Monthly Archives: January 2017
“The idea that federal courts are required by law (Chevron Deference), to take the side of an often highly-politicized federal administrative agency (like the SEC, FDIC, etc.) over individual citizens and private institutions…
…in their interpretation their own often vague and arbitrary regulations, is un-American and un-Constitutional, and is just like the dystopian world described in George Orwell’s novel “1984”. So glad to see the Republicans in Congress take up this matter and try and eliminate it. While they are at it, they should fix two other matters. First, government officials, whether elected or appointed, should not be protected by sovereign immunity, when they libel or slander individual American citizens. Second, in civil matters, plaintiffs lawyers are protected by law from their lies, misstatements (intentional or not), omissions, distortions, biases, and lack of fact-checking, made in their allegations within the four-corners of a lawsuit. Given this well-know fact, the press/media should not be protected from libel and slander lawsuits, where they regurgitate allegations from civil lawsuits (even ones filed by governments or their agencies), without any independent verification of the often blatantly false allegations made.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“This is wrong on so many levels. Fannie Mae, still in government conservatorship since 2008 (when they and Freddie Mac were bailed out by taxpayers to the tune of $190 billion), is going to guarantee (a taxpayer guarantee!!!) huge Wall Street firm Blackstone’s debt secured by rental homes…
…so they can issue it at cheaper rates, so they can outbid individual Americans who might otherwise buy these homes at a lower price! They can’t be privatized because they require the government/taxpayer guarantee (implicit or explicit) to issue cheap debt (U.S. Treasury-like) and mortgage guarantees, and make any profit. Wake up folks, did we learn nothing? Fannie and Freddie need to be shut down.”, Mike Perry, Former Chairman and CEO, IndyMac Bank
Ryan Dezember and Nick Timiraos, January 24, 2017, The Wall Street Journal
Blackstone Wins Fannie’s Backing for Rental Home Debt
Agreement announced in a filing made by Blackstone unit Invitation Homes ahead of its IPO
Fannie Mae headquarters in Washington, D.C. PHOTO: MANUEL BALCE CENETA/ASSOCIATED PRESS
By Ryan Dezember and Nick Timiraos
Fannie Mae is backing debt from Blackstone Group LP’s investment in single-family homes, offering an important endorsement to Wall Street’s expanding business of owning and renting houses.
The government-controlled mortgage-finance company said it would guarantee up to $1 billion in debt from Blackstone’s Invitation Homes Inc., which owns the country’s largest pool of rental homes.
The deal was disclosed as Invitation began pitching investors on its shares this week with an initial public offering expected as soon as next week. Invitation’s stock-market debut could be the largest U.S. IPO since October 2015, if the shares price in the middle of their expected range, raising about $1.5 billion for the company.
Fannie Mae’s involvement signals a belief that homeownership will remain out of reach for many Americans. Homeownership has declined since the housing crisis amid stricter lending standards, mounting student debt, and potential buyers whose savings and credit diminished during the recession. Last year, the homeownership rate reached its lowest level in at least 50 years, according to U.S. Census Bureau data.
Fannie’s guarantee also suggests a view that Wall Street’s housing wager is a long-term business, not just an opportunistic trade made after the foreclosure crisis.
For Fannie and its smaller government-controlled peer, Freddie Mac, the expansion into the nascent single-family rental market shows both the potential for the companies to expand their role in a changing housing market and, in the process, to institutionalize new investment classes. Both companies have long provided funding to the apartment sector, including luxury rental buildings owned by publicly traded real-estate investment trusts and other institutional owners.
For years, policy makers in Washington talked of overhauling the firms, but the expansion into a new asset class illustrates how the companies have broadened their utility to the market as efforts to replace the companies has stalled.
Fannie’s latest move represents a shift from about four years ago, when regulators blocked Freddie from backing bulk buyers of foreclosed homes, concerned banks wouldn’t be able to compete with its cheap debt.
Fannie’s support will likely make it cheaper for buyers like Blackstone to add homes in the future as its guarantee of payment makes the debt less risky for investors than the rental-backed bonds that Invitation and its rivals sold amid a dearth of financing for home purchases after the housing meltdown.
“The question is, to what extent does the cheaper financing that accompanies Fannie’s guarantee result in greater competition for single-family homes?” said Heidi Learner, chief economist at real-estate brokerage Savills Studley. She said the agreement “is essentially a sign that individual homeownership is no longer a government priority.”
A Blackstone spokeswoman declined to comment. Invitation representatives didn’t respond to requests for comment.
“This transaction helps us gather data and test the market to ensure we are delivering the right solutions that meet the increasing demand for single-family rental housing across all demographics,” Fannie Mae told The Wall Street Journal.
Big investors’ bet on single-family homes comes with risks. Competition from individual buyers could drive up home prices, which are already rising. Many of Wall Street’s new purchases are being made on the open market now that foreclosure rates have returned to normal levels. Wider availability of credit and a boom in home building could also hurt the business of Invitation and its rivals.
Invitation said in an IPO filing that it secured commitments from Wells Fargo & Co. and Fannie on a 10-year loan secured by some of its 48,431 homes. Invitation, which is based in Dallas and owns properties in 13 metropolitan markets, said it would use the loan proceeds to repay older debt.
That debt was raised by selling short-term bonds backed by rental revenue from bundles of specific homes. Invitation was the first to sell such bonds in 2013 and has been a major issuer since. In all, big investors have sold about $18.3 billion of rental-backed bonds, with about $16.8 billion of such debt outstanding, according to Kroll Bond Rating Agency Inc.
Fannie and Freddie don’t issue mortgages. Rather, they buy mortgages issued by banks, bundle them and sell the debt, which they guarantee against default, to investors. Since 2008, they have been controlled by the U.S. government through a process known as conservatorship when the foreclosure crisis prompted concerns that they might fail and intensify the financial panic.
In 2012, the entities’ regulator, the Federal Housing Finance Agency, blocked Freddie from financing investors who were buying foreclosed homes in bulk amid concerns that Freddie’s cheap debt would make it difficult for banks to compete on loans to the increasing number of investors gobbling up foreclosed homes.
Much has changed since then. Beside the advent of the rental-backed bond market, two Invitation rivals— American Homes 4 Rent and Colony Starwood Homes, the country’s second- and third-largest single-family homeowners, respectively—have gone public. Also, home prices have rebounded.
Fannie has long backstopped loans to the mom-and-pop landlords that have traditionally dominated the rental-home business.
On a call Monday with investors and Green Street Advisors LLC analysts, Donald Mullen Jr., a former Goldman Sachs Group Inc. executive whose Pretium Partners LLC backs Progress Residential, owner of the fourth-largest pool of U.S. rental homes, said Fannie’s agreement with Invitation is overdue and should put to rest skepticism over the staying power of the institutional rental-home business.
Lately, Mr. Mullen has been soliciting investors for $1 billion to buy more houses to add to the 20,000 Progress already owns, The Wall Street Journal has reported.
“This is a great outcome not just because it obviously will reduce the cost of our financing, but it puts a further stamp of approval on this industry,” Mr. Mullen, who a decade ago oversaw Goldman’s lucrative bet against the housing market, known as “the big short,” said Monday.
“Washington’s many agencies, bureaus and departments propagate rules that weigh down businesses, destroy jobs, and limit American freedoms. Career bureaucrats who never face the voters wield punishing authority with little to no accountability…
…If there’s a swamp in Washington, this is it. Faced with a metastasizing bureaucracy, the House is undertaking structural and specific reform to offer the nation a shot at reviving the economy, restoring the Constitution, and improving government accountability, all at once. The plan to strip power from the bureaucracy and give it back to the people has two steps. First, we began structural reform by passing the REINS Act, an acronym for Regulations From the Executive in Need of Scrutiny. If the bill becomes law, new regulations that cost $100 million or more will require congressional approval before they take effect. The House also passed the Regulatory Accountability Act, which would require agencies to choose the least-costly option available to accomplish their goals. That bill would also prohibit large rules from going into effect while they are being challenged in court…..Further, it would end “ Chevron deference,” a doctrine that stacks the legal system in favor of the bureaucracy by directing judges to defer to an agency’s interpretation of its own rules.”, House Majority Leader, Republican Kevin McCarthy, “How the House Will Roll Back Washington’s Rule by Bureaucrats”, The Wall Street Journal, January 25, 2017
“Fabulous and would never have happened with the liberal Democrats, who are destroying our Country from within, in charge. p.s. I dealt first hand with this un-Constitutional and un-American bureaucracy, at both the SEC and FDIC, when my bank failed in the 2008 financial crisis. I also dealt with this ridiculous and un-Constitutional Chevron Rule!”, Mike Perry, former Chairman and CEO, IndyMac Bank
How the House Will Roll Back Washington’s Rule by Bureaucrat
We passed legislation to tighten the reins on federal agencies and will soon nix new Obama regulations.
