housing. It will be very difficult for government to argue that it is maintaining housing by evicting people from housing when “housing” means the particular housing which is in dispute (that is, government will not be able to argue that maintenance of housing “in general” jusifies a specific instance of housing eviction). Assuming that both housing and property now enjoy not intermediate, but rather, strict scrutiny, housing evictions (and this includes unlawful detainer for rental housing) will be impossible short of a national emergency. Under this test, government will have to show that housing eviction is narrowly tailored to achieve a compelling government purpose. Some policy–such as a nationwide emergency, insurgency or war–is the only policy which would trump housing under this test. All the so-called “social” facts will now become rights, as long as they pass the Barnette (or should we call it, the Roberts) test.

    What is happening is that we are changing the Constitutional regime. The doctrine of the scrutiny regime was that law only rationally relates to a legitimate government purpose. It appears now that so many facts will be rights, that the thinking underlying the scrutiny regime has been overridden or superseded by a new regime, the maintenance Constitutional regime, the doctrine of which is that the law only maintains important facts. That is what Mel Watt’s confirmation means.

  2. Does this mean we should see a rise in house prices?

  3. You have to view Watt along with the Democrat/Marxist agenda that includes the former absolutely incomptent Mayor of Charlotte elected in 09, Anthony Foxx who is now the Secy of Transportation. In 2009 when he ran for Mayor, he stated his major accomplishment was being President of the SGA at Davidson College.

    Both are useless expect for that they are being groomed for statewide office like Sen Kay Hagen, who campaigned as a Demo conservative. She’ll have her ass handed to her next November. And both Foxx & Watt will too when they try, witnessed the shift from O’Liar in 08 to the whole state going republican in 12.

  4. hey Lamount Cranston,Some folks may not know charlotte is in,North carolina.I wish to know if the whole state is going republican(which i like)then how did a democratic liberal just get elected to replace Fox in Charlotte? BK,have u heard of gov’t program that loans a homeowner with bad mortgage,refinanceing,and at the end of one year forgives the debt if they don’t pay?

  5. Conscience of a Conservative says:

    It comes down to whether Fannie, Freddie and the taxpayers should be subsidizing credit and taking losses on loans that don’t cover the true costs(duration and credit risk to name two). Wall Street loves this because they can capture some of that mis-pricing, and Liberals love it too because they can get people into homes that can’t afford them in exchange for votes but not be around for when that person loses their home.

  6. There is some writing on the wall, here. It will be very surprising if prices of commodities and interest rates do not take-off to the sky as these probable changes are implemented.

  7. Conscience of a Conservative says:

    It’s odd, on the one hand Watt wants to make it more difficult to evict, and on the other he wants to encourage home buying to those that are the worst credits having Democrats singing, “I’m dreaming of a Watt Christmas’, all of which ignores two facts, first that investors lend money for those mortgages and second that tax payers are on the hook for credit losses.

  8. “Watt’s statement is payback for the liberals/progressives who want to take F/F back to the status quo of 2008 and who supported Watt to that end. In 2008 the mortgage giants were agents of federal policy on housing. The ‘mission’ was to increase home ownership at any cost.”

    I agree with Hey You above: with an absolute rejection of fiscal responsibility the cost to borrow has to go up.

    Bruce, is the only way to hold off reality a continuation of QE no matter what they happen to label it as going forward?

  9. Any 2014 forecast? Thanks.