For decades, William Isaac’s insights on the U.S. financial system have been featured in leading news publications. Now, you can browse them all in one location.

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Another Plea From Fannie Mae, an editorial published in the Wall Street Journal, February 15, 2018

Another Plea From Fannie Mae, an editorial published in the Wall Street Journal, February 15, 2018

February 15, 2018

Another Plea From Fannie Mae
The mortgage ward of the state needs $3.7 billion from taxpayers

Fannie Mae is again going hat in hand to taxpayers after announcing a $6.5 billion quarterly loss on Wednesday. Washington should take this news as a kick in the keister to finally start winding down the mortgage giant and its busted brother, Freddie Mac . But the Trump Administration seems to be moving in the opposite direction.

When the housing mania turned to panic in 2007-08, Fan and Fred called in their implicit government guarantee, at a cost of almost $190 billion. The pair, now in “conservatorship,” have since paid back that amount, and their profits continue to flow to the Treasury—as they should, given that the taxpayer guarantee hasn’t been revoked.

The trouble is that Fan and Fred were left in limbo. Hedge funds bought up their shares, betting they could pressure Washington into bringing back the old business model of public risk and private reward. Investors filed lawsuits claiming that the government was illegally seizing Fan and Fred’s earnings.

Fannie’s latest dip into the Treasury will be dismissed as an accounting fiction—and maybe so, but it’s a useful one. Congress’s recent tax reform decreased the value of tax deferrals on Fannie’s balance sheet, resulting in a one-time charge of $9.9 billion. Because Fannie hasn’t been allowed to keep a large capital buffer, it now needs a $3.7 billion infusion. While this is hardly ideal, at least taxpayers are getting the profits along with the losses.

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Ed Pinto, Co-director, American Enterprise Institute Center on Housing Markets and Finance, is a friend of mine and a distinguished authority on housing finance. I thought you might be interested in seeing Ed’s predictions for the housing markets in 2018

Ed Pinto, Co-director, American Enterprise Institute Center on Housing Markets and Finance, is a friend of mine and a distinguished authority on housing finance. I thought you might be interested in seeing Ed’s predictions for the housing markets in 2018

December 29, 2017

 

1. The historically tight supply of single-family homes will tighten further in 2018 after hitting a record low in November 2017: on December 21, 2017 the National Association of Realtors (NAR) announced that November 2017 remaining inventory of existing homes for sale hit a record low of 3.4 months–eclipsing the prior record of 3.5 months reached in both January 2005 and January 2017. Expect new lows to be recorded for December 2017 and January 2018. January is projected to come in at around 3 months. This tight supply trend has been going on for 5+ years.

2. The national home price boom that began in mid-2012, will continue, and given the unprecedented low levels of inventory, will even accelerate further: expect year over year increases of 6.25% -6.75%, up from about 6%-6.5% in 2017. The substantial reduction in the utilization of the mortgage interest deduction and commensurate reduction in subsidies, will somewhat reduce upward pressure on home prices. Without the tax act, the prediction for 2018 home price increase would have been even higher: 6.75%-7.25%.

3. First-time buyers (FTB) will face even higher home price gains for entry level homes. Expect year-over-year gains for the bottom third of homes to come in at 10.5% to 11% for 2018 (December 2018 over December 2017 based on 16 tiered HPI from CoreLogic Case Shiller). At current levels of wage growth, this boom in entry level home prices is ultimately unsustainable.

4. First-time buyers (FTB) will continue take on even more leverage in an effort to keep up with the out-sized home price gains on entry level homes. The AEI First-Time Buyer National Mortgage Risk Index is expected to rise to 17.1% for September 2018 agency originations, up from to 16.4% for September 2017. Risk scores above 12% have a high risk of default under severe economic stress.

Time To Drain The Fed Swamp. By First Trust, published by First Trust Advisors L.P., Monday Morning Outlook

Time To Drain The Fed Swamp. By First Trust, published by First Trust Advisors L.P., Monday Morning Outlook

September 13, 2017

The Panic of 2008 was damaging in more ways than people think. Yes, there were dramatic losses for investors and homeowners, but these markets have recovered. What hasn’t gone back to normal is the size and scope of Washington DC, especially the Federal Reserve. It’s time for that to change.

D.C. institutions got away with blaming the crisis on the private sector, and used this narrative to grow their influence, budgets, and size. They also created the narrative that government saved the US economy, but that is highly questionable.

Without going too much in depth, one thing no one talks about is that Fannie Mae and Freddie Mac, at the direction of HUD, were forced to buy subprime loans in order to meet politically-driven, social policy objectives. In 2007, they owned 76% of all subprime paper (See Peter Wallison: Hidden in Plain Sight).

At the same time, the real reason the crisis spread so rapidly and expanded so greatly was not derivatives, but mark- to-market accounting.

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Making Housing Sane Again, an editorial published in the Wall Street Journal, January 9, 2017

Making Housing Sane Again, an editorial published in the Wall Street Journal, January 9, 2017

January 9, 2017

Making Housing Sane Again

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 Steve 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 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.

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Government Payday Choke Hold, published in the Wall Street Journal, December 29, 2016

Government Payday Choke Hold, published in the Wall Street Journal, December 29, 2016

December 29, 2016

Government Payday Choke Hold

For all the coverage of Donald Trump’s Twitter blasts against one company or another, hardly anyone notices that the Obama Administration has spent years targeting entire industries merely because the left dislikes them. Case in point is the onslaught against payday lenders, and a lawsuit presents an opportunity to expose an extralegal cross-agency campaign.