PHOTO: DE AGOSTINI/GETTY IMAGES
By Kevin McCarthy
When President Trump delivered his inaugural address last week, he declared that “we are transferring power from Washington, D.C., and giving it back to you, the people.” Note that he said we are transferring power, in the present tense. The House has already begun turning the president’s words into reality by targeting the part of Washington that poses the greatest threat to America’s people, economy and Constitution: the federal bureaucracy.
Washington’s many agencies, bureaus and departments propagate rules that weigh down businesses, destroy jobs, and limit American freedoms. Career bureaucrats who never face the voters wield punishing authority with little to no accountability. If there’s a swamp in Washington, this is it.
In President Obama’s final year the Federal Register hit 97,110 pages—longer by nearly 18,000 pages, or 15 King James Bibles, than in 2008. Federal regulations cost the American people about $1.89 trillion every year, according to an estimate by the Competitive Enterprise Institute. That’s more than 10% of GDP, or roughly $15,000 per American household. The Obama administration has also burdened the public with nearly 583 million hours of compliance over the past eight years, according to the American Action Forum. That’s averages to nearly five hours of paperwork for every full-time employee in the country.
Faced with a metastasizing bureaucracy, the House is undertaking structural and specific reform to offer the nation a shot at reviving the economy, restoring the Constitution, and improving government accountability, all at once. The plan to strip power from the bureaucracy and give it back to the people has two steps.
First, we began structural reform by passing the REINS Act, an acronym for Regulations From the Executive in Need of Scrutiny. If the bill becomes law, new regulations that cost $100 million or more will require congressional approval before they take effect. The House also passed the Regulatory Accountability Act, which would require agencies to choose the least-costly option available to accomplish their goals. That bill would also prohibit large rules from going into effect while they are being challenged in court. Further, it would end “ Chevron deference,” a doctrine that stacks the legal system in favor of the bureaucracy by directing judges to defer to an agency’s interpretation of its own rules.
Second, the House next week will begin repealing specific regulations using the Congressional Review Act, which allows a majority in the House and Senate to overturn any rules finalized in the past 60 legislative days.
Perhaps no aspect of America’s economy has been as overregulated as energy. So the House will repeal the Interior Department’s Stream Protection Rule, which could destroy tens of thousands of mining jobs and put up to 64% of the country’s coal reserves off limits, according to the National Mining Association.
Likewise, the Obama administration moved at the 11th hour to limit the oil-and-gas industry through a new methane regulation. It could cost up to $1 billion by 2025, the American Petroleum Institute estimates, even though the industry is already subject to the Clean Air Act and has leveraged technological advances to dramatically reduce methane emissions. The additional regulation would force small and struggling operations—in the West in particular—to close up shop, which is why it will be one of the first to go.
The House will also take the ax to the Securities and Exchange Commission’s disclosure rule for resource extraction, which adds an unreasonable compliance burden on American energy companies that isn’t applied to their foreign competitors. This rule, which closely mimics a regulation already struck down by the courts, would put American businesses at a competitive disadvantage.
The bureaucracy under President Obama has also threatened America’s constitutional rights. A new rule from the Social Security Administration would increase scrutiny on up to 4.2 million disabled Americans if they attempt to purchase firearms. This would elevate the Social Security Administration to the position of an illegitimate arbiter of the Second Amendment. And in an affront to basic due process, the bureaucracy has attempted to blacklist from federal contracts any business accused of violating labor laws—before the company even has a chance to defend itself in court.
With President Trump’s signature, every one of these regulations will be overturned. In the weeks to come, the House and Senate will use the Congressional Review Act to repeal as many job-killing and ill-conceived regulations as possible. That’s how to protect American workers and businesses, defend the Constitution, and turn words into actions.
Mr. McCarthy, a California Republican, is the House majority leader.
“Mr. Gilbert (CEO of Quicken Loans) said that his company has been unfairly targeted. “You want to know what this case is about?” he said. “Somebody probably put up a whiteboard and said, ‘Here are the 10 largest F.H.A. lenders, now go and collect settlements from them, regardless of whether they did anything wrong.’”…
…In court documents, Quicken argues it has the lowest default rates in the F.H.A. program. It projects the government will reap $5.7 billion in net profits from the insurance premiums for loans made from 2007 to 2013, after paying out any claims. These days, Mr. Gilbert appears to be itching for a fight with the Justice Department. In court filings, Quicken argued that the three-year government investigation was based on 55 “cherry-picked” loans out of nearly 250,000. Quicken also argued that a longstanding F.H.A. process to resolve loans that did not meet its requirements, through either the repurchase of the loan or by indemnifying F.H.A. from any losses, was retroactively discontinued for Quicken….In September 2012, banks originated 65 percent of the purchase-mortgage loans insured by the F.H.A., according to the data. Today, that number has more than flipped: Nonbanks originate 73 percent of the loans, with banks’ share dropping to 18 percent. The figures are more spectacular for refinanced mortgages, where nonbanks now make up 93 percent of loans…..“The market has moved to the nonbanks because the nonbanks’ appetite for risk is much higher,” said Edward J. Pinto, a director of the Center on Housing Risk. He has argued that the F.H.A. is not only failing to help low-income communities with its programs, but is actually weakening them with imprudent loans.”, “The New Mortgage Machine”, Julie Creswell, The New York Times, January 22, 2017
“I agree with Quicken and its CEO and also the AEI’s Edward Pinto, with respect to the risk of the FHA program and why the major banks have ceded this market to non-bank mortgage lenders. FHA loans (with 3.5% down to subprime credit scores as low as 580) only work when home prices are rising and the economy is solid. In other times, they are as big a risk to the borrowers, as they are to the American taxpayer.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Quicken Loans, the New Mortgage Machine
DETROIT — A low buzz fills the air as an army of mortgage bankers, perched below floating canopies in a kaleidoscope of vivid pinks, blues, purples and greens, works the phones, promising borrowers easy financing and low rates for home loans.
By the elevators, nobody blinks when an employee wearing a pink tutu bustles past. On any given day, a company mascot, Simon, a bespectacled mouse, goes on the hunt for “gouda,” or good ideas, from the work force.
A visit to the headquarters of Quicken Loans in downtown Detroit may seem like a trip to a place where “Glengarry Glen Ross” meets Seussville. But the whimsical, irreverent atmosphere sits atop a fast-growing business in a field — the selling of the American dream — that has changed drastically since an earlier generation of mortgage lenders propelled the economy to near collapse in 2008 by issuing risky and even fraudulent loans.
In the years since the crisis, many of the nation’s largest banks pulled back their mortgage-lending activities. Quicken Loans pushed in. Today, it is the second-largest retail mortgage lender, originating $96 billion in mortgages last year — an eightfold increase from 2008.
Privately held Quicken, like some of America’s largest banks before it, has also landed in regulators’ cross hairs. In a federal false-claims lawsuit filed in 2015, the Department of Justice charged that, among other things, the company misrepresented borrowers’ income or credit scores, or inflated appraisals, in order to qualify for Federal Housing Administration insurance. As a result, when those loans soured, the government says that taxpayers — not Quicken loans — suffered millions of dollars in losses.
Quicken Loans today is the F.H.A. insurance program’s largest participant.
Executives at Quicken Loans deny the charges, maintaining, among other things, that the government “cherry-picked” a small number of examples to build its case. In an aggressive move, the company pre-emptively sued the Department of Justice, demanding a blanket ruling that all of the loans it had originated met requirements and “pose no undue risks to the F.H.A. insurance fund.”
