I became a personal fan of Bethany’s after reading the book she co-authored with Joe Nocera, “All the Devil’s are Here”. I highly recommend her new book as a quick read into the crisis at Fannie Mae and Freddie Mac. And as a buzzworthy aside, Bethany has agreed to be our keynote speaker at Valuation Expo, in November 2016.
TRICE: Bethany, one of your later chapters is titled “No End in Sight”. Who would have ever guessed that Fannie Mae and Freddie Mac could remain in conservatorship so long? Can this go on indefinitely?
McLEAN: Well, politicians seem to think it can go on forever! But generally, things that aren’t sustainable come to an end, and unfortunately, it’s usually a bad end. I worry that the GSEs will suffer a big quarterly loss, which will force them to draw from taxpayers again, or that there will be some drama in the lawsuits that investors have filed. Either one could force the politicians to lurch to a hasty, sloppy solution.
TRICE: What do you think it will take to get Congress to actually find a solution?
McLEAN: A crisis!
TRICE: What role did appraisers play in the demise of the Government Sponsored Enterprises (GSEs)?
McLEAN: Inflated appraisals played a role in the overall crisis, both at the GSEs and elsewhere, but I’m not sure the blame for that should fall on appraisers. The problem, as you have often pointed out, is that everyone else in the process has an incentive to close the deal, and closing the deal is dependent on the appraisal. So appraisers get bullied. And of course they want repeat business. They have the incredibly difficult job of saying no when everyone else is saying yes. What I’ve been told is that HVCC has steered business to the big appraisal management companies, which makes life even harder on appraisers.
TRICE: One thing you suggested in your book, which gave me pause, was the potential of a panic driven market to negatively impact house values if the GSEs were dismantled. I would agree that uncertainty is indeed bad for the market whether that is the individual homebuyer or the capital markets. What do you think the plan should be?
McLEAN: There are some people who say that the market would function just fine if we got rid of the GSEs. They might be right. But the truth is, we don’t know. Fannie has been around for almost 80 years. We’ve never tried it! I wish we could have a larger conversation about homeownership – about stimulating ownership, rather than indebtedness through cash out refis, about rewarding people for growing equity instead of taking on more debt, etc. But we’re not going to do that. I think we should fix Fannie and Freddie. It would not be perfect. But if they were regulated as utilities (with incentives to be smart in times when the market is going crazy), prevented from being in the portfolio business except in times of crisis, and given affordable housing mandates that were structured in a safe way that couldn’t be manipulated, we would go a long way toward fixing the problem.
TRICE: One thing you did not discuss