In 2013 the Justice Department launched Operation Choke Point, which involves pressuring banks to cut off financial services for payday lenders, no evidence of lawbreaking required. According to a House Oversight Committee report, the Justice Department has pumped out subpoenas under a statute that allows the government to go after outfits that commit fraud against banks, not punish banks that do legal business with legal businesses.

The operation seems to have been coordinated among several agencies. A report last year from the Federal Deposit Insurance Corp. Inspector General found that three of six FDIC regional directors thought their job description included discouraging banks from servicing payday lenders. A former director of the Atlanta office told his staff: “Any banks even remotely involved in payday should be promptly brought to my attention.”

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WHY NOT 100-YEAR U.S. TREASURY BONDS? Let’s snatch fiscal victory from the jaws of defeat By Larry Kudlow on CNBC, December 10, 2016

WHY NOT 100-YEAR U.S. TREASURY BONDS? Let’s snatch fiscal victory from the jaws of defeat By Larry Kudlow on CNBC, December 10, 2016

December 10, 2016

[CNBC contributor Larry Kudlow urges that the U.S. start issuing much longer maturities of government bonds, possibly experimenting with 50-year debt issuance, and maybe go out as long as 100 years.  Kudlow’s a smart guy with a wealth of experience and his article is well worth reading.]

If President-elect Donald Trump’s economic growth plan — slashing business and personal marginal tax rates and rolling back costly business regulations — is achieved next year, the economy could break out with 4 to 5 percent growth. And that means much higher interest rates.

This rate rise will be growth-induced, a good thing. Higher real capital returns will drive up real interest rates. And inflation will likely remain minimal, around 2 percent, with more money chasing even more goods alongside a reliably stable dollar-exchange rate.

We’re already seeing some of this with the big post-election Trump stock rally occurring alongside a largely real-interest-rate increase in bonds.

 However, looking ahead, 4 percent real growth plus 2 percent inflation could imply 6 percent bond yields in the coming years. That’s a big jump from the 2 percent average of most of the past ten years.

And what that says is the time to act is now. 

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The Puerto Rico Drama Has a Long Way to Run By Alex Pollock published by Real Clear Markets on October 24, 2016

The Puerto Rico Drama Has a Long Way to Run By Alex Pollock published by Real Clear Markets on October 24, 2016

October 25, 2016

On October 14, the outgoing Governor of Puerto Rico, Alejandro Garcia Padilla, who is not running for re-election next month, addressed the Oversight Board which is charged by Congress with addressing the disastrous finances of the insolvent government of Puerto Rico. In default on more than a billion dollars of its debt, with no prospects of repaying its debt in full, having run deficits for 15 straight years, and trapped in the U.S. dollar currency zone, the government has massively difficult problems ahead. So do its creditors and the Oversight Board.

Creation of the Oversight Board was a necessary step. Now its work has really begun. The Governor presented to it the government’s draft fiscal plan for the next ten years-the opening gambit in what will unavoidably be complex and tense negotiations. The substance and the rhetoric of the presentation are instructive.

Garcia Padilla conceded that the accumulated debt and economic problems “are the culmination of decades of misguided and unscrupulous public policies in San Juan,” a fair admission, but immediately adds that these unscrupulous public policies were also in “Wall Street and Washington.” Surely somebody else is also to blame.

“Puerto Rican children and retirees are not to blame for careless decisions made here in New York by the rating agencies”-so it’s the bond rating agencies’ fault-“or the mistaken decisions made by Congress,” such as ending tax subsidies to Puerto Rico. Of course, there are the “greedy lenders” who bought Puerto Rico’s bonds.

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Payday Lending: Will Anything Better Replace It? By Bethany Mclean published by The Atlantic on May 2016 issue

Payday Lending: Will Anything Better Replace It? By Bethany Mclean published by The Atlantic on May 2016 issue

April 26, 2016

Payday Lending: Will Anything Better Replace It?

The practice is slowly being regulated out of existence. But it’s unclear where low-income Americans will find short-term loans instead.

[The May 2016 Issue of The Atlantic includes one of the best and most honest articles on subprime lending I have seen, and I recommend it to you highly. Nearly 100 million of our fellow Americans are not able to participate more than marginally in the regulated banking system so they turn to friends or family or alternative lenders to meet their emergency financial needs. Some worry that the new Consumer Financial Protection Bureau is about to adopt regulations that will effectively shut down the short-term lenders who supply expensive and much needed loans to tens of millions of people. What is the answer to this vexing problem that is one of the most important economic and social issues facing our nation? Interestingly, the author suggests that a possible compromise might be for consumer and industry groups to compromise on a reform along the lines of the Colorado short-term lending law. Some believe that at least a partial answer may be for regulators to take steps to encourage banks and credit unions to work jointly with short-term lenders to address this urgent need. I encourage you to read the Atlantic article.]

Fringe financial services is the label sometimes applied to payday lending and its close cousins, like installment lending and auto-title lending—services that provide quick cash to credit-strapped borrowers. It’s a euphemism, sure, but one that seems to aptly convey the dubiousness of the activity and the location of the customer outside the mainstream of American life.

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