Quicken’s suit was dismissed. But it reflects the in-your-face style of Quicken Loans’ founder and chairman, Dan Gilbert, the billionaire who once publicly excoriated the N.B.A. superstar LeBron Jamesfor leaving the Cleveland Cavaliers, in which Mr. Gilbert has a majority stake. He also owns significant chunks of central Detroit, where Quicken Loans is based.
Mr. Gilbert, who founded the company in 1985, sold it to the business software company Intuit in 1999, before buying it back with other investors in 2002.
He is working to rectify the city’s downtrodden image with streetcars, upscale cafes and boutiques, and fiber-optic data, making him a hometown hero. Late last year, Quicken Loans won a motion to move the Department of Justice case to a federal courthouse roughly three blocks from its Detroit headquarters.
Sitting on the edge of a chair in his office, the Motor City’s skyline a steel gray in the late-afternoon November sun, Mr. Gilbert said that his company has been unfairly targeted. “You want to know what this case is about?” he said. “Somebody probably put up a whiteboard and said, ‘Here are the 10 largest F.H.A. lenders, now go and collect settlements from them, regardless of whether they did anything wrong.’”
In court documents, Quicken argues it has the lowest default rates in the F.H.A. program. It projects the government will reap $5.7 billion in net profits from the insurance premiums for loans made from 2007 to 2013, after paying out any claims.
A spokesman for the Department of Housing and Urban Development, which is home to the F.H.A. program at the center of the case against Quicken, declined to speak about the lawsuit.
Late last year, Donald J. Trump named a former Quicken Loans lobbyist, Shawn Krause, to his H.U.D. transition team. A Trump spokeswoman did not respond to an email asking about potential conflicts of interest. In an emailed statement, Quicken Loans said the fact that Ms. Krause had come from the largest F.H.A. lender in the country “bodes well for the positive impact she has, and will, make on H.U.D.”
In the years since the financial crisis, Quicken has emerged as a leader in the nation’s shadow-banking system, a network of nonbank financial institutions that has gained significant ground against its more heavily regulated bank counterparts in providing home loans to Americans. Increased regulation and decreased profits sent the nation’s banks packing.
Nonbanks, like Quicken, have filled that gap. Today, Quicken is the nation’s second-largest retail residential mortgage lender, behind Wells Fargo, but ahead of banking giants like J. P. Morgan, Bank of America and Citigroup, according to Mortgage Daily.
Considered by many to be a visionary leader, Mr. Gilbert often strikes a pugnacious stance. When Mr. James, the N.B.A. star, announced he was leaving the Cleveland Cavaliers in 2010 to join the Miami Heat, Mr. Gilbert — who not only has a majority stake in the Cavaliers, but also operates Quicken Loans Arena, where they play — penned a public tirade against the “cowardly betrayal,” in a letter written in the typeface Comic Sans.
Mr. James is again playing for the Cavaliers. A call to his agent seeking comment was not returned.
The year before, Mr. Gilbert got into an altercation at a bar mitzvah, punching a former colleague, David Hall, in the head before he was escorted out by security, according to interviews conducted by the Birmingham Police Department in Michigan. In police documents, Mr. Gilbert’s lawyer said Mr. Hall filed the complaint in order to pressure Mr. Gilbert into paying $2 million to buy out Mr. Hall’s investments in Mr. Gilbert’s companies. The Birmingham city attorney ultimately denied a warrant in the case on the grounds that the charges were not “supported by probable cause.”
Mr. Hall did not return an email seeking comment. In an email statement, a Quicken Loans spokesman said Mr. Gilbert “defended himself in a minor confrontation that was instigated by a former employee who was the aggressor.”
On a more trifling scale, after sending text messages about this article to a reporter at The New York Times but not receiving a response — Mr. Gilbert was texting her landline number by accident — he followed up with an email accusing the reporter of disconnecting her mobile phone to avoid him. The phone “likely is one of your temporary numbers that you deploy for the surreptitious work that you do,” he wrote.
When alerted to the misunderstanding, Mr. Gilbert apologized “for any of it that was caused on my end.”
When Mr. Gilbert was asked in an email if he “often strikes a ‘combative stance’ or ‘frequently attacks his critics,’” a Quicken Loans spokesman responded in an email, “It’s interesting that when someone with as long and successful career as Mr. Gilbert is forced to defend his integrity and honor from old and/or insignificant already rehashed incidents and accusations from a media source as credible as The NY Times, you would imply that doing such is ‘frequently attacking’ his critics.”
These days, Mr. Gilbert appears to be itching for a fight with the Justice Department. In court filings, Quicken argued that the three-year government investigation was based on 55 “cherry-picked” loans out of nearly 250,000.
Quicken also argued that a longstanding F.H.A. process to resolve loans that did not meet its requirements, through either the repurchase of the loan or by indemnifying F.H.A. from any losses, was retroactively discontinued for Quicken.
Since 2011, Mr. Gilbert has spent more than $2.2 billion on downtown Detroit, buying up 95 decrepit properties and rehabilitating them in an effort to lure new tenants. Nike opened a store there last year. The New York burger chain Shake Shack is coming in 2017, as is the sports retailer Under Armour. Mr. Gilbert also notes that he has leased space downtown to several local minority-owned start-up businesses.
That sort of presence makes downtown Detroit today seem a bit like a company town, a sort of Quickenville. That’s because Quicken Loans is just one of more than 100 closely knit companies that is owned or controlled by Mr. Gilbert with a footprint in the area. Through his commercial real estate properties, Mr. Gilbert can decide which tenants fit into his vision for downtown Detroit, and which don’t.
Rocket Fiber, an idea developed by three former Quicken Loans technology employees and financially backed by Mr. Gilbert, has brought high-speed internet to downtown Detroit. For a $15 million donation, Quicken received the naming rights for the QLine, a streetcar that is expected to start running through downtown Detroit this spring. Mr. Gilbert sits on the board of the streetcar project.
Lines of bicycles in downtown Detroit are available free for all employees of Mr. Gilbert’s companies. And visitors can bet at the tables at Jack Detroit Casino-Hotel Greektown, a gambling venture controlled by Mr. Gilbert.
The Quicken Loans family also includes one of the largest title companies in the United States, an appraisal firm, a call center and In-House Realty, which says on its website that it is the “preferred real estate partner” of Quicken Loans.
Mr. Gilbert, who was busted in college for running a football betting ring (the charges were dismissed and his record was expunged), plays on a big stage. Back in 2010, he guaranteed that the Cavaliers would win the N.B.A. championship before LeBron James would. They didn’t, but the team, led by Mr. James, did win the title last year, and this season’s team has the highest payroll in the league.
With Quicken Loans, Mr. Gilbert has built a game-changing company in the once-staid mortgage-lending industry.
Former executives describe Quicken Loans as a technology company that sells mortgages. But the heart that keeps Quicken’s blood moving is the 3,500 mortgage bankers who work its phones. Many new employees come in with little to no background in financial services. One employee joined after delivering pizzas to the Quicken Loans office and becoming interested in working there.
Entry-level employees typically make hundreds of calls a day, trying to get potential customers on the phone. Not unlike the assembly lines that put together cars in Detroit, the call is immediately handed off to a licensed mortgage banker, who completes the loan application, then quickly passes it to processing so that he or she can focus on the next loan application.
Mr. Gilbert said clients are able to close more quickly on loans when specialists focus on each stage of the loan process. He and other Quicken executives note that the company has repeatedly made Fortune magazine’s list of Best Places to Work For and has earned top marks in J. D. Power client satisfaction surveys.
Quicken defines its culture and philosophy through a number of so-called “isms,” created and curated over the years by Mr. Gilbert: “Yes before no.” “A penny saved is a penny.” “We eat our own dog food.”
At the same time, several former employees and executives in interviews described a demanding work environment, with staff members expected to work long hours and weekends to hit targets. In recent years, Quicken and its affiliated companies have faced at least four lawsuits filed by former mortgage bankers seeking overtime.
Quicken won one of the overtime cases, but court documents indicate others were directed into settlement negotiations. An email to the various plaintiffs’ lawyers was not returned.
And in early 2016, a National Labor Relations Board judge ruled that Quicken and five of its related companies issued an employee handbook with rules that violated workers’ right to engage in various activities, including union-related ones. Quicken has appealed the ruling, calling the policies “common, rational and sensible.”
When asked about criticisms of the work environment, Mr. Gilbert and other executives defended the company, noting that mortgage bankers work an average of 44 hours per week and are compensated well. It is possible for team members, Mr. Gilbert said, to earn over $85,000 in their second year, more than double the median household income for Wayne County, Mich.
Quicken Loans’ growing role in parts of the mortgage market may make it a lightning rod for critics.
Proponents say that nonbanks like Quicken or PennyMac in California — which was started by former executives of Countrywide, the mortgage machine in Southern California that was a hotbed of toxic mortgages in the 2008 crisis — are filling an important void. They argue that they serve people with low to moderate incomes or lower credit scores whom the big banks shun. The big banks, they say, focus instead on so-called jumbo mortgages, or mortgages of more than $424,100, the maximum amount that can be backed by government-sponsored enterprises like Fannie Mae and Freddie Mac.
“The large banks want to go after the higher-end business,” said Guy D. Cecala, the chief executive and publisher of Inside Mortgage Finance.
Thanks to low interest rates, home sales are booming and the mortgage market was expected to top $2 trillion in originations in 2016. That’s a far cry from the frothy height of $3.8 trillion that was hit in 2003.
Moreover, many other parts of the mortgage machine that were in place leading up to the financial crisis have been dismantled.
Still, critics say today’s shadow banks, by focusing on the riskier end of the mortgage market, may be revving up the same parts of the engine that resulted in defaults and foreclosures in the past. Nonbanks, which are typically less capitalized and may have more difficulty reimbursing the government for bad loans, now dominate F.H.A.-insured mortgage loans, according to data from the American Enterprise Institute’s International Center on Housing Risk.
In September 2012, banks originated 65 percent of the purchase-mortgage loans insured by the F.H.A., according to the data. Today, that number has more than flipped: Nonbanks originate 73 percent of the loans, with banks’ share dropping to 18 percent.
The figures are more spectacular for refinanced mortgages, where nonbanks now make up 93 percent of loans.
“The market has moved to the nonbanks because the nonbanks’ appetite for risk is much higher,” said Edward J. Pinto, a director of the Center on Housing Risk. He has argued that the F.H.A. is not only failing to help low-income communities with its programs, but is actually weakening them with imprudent loans.
Mr. Gilbert disputed any “false narrative” that claims Quicken faces less regulatory scrutiny, is lightly capitalized or makes risky loans. He said that the average credit score of a Quicken borrower is one of the highest in the nation; that the parent company’s assets “are larger than that of 93 percent of all F.D.I.C.-insured depositories”; and that the company is regulated by 50 states, multiple municipalities and numerous federal agencies. Quicken Loans is privately held, and it is unclear what its assets are worth.
In an email response to follow-up questions, Mr. Gilbert added, “Quicken Loans underwriting and production is one of the highest, if not the highest, quality production in the entire country.”
Correction: January 21, 2017
An earlier version of this article misstated Dan Gilbert’s position at Quicken Loans. He is the founder and chairman, not the chief executive. A summary of the article repeated the error.
The earlier version of the article also incompletely described the company’s history. Mr. Gilbert founded the company in 1985, sold it to Intuit in 1999 and then bought it back with other investors in 2002. It was not simply that he and other investors bought Quicken from Intuit in 2002.
A version of this article appears in print on January 22, 2017, on Page BU1 of the New York edition with the headline: The New Mortgage Machine.
“The Troubled Asset Relief Program may have been the least of the rescue measures, but it was the highest risk, because the people’s bipartisan representatives were required to put their imprimatur on unpopular bailouts…
…Nonetheless, TARP was enacted Oct. 3, 2008, almost four months before President Obama took office. On March 16, 2008, the Federal Reserve arranged a fire sale of Bear Stearns. Between Sept. 19 and Oct. 26, numerous other institutions were bailed out; the money-fund industry and commercial paper market were propped up; bank depositors were favored with a big extension of deposit insurance. On Dec. 19, as a final act, the Bush administration directed $17.4 billion in TARP funds to keep General Motors and Chrysler afloat so the Obama administration wouldn’t be confronted with their liquidation on its first day in office. There were numerous discrete acts that constituted the bailout. All were undertaken by the Bush administration. There was one heroic, pell-mell effort at bipartisan legislative coalition-building of the sort that never took place during eight years of the Obama administration. That was TARP. Mr. Obama wasn’t even a character in the HBO movie about all this, “Too Big to Fail.” As all now agree, it was Lehman, not the washing through of modest subprime losses, that turned a regional U.S. housing downturn into a global financial panic. In his memoirs, Fed chief Ben Bernanke protests that the Fed knew exactly what a catastrophe Lehman’s unmanaged collapse would be, but its hands were legally tied at the time. Actually, what seemed obvious at the time was that the Fed and Treasury were reacting to the populist revulsion against bailouts. They feared getting on the wrong side of public opinion and the politicians.”, “Obama Did Not Save the Economy”, The Wall Street Journal, January 21, 2017
“I think TARP was a lot more important than Mr. Jenkins notes, as it recapitalized all the Too Big to Fail Banks and other banks, whose capital had been depleted by mark to market losses of securities and reserves for future loan losses.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Obama Did Not Save the Economy
It’s not his fault he arrived too late to play a role. But getting the credit wrong also gets the blame wrong.
By Holman W. Jenkins, Jr.
As he goes out the door, President Obama is praised lavishly for saving the financial system and warding off a second Great Depression—which indeed would have been an amazing accomplishment for a backbench U.S. senator.
To cite an example almost at random, Harvard economist Kenneth Rogoff claimed on NPR this week that Mr. Obama “pulled us out of a very deep abyss,” though Mr. Rogoff also allowed that President Bush deserves “a little credit here.”
Put aside the desire to be nice to the outgoing president. Such spin is unpromising simply in the face of the calendar.
The Troubled Asset Relief Program may have been the least of the rescue measures, but it was the highest risk, because the people’s bipartisan representatives were required to put their imprimatur on unpopular bailouts. Nonetheless, TARP was enacted Oct. 3, 2008, almost four months before President Obama took office.
On March 16, 2008, the Federal Reserve arranged a fire sale of Bear Stearns. Between Sept. 19 and Oct. 26, numerous other institutions were bailed out; the money-fund industry and commercial paper market were propped up; bank depositors were favored with a big extension of deposit insurance.
On Dec. 19, as a final act, the Bush administration directed $17.4 billion in TARP funds to keep General Motors and Chrysler afloat so the Obama administration wouldn’t be confronted with their liquidation on its first day in office.
There were numerous discrete acts that constituted the bailout. All were undertaken by the Bush administration. There was one heroic, pell-mell effort at bipartisan legislative coalition-building of the sort that never took place during eight years of the Obama administration. That was TARP.
Mr. Obama wasn’t even a character in the HBO movie about all this, “Too Big to Fail.”
When he finally arrived, his contribution consisted of fudgy bank “stress tests,” less to establish confidence in the banks than to establish confidence in the new administration, under lefty pressure at the time to reinflame the crisis by nationalizing the industry.
He gave us a $787 billion pork-barrel “stimulus,” an exercise in hand-waving which ever since has figured prominently in the efforts of Obama publicists to create confusion about what ended the crisis.
His own Council of Economic Advisers, in a yeoman effort, argues essentially that since a second Great Depression didn’t happen, whatever Mr. Obama did gets the credit. Never mind that recoveries normally follow recessions.
Many convince themselves that Mr. Obama surmounted overwhelming political opposition to prop up GM and Chrysler, when the clear lesson of the Bush action is that no president would have been prepared to pay the political price of letting them fail.
We are perfectly serious when we say that Mr. Obama will carry a burden of cognitive dissonance on this point in the decades ahead. It isn’t his fault that he arrived too late to play an important role in the rescue. But in getting the credit wrong, we also get the blame wrong.
As all now agree, it was Lehman, not the washing through of modest subprime losses, that turned a regional U.S. housing downturn into a global financial panic. In his memoirs, Fed chief Ben Bernanke protests that the Fed knew exactly what a catastrophe Lehman’s unmanaged collapse would be, but its hands were legally tied at the time.
Actually, what seemed obvious at the time was that the Fed and Treasury were reacting to the populist revulsion against bailouts. They feared getting on the wrong side of public opinion and the politicians.
New evidence on this agitated question comes from University of Pennsylvania legal scholar Peter Conti-Brown, in his history of the Fed, “The Power and Independence of the Federal Reserve.” He finds Mr. Bernanke’s legal arguments wanting and concludes that political imperatives were indeed paramount.
He also argues that the Fed’s decision, though terrible for the economy, worked out just fine for the Fed. The post-Lehman meltdown justified the central bank’s subsequent bailout efforts and positioned the Fed to survive Dodd-Frank with its powers intact.
OK, presidents get credit they don’t deserve. They also sometimes escape blame. Let it be said that, in the kind of omission that damns a presidency in the eyes of the cognoscenti, it was President Bush who should have and could have stepped up and provided his appointees political cover to spare the world the Lehman meltdown.
“U.S. consumers and businesses have enjoyed ultralow borrowing costs since the financial crisis because the Federal Reserve pinned interest rates near zero. At the same time, regulators and lenders intent on fortifying the financial system have clamped down on risk-taking, making it harder for many borrowers to get loans…
…The result is that lending for housing, a pillar of the U.S. economy, has bifurcated. Well-off households and home builders have their choice of loans, while many others without solid credit or stable incomes are locked out. That dynamic is one reason the U.S. has seen such anemic economic growth despite aggressive efforts to encourage investment. Money has been cheaper and more abundant than ever, but—for some—much harder to get. Policy makers have focused on “lowering the cost of capital instead of increasing the availability of credit,” says Mr. Dobson, chief executive of Amherst Holdings, an investment firm in Austin, Texas.”…. Lenders have been reluctant to extend credit to the limits of what government programs allow because of concerns over lawsuits if loans ultimately default, and because the costs of managing delinquent mortgages have soared….“If we had our druthers, we would never service a defaulted mortgage again,” said J.P. Morgan Chase & Co. Chief Executive James Dimon in a shareholder letter earlier this year. “We do not want be in the business of foreclosure because it is exceedingly painful for our customers…and our reputation.” J.P. Morgan cut its mortgage offerings to 15, from 37, and said it had “dramatically reduced” its participation in low-down-payment lending through the FHA. “It is simply too costly and too risky to originate these kinds of mortgages,” said Mr. Dimon.”, “Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime’”, The Wall Street Journal, December 5, 2016
Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime’
After prices and rates dropped, regulators and lenders made it harder for borrowers to get loans
Charles Schetter, CEO of Atlanta’s Smith Douglas Homes, says banks would rather extend credit to large firms than to mom-and-pop builders. PHOTO: KEVIN D. LILES FOR THE WALL STREET JOURNAL
By Nick Timiraos
Sean Dobson wanted to start a mortgage bank four years ago to serve borrowers with middling credit or irregular income. He eventually decided that growing regulatory hurdles and other costs would erase his returns.
Instead, he purchased thousands of homes in states from Texas to Indiana and now rents them to people who might have been his borrowers.
U.S. consumers and businesses have enjoyed ultralow borrowing costs since the financial crisis because the Federal Reserve pinned interest rates near zero. At the same time, regulators and lenders intent on fortifying the financial system have clamped down on risk-taking, making it harder for many borrowers to get loans.
The result is that lending for housing, a pillar of the U.S. economy, has bifurcated. Well-off households and home builders have their choice of loans, while many others without solid credit or stable incomes are locked out.
That dynamic is one reason the U.S. has seen such anemic economic growth despite aggressive efforts to encourage investment. Money has been cheaper and more abundant than ever, but—for some—much harder to get.
Policy makers have focused on “lowering the cost of capital instead of increasing the availability of credit,” says Mr. Dobson, chief executive of Amherst Holdings, an investment firm in Austin, Texas.
Private investment across the economy is now about 6% above its prerecession level on a per-capita basis, but that obscures large differences. Spending on consumer durables, which include cars, appliances and smartphones, is 21% above prerecession levels. Residential real-estate investment, however, is 22% below its prerecession level, according to the Federal Reserve of St. Louis.
Home prices and sales have risen since 2011, with prices nationally surpassing their 2006 highs, before adjusting for inflation. But new construction collapsed so drastically during the bust that even today it has returned only to levels normally seen in recessions. Sales of new homes are running about 30% below the average between 1983 and 2007 and are lower than every one of those years except for the recession of 1990-91.
“We are at a point when housing should be going gangbusters. It’s not going anywhere,” says Lewis Ranieri, a financier who pioneered the market for mortgage-backed securities in the 1980s. “The people with access to credit have become rich, and the people without access don’t even have a chance to climb up the ladder.”
Homes are generally the biggest purchase Americans make, and housing dollars ripple through the economy by triggering spending on appliances, furniture and landscaping.
Single-family home construction accounted for 2% of gross domestic product, on average, during the 1990s. It hasaveraged just 1% of GDP since the recession ended in 2009.
Lending for home purchases hit its highest level since 2007 during the April-to-June quarter, but almost all the growth has come from borrowers with credit scores of at least 700. Credit scores run between 300 and 850, with scores below 620 considered subprime. Borrowers with scores below 700 accounted for just 15% of originations, the lowest share of such lending since at least 2000, according to data provider Black Knight Financial Services.
Regulators have defended the spate of rules implemented after the crisis while acknowledging the strain. “No economic sector that precipitates a global financial meltdown could possibly expect to escape far-reaching reforms,” said Richard Cordray, director of the Consumer Financial Protection Bureau, in a speech to mortgage bankers in October. Nevertheless, he added, “the market is not yet supporting access to credit for the full spectrum of creditworthy borrowers.”
Analysts at Pacific Investment Management Co. estimate between one million and 1.4 million Americans who would have been eligible for a mortgage in 2002, before the loosening of lending standards that caused the subprime crisis, couldn’t get a mortgage today.
The bifurcation has made the banking system and the economy less susceptible to the kind of losses that triggered the 2008 financial crisis, but also shows how policy makers retreated from a bipartisan push of homeownership.
The homeownership rate has fallen on a year-over-year basis in every quarter for the last 10 years, and a surge in renting has dropped the homeownership rate to a 50-year low.
Banks would rather extend more credit to large, established firms than make lots of smaller loans to mom-and-pop builders, many of which lost money during the downturn, says Charles Schetter, chief executive of Smith Douglas Homes Inc., a large, privately held builder in Atlanta.
“For the first time, the burden of regulation is setting up a threshold of scale,” says Mr. Schetter, whose company will sell 700 homes this year. He started out in the industry building homes with his father, “when anyone with a hammer, a pickup truck and access to local tradesmen” could start a company, which he says would be difficult today.
Consolidation in the home building and banking industries predated the financial crisis but accelerated during the downturn. Banks with more than $100 billion in assets held around two-thirds of construction loans in 2016, up from less than half during the housing bubble and less than one-third in 2000, according to the Mortgage Bankers Association.
Suppliers and vendors throughout the housing ecosystem were left reeling from the crash, and builders say their challenges finding plumbers, electricians and house framers has begun to limit their ability to build homes.
Jim Ellenburg started his own flooring supply and installation company in 2009 after he was laid off from a firm that closed when builders couldn’t pay their bills. He couldn’t get a loan to start the company, so he used his credit cards. Now that his company has a solid record—he expects $90 million in sales this year in three states—banks are eager to lend.
“That’s part of the problem: You can’t get credit until you can demonstrate you don’t need it,” says Mr. Ellenburg, owner of Cartersville Flooring Center in Cartersville, Ga.
After Sean Dobson of Austin, Texas, decided not to start a mortgage bank, he bought thousands of homes from Texas to Indiana and now rents them to people who might have been his borrowers. PHOTO: CATALIN ABAGIU FOR THE WALL STREET JOURNAL
With home prices nationally now above their highs of last decade, investors who took huge risks buying tens of thousands of homes as the market hit bottom are reaping the benefits. Some of their renters are former owners who couldn’t pay their mortgages after the bust and weren’t able to buy again when homes became much cheaper because they couldn’t meet lenders’ tightened requirements.
Mr. Dobson’s rental-home firm, Main Street Renewal, rents 11,000 homes in 18 states, primarily in the South and Midwest. “Unless something changes dramatically in Washington, this is the way a lot of people are going to be in their first home,” says Mr. Dobson, who is still tinkering with ways to start a mortgage bank.
On a recent Saturday afternoon, Margaret Wooten of the Chicago Urban League counseled renters at a homebuying fair on the basics of getting a loan in today’s more stringent environment.
On a packed bus touring foreclosed properties about to hit the market on Chicago’s South Side, Ms. Wooten explained how banks’ insistence on using tax returns to verify incomes—put in place to satisfy the new ability-to-repay regulations—had created bigger hurdles for small-business owners and the self-employed. They sometimes legally write off business expenses to lower their taxable income but then can have trouble proving their higher take-home pay to lenders.
“No, you didn’t have to pay Uncle Sam, but you’re not going to get that home, either,” she told attendees. Ms. Wooten cautioned against going out to buy furniture or a new car after getting approved to buy a home.
“Do not touch anything after you’ve been approved,” she said. “Leave your credit as it is.”
By some measures, mortgage standards aren’t any tighter today than they were in the early 1990s. But demographic changes, including more households delaying marriage and a higher share of younger households with less inherited wealth, suggest that, when combined with more-stringent credit rules, a homeownership rate below the historical level of 64% “is absolutely here to stay,” says Laurie Goodman of the Urban Institute think tank.
“I’ve sat through four years of home-buyer classes where people know they are missing out on the deal of a lifetime and can’t get the credit to compete for it,” says Glenn Kelman, chief executive of Redfin, a real-estate brokerage that operates in 37 states.
Policy makers have struggled for decades to find the right lending balance. Beginning in the 1970s, regulators tried to end a discriminatory practice known as “redlining,” in which banks avoided predominantly African-American neighborhoods.
By the late 1990s, Wall Street rushed into the subprime-mortgage business, long dominated by local niche lenders, transforming pools of those loans into highly rated securities. When the Fed started raising rates in 2004, lenders lowered standards to keep loan volumes from falling.
“No one thought about affordability or sustainability,” says Ms. Wooten, the Chicago housing counselor. “The only thing they thought was, ‘Everybody can be a homeowner.’ That was crazy.”
New homes under construction earlier this year in Arvada, Colo. PHOTO: RICK WILKING/REUTERS
When property values fell in 2007, the riskiest loans defaulted, credit tightened and the economy ultimately fell into a recession.
Congress responded in 2010 by passing the Dodd-Frank Act, which created the new Consumer Financial Protection Bureau, and asked it and other regulators to flesh out several new sets of rules, including requiring lenders to ensure borrowers have the ability to repay loans.
The government took control of mortgage giants Fannie Mae and Freddie Mac, which together with agencies such as the Federal Housing Administration guaranteed most new mortgages. Fannie and Freddie increased fees for riskier borrowers, widening the gap between mortgage rates available to borrowers with good and weak credit.
By late 2011, the Obama administration had grown worried about the cumulative effect of the new rules and ultimately prevailed on regulators to back off some of the most stringent proposals.
“There was a lot of concern that steps intended to protect the market would end up locking people out,” says James Parrott, a former White House official involved in those efforts who is now a mortgage-industry consultant.
Lenders have been reluctant to extend credit to the limits of what government programs allow because of concerns over lawsuits if loans ultimately default, and because the costs of managing delinquent mortgages have soared.
“If we had our druthers, we would never service a defaulted mortgage again,” said J.P. Morgan Chase & Co. Chief Executive James Dimon in a shareholder letter earlier this year. “We do not want be in the business of foreclosure because it is exceedingly painful for our customers…and our reputation.”
J.P. Morgan cut its mortgage offerings to 15, from 37, and said it had “dramatically reduced” its participation in low-down-payment lending through the FHA. “It is simply too costly and too risky to originate these kinds of mortgages,” said Mr. Dimon.
“The Justice Department last year sued the Detroit-based mortgage lender on charges that it knowingly approved loans that violated Federal Housing Administration rules for government mortgage insurance. The charges didn’t make Quicken Loans unique, as the Obama Administration has spent years wringing settlements out of lenders without having to prove its charges in court…
…In the larger campaign to blame the 2008 financial crisis entirely on private business—rather than federal housing and monetary policy—the government has raided banks for more than $100 billion…..Mr. Gilbert says his company offered to “step in to FHA’s shoes and take over providing insurance on our FHA loans; meaning we would collect the premiums on the loans and pay out any claims. Not surprisingly, they weren’t interested.”…. But not holding a trial at all would be the wisest course, not least because Justice is likely to lose in court. By dropping the case, Mr. Sessions can show that the Justice Department is done extorting business for political show. All Trump cabinet officers should send similar tidings to ring in a new era of growth.”, The Wall Street Journal Editorial Board, December 20, 2016
The Quicken Loans Signal
Jeff Sessions can review and drop a bad anti-business prosecution.
Donald Trump’s choice for Attorney General, Sen. Jeff Sessions, in Washington on Nov. 29. PHOTO: ASSOCIATED PRESS
Faster than a Rocket Mortgage, Attorney General nominee Sen. Jeff Sessions can send a message that the Obama era of arbitrary, political prosecutions of business is over. Soon after confirmation, he and his new team should review and then kill the government’s dubious civil case against Quicken Loans.
The Justice Department last year sued the Detroit-based mortgage lender on charges that it knowingly approved loans that violated Federal Housing Administration rules for government mortgage insurance. The charges didn’t make Quicken Loans unique, as the Obama Administration has spent years wringing settlements out of lenders without having to prove its charges in court.
Last week Justice issued a press release celebrating that since January 2009 it has extracted more than $7 billion using a single legal technique—False Claims Act cases related to federally insured mortgages. In the larger campaign to blame the 2008 financial crisis entirely on private business—rather than federal housing and monetary policy—the government has raided banks for more than $100 billion.
So it was no surprise that Justice wanted a bite of Quicken’s earnings. What may have surprised the feds, given the normal corporate desire to write a check and make Washington go away, is that Quicken founder Dan Gilbert had no desire to settle.
Mr. Gilbert tells us that “it would lack integrity and ring hollow to our 17,000 employees to pay some large, unwarranted settlement and admit things we did not do just because a young lawyer walks in with a business card that says ‘DOJ’ on it.” Mr. Gilbert, who owns the National Basketball Association’s Cleveland Cavaliers, seems ready to compete in the courtroom, too.
The government’s case is built on a handful of internal Quicken emails with disparaging comments about particular loans. But if some great offense has been committed, it’s hard to find it in the records kept by the alleged victim.
A critical metric the FHA uses to judge lenders is known as the “compare ratio.” Specifically, it compares the rate of early defaults and claims generated by one lender with the rate generated by other lenders who cover the same area. A lender that never originates a bad loan would have a ratio of 0% and a lender with an average rate of defaults would be marked at 100%. According to the government’s own data, Quicken’s compare ratio is 35%—not merely better than average but the best score among all large national lenders.
Mr. Gilbert says his company offered to “step in to FHA’s shoes and take over providing insurance on our FHA loans; meaning we would collect the premiums on the loans and pay out any claims. Not surprisingly, they weren’t interested.”
Federal Judge Reggie Walton recently rejected the government’s attempt to hold a trial in Washington instead of Quicken’s home state of Michigan. But not holding a trial at all would be the wisest course, not least because Justice is likely to lose in court. By dropping the case, Mr. Sessions can show that the Justice Department is done extorting business for political show. All Trump cabinet officers should send similar tidings to ring in a new era of growth.
“Treasury Secretary-designate Steven Mnuchin made a fortune buying mortgage company IndyMac in a distressed sale about eight years ago. The government was so anxious to unload, it protected Mr. Mnuchin and his group from almost all losses over 30% on many mortgages. Nice deal if you can get it.”, WSJ, December 28, 2016
Does Trump Have a Secret Master Plan for Wilbur Ross?
We need a good distressed investment guy to buy up the distressed properties of the world economy.
The commerce secretary nominee at Trump Tower in New York, Dec. 15. PHOTO: BLOOMBERG NEWS
By Andy Kessler
Wilbur Ross to run the Commerce Department? The 79-year-old distressed investment guy? At first it makes no sense. Bottom fishing old industrial companies is not the magic elixir to fix our economy. The Ross nomination reminds me of a Kidder Peabody executive’s line in 1987, when General Electric announced a new CEO for its investment banking subsidiary: “I was thinking just the other day that what we need around here is a good tool-and-die man.”
I met Mr. Ross a few years back when he was touting his investments in shipping companies. Those firms were, as many still are, very distressed. But Mr. Ross has also dabbled in mining, tractors, energy and other machinery. What is distressed investing? Simply recognizing when a seller is desperate to unload, at almost any price. The trick is patience and an iron gut—oh, and deep pockets.
In 1998 I sat across from a South Korean executive in need of hard dollars as the Korean won imploded in the nasty currency crisis. Our fund was a co-investor in a company that pioneered HDMI for high-definition TVs. I watched as sweat dripped from his face. Clearly distressed. We lowballed an offer. He took it. Nine months later the company went public at 10 times our bid. Distressed investing never leaves you. Much to my family’s annoyance, I only buy distressed tickets to sporting events. I even bought tickets to the Super Bowl at a serious discount the morning of the game.
Treasury Secretary-designate Steven Mnuchin made a fortune buying mortgage company IndyMac in a distressed sale about eight years ago. The government was so anxious to unload, it protected Mr. Mnuchin and his group from almost all losses over 30% on many mortgages. Nice deal if you can get it. (He was the only bidder.)
The guy that knows the most about distressed properties is President-elect Donald Trump—except he was on the other side of the table. His Atlantic City casinos were bleeding losses and desperately needed cash. Even Mr. Ross figured that one out and put up capital, but not before Mr. Trump turned the tables, commanding concessions by insisting any new investors would be distressed without the Trump brand on the building. The distressed turned distressor.
Which brings me back to Mr. Ross at the Commerce Department. This usually seems like a do-nothing job—see President Obama’s choice, Penny Pritzker of hotel-empire fame. So why pick Mr. Ross? Well, distressed is what we need. No, not here in the U.S., where a little tax reform and regulatory relief could reignite the stimulative fire. It’s the rest of the world, I can’t help but noticing, that’s a hot mess.
You can buy most of Venezuela in exchange for a Happy Meal. Many real-estate properties are at a deep discount in Brazil. We’re one dead Castro away from JetBlue flights filled with roller bags of cash headed to Havana. The euro is closing in on dollar parity. A Grecian earns less today than 10 years ago. Italian banks are threatening collapse and causing political turnover. Et tu, France?
Oil is at $53. But with a Dakota pipeline, it could head back to $20, with Russia and large swaths of the Middle East going under. And China? In May, Mr. Ross told Bloomberg TV, “I’m getting very interested in China in terms of the distressed loans,” noting “something like 10% of the loans are not covering their interest.”
It’s a good time to be doing trade deals. Maybe this is Mr. Trump’s master plan for Mr. Ross. A buoyant U.S. knowledge economy and roaring stock market creating enough wealth to go out and buy up the distressed properties of a wrecked world economy. Let them keep their brand but under new ownership.
If this is the plan I hope it is, the Trump transition has been hiding it well. Carrier should be buying up competitors rather than propping up failing Indiana factories. It’s no Marshall Plan, but bailing out world economies might be sorely needed over the next few years. Maybe we do need a good distressed man.
Mr. Kessler, a former hedge-fund manager, is the author of “Eat People” (Portfolio, 2011).
“Fan and Fred’s owners feasted for decades on an implied taxpayer guarantee before the housing crisis. Since everyone knew the two government-created mortgage giants would receive federal help in a crisis, they were able to run enormous risks and still borrow cheaply as they came to own or guarantee $5 trillion of mortgage paper…
…When the housing market went south, taxpayers had to stage a rescue in 2008 and poured nearly $190 billion into the toxic twins. Fannie and Freddie recovered, but only because of this taxpayer backing. Not unreasonably, taxpayers now receive all of their profits. But the private shareholders of these so-called government-sponsored enterprises keep pretending that something other than the government is responsible for their income streams. As if anyone would buy their guarantees—or give them cheap financing—if Uncle Sam weren’t standing behind them. The hedgies that own Fan and Fred shares talk about liberating the companies from Washington, but what they really want is to liberate for themselves the profits that flow from a duopoly backed by taxpayers…. We’re all for businesses getting out of government control—unless they’re playing with taxpayer money. Americans were told that Fannie and Freddie were safe for years before the last crisis. The right answer is to shut them down.”, The Wall Street Journal Editorial Board, January 9, 2017
Making Housing Sane Again
Will Trump protect taxpayers or Fannie and Freddie shareholders?
Fannie Mae headquarters in Washington. PHOTO: ASSOCIATED PRESS
If you think most equity investors have been in an ebullient mood since Election Day, consider the euphoric owners of Fannie Mae and Freddie Mac. With both stocks soaring more than 130% since Nov. 8, Fan and Fred shareholders are ready to do the Juju on That Beat in the middle of Wall Street. The Trump Administration needs to shut down this block party before it gets out of hand.
The cause for revelry is the expectation that Treasury secretary nominee Steven Mnuchin is going to revive the Beltway model of public risk and private reward. When the Senate Finance Committee hosts his confirmation hearing, likely soon after Inauguration Day, lawmakers should extract a promise that he won’t.
Fan and Fred’s owners feasted for decades on an implied taxpayer guarantee before the housing crisis. Since everyone knew the two government-created mortgage giants would receive federal help in a crisis, they were able to run enormous risks and still borrow cheaply as they came to own or guarantee $5 trillion of mortgage paper. When the housing market went south, taxpayers had to stage a rescue in 2008 and poured nearly $190 billion into the toxic twins.
Fannie and Freddie recovered, but only because of this taxpayer backing. Not unreasonably, taxpayers now receive all of their profits. But the private shareholders of these so-called government-sponsored enterprises keep pretending that something other than the government is responsible for their income streams. As if anyone would buy their guarantees—or give them cheap financing—if Uncle Sam weren’t standing behind them.
The hedgies that own Fan and Fred shares talk about liberating the companies from Washington, but what they really want is to liberate for themselves the profits that flow from a duopoly backed by taxpayers.
And Mr. Mnuchin, the Goldman Sachs alum, seems to be speaking their language. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have,” Mr. Mnuchin told Fox Business in November. “So let me just be clear—we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again. But we got to get them out of government control.”
We’re all for businesses getting out of government control—unless they’re playing with taxpayer money. Americans were told that Fannie and Freddie were safe for years before the last crisis. The right answer is to shut them down.
We were hoping that perhaps the Treasury nominee’s thinking might have evolved since he sent Fannie and Freddie shares soaring last year. But on Friday night a Trump transition official gave us a comment similar to the one Mr. Mnuchin gave to Fox in November.
As a former mortgage-backed securities trader, Mr. Mnuchin may try to argue that change would disrupt markets and that reform could deny people a cheap 30-year mortgage. There’s a Wall Street-Washington mythology, expressed recently in a paper from the Obama Treasury, that government backing is an essential element of housing finance.
This is nonsense. As former FDIC Chairman William Isaac and former Wells Fargo Chairman Richard Kovacevich noted recently in these pages, “Nonconventional or ‘jumbo’ 30-year mortgages not guaranteed by Fannie and Freddie have existed for decades. In the decade preceding the financial crisis, the interest rate on these jumbo mortgages averaged only about 0.25% higher than similar guaranteed mortgages, a difference of a little over $40 a month on a $200,000 mortgage.”
A 2014 report from the Congressional Budget Office found that rate increases in a private market would likely be smaller than the annual rate fluctuations in the government-backed market today.
Speaking of the government-backed market, there are still more threats to taxpayers over at the Federal Housing Administration, Fan and Fred’s cousin that is part of the Department of Housing and Urban Development. The housing industry is hoping HUD Secretary Julián Castro will deliver one more subsidy boost on his way out the door by announcing lower premiums on federal mortgage insurance.
Mr. Mnuchin can show that the Trump Administration is charting a new course by rejecting the old model of housing finance that created a financial crisis and still endangers taxpayers.
“The abusive SEC investigates most public companies whose stock declines materially or fails, and often sues the CEO and CFO using SOX, accusing these officers (who relied on lawyers and other experts) of violating vague and/or subjective civil securities disclosure laws, with no real proof other than stock losses…
…add that to the time required to comply with massive quarterly disclosure rules and the unrealistic pressure and often counterproductive (for long-term success) nature of quarterly results and you understand why we have a lot fewer public companies in the United States these days, as the WSJ article below notes.”, Mike Perry, former Chairman and CEO, IndyMac Bank
January 6, 2017, Maureen Farrell, The Wall Street Journal
America’s Roster of Public Companies Is Shrinking Before Our Eyes
Gusher of private capital, IPO slump and merger boom cause listings to plunge; ‘There’s no great advantage’
The number of U.S.-listed public companies has declined by more than 3,000 since peaking at 9,113 in 1997. Traders, above, work on the floor of the New York Stock Exchange. PHOTO: MICHAEL NAGLE/BLOOMBERG NEWS
By Maureen Farrell
Executives at LoanCore Capital LLC were plotting an initial public offering in 2015 for a portfolio company that manages commercial real-estate credit. Just before the IPO was to launch, the stock market fell sharply. LoanCore pulled the plug.
It hardly mattered. There was plenty of money elsewhere. Last March, LoanCore raised $1 billion from two sovereign-wealth funds. The company expects to continue to raise money from these investors, Canada Pension Plan Investment Board and Singapore’s GIC, according to people familiar with the matter.
LoanCore is emblematic of a new generation of companies that have shunned public markets. With interest rates hovering near record lows, big investment funds seeking higher returns are showering private companies with cash. Companies also are leaving the stock market in near-record numbers through mergers and acquisitions.
The U.S. is becoming “de-equitized,” putting some of the best investing prospects out of the reach of ordinary Americans. The stock market once offered a way for average investors to buy into the fastest-growing companies, helping spread the nation’s wealth. Since the financial crisis, the equity market has become bifurcated, with a private option available to select investors and a public one that is more of a last resort for companies.
The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.
In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.
Private funding markets have taken on attributes of public equity, such as an ability to hand employees shares they can trade. Airbnb Inc.’s recent $850 million funding round, which valued the home-rental company at $30 billion, enabled employees to sell $200 million of stock. Investors, particularly in late-stage funding rounds, now often have a better view of a private company’s financials than they used to, including through quarterly conference calls.
“There’s no great advantage of being public,” says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of “The Vanishing American Corporation.” “The dangers of being a public company are really evident.”
Among them, Mr. Davis and others say: having an investor base that clamors for short-term stock gains and being forced to disclose information that could be useful to competitors.
Company departures from public markets have left fund managers with fewer investment options. Their eagerness for more IPOs is evident in the extreme volatility of the few technology companies that made their debuts last year, investors say. Shares of Twilio Inc., Nutanix Inc. and other tech companies that made debuts last year surged well beyond their private-market values, and while most remain above those levels, many pulled back sharply from their post-IPO highs.
Brad Slingerlend, who invests almost exclusively in public companies as a portfolio manager at the Janus Global Technology Fund, often meets with entrepreneurs and seeks to convince them public markets could be their most inexpensive source of capital, while also trying to ease their concerns about listing. “There’s a lot of talk that the stock market is full of big scary monsters that will kill your business,” he says.
Lance Crosby founded cloud-computing company SoftLayer Technologies Inc. and built it to go public, then changed his mind and sold it to International Business Machines Corp. for roughly $2 billion in 2013. “I thought the public markets were too harsh on companies that were creating something that doesn’t exist,” he says, citing the then-nascent cloud-computing industry. “It’s tough to answer every quarter for something when you don’t have all the answers because it’s still unfolding.”
In 2015 he started cybersecurity-software company StackPath, raising about $180 million in private funding. He says he once again will plan for a public offering, but remains doubtful it will be the right path. “I want to change the world to fix security, and I’m not sure that’s possible as a public company,” he says.
Matthew Prince says in the next few years he plans to list shares of his web-security company, Cloudflare. He has mixed feelings. He says the regular financial updates he currently gives employees help them better understand how their actions affect the company. He worries U.S. securities regulations for public companies would force him to scale back such communication outside of quarterly financial reports to investors. But he also wants his investors and employees to be able to sell shares with ease, which the public market allows.
Matthew Prince, co-founder and CEO of web-security company Cloudflare, says he has mixed feelings about taking his company public. PHOTO: PRESTON GANNAWAY/GRAIN FOR THE WALL STREET JOURNAL
While it is difficult to quantify, there has been an explosion in private investment capital in recent years. Sovereign-wealth funds—pools of capital invested by nations—have roughly $7.4 trillion under management, more than double the $3.5 trillion they held in 2007, according to the Sovereign Wealth Fund Institute, a research and data firm. Assets under management at U.S. private-equity firms totaled $1.4 trillion, an increase of more than 30% since 2007 and nearly four times the tally in 2000, according to the most recent data from PitchBook, a data provider and research unit of Morningstar Inc.
Last year, 111 companies went public on U.S. exchanges, raising $24.2 billion, a dollar-volume drop of 33% from the previous year and the lowest dollar volume since 2003, according to Dealogic. The slowdown has confounded market watchers because it comes at a time when stocks are near all-time highs and M&A volume, which typically moves in tandem with IPO activity, was one of the highest years on record.
Since 2009, the number of U.S.-listed IPOs has hovered at fewer than 200 a year, on a 10-year rolling average, well below what it was in the previous decade, according to Dealogic data. Meanwhile, M&A activity targeting U.S. listed companies has risen since 2012 to more than 9,300 transactions a year, on a 10-year rolling average. Before 2012, the average ranged from 8,000 to 9,200.
With fewer places for investors to spread their cash and more companies combining, the average size of a public company in the U.S. has swelled, hitting an all-time high of $4.7 billion in 2014 before dropping slightly through the first half of 2016, according to University of Chicago data. The average public company is more than three times as large as it was in 1997, after adjusting for inflation. The inflation-adjusted total capitalization of the U.S. public market has been hovering near its peak.
“We have to match the concentration of the market over time, so we are concentrated in fewer names,” Janus’s Mr. Slingerlend says.
Some investors question whether the private markets will maintain strength over the long haul and whether a pullback could bring more companies back to public ownership.
Venture-capitalist Bill Gurley sees a bubble in the private markets. He predicts investors will lose significant amounts in many closely held companies valued at $1 billion or more, which currently stand at 154, according to Dow Jones VentureSource. “History would suggest that it’s a real possibility,” he says.
For now, there are few signs of such a pullback. In October, Japanese internet and telecommunications giant SoftBank Group Corp. and Saudi Arabia’s sovereign-wealth fund announced plans to together invest as much as $100 billion over the next five years in the technology industry, with some of it expected to go into private companies and other money to fund buyouts of public ones. That sum is nearly as much as all venture-capital firms raised since the beginning of 2014, according to PitchBook.
Retail investors haven’t had access to shares of some of the highest-value private companies, including Uber Technologies Inc., Airbnb and Snap Inc. Some of those shares have gone to clients of the wealth-management arms of large banks, typically wealthy individuals or families.
If those private companies enter the public markets in coming years as expected, average investors may miss much of the kind of rapid growth achieved by nascent public companies a decade or two ago. Amazon.com Inc., which went public in 1994 valued at $440 million, is now worth about $358 billion.
Morgan Stanley’s head of private-capital markets, Ted Tobiason, says private money allows companies to enter public markets healthier. “Certain things like volatility in the business can be better handled in the private market,” he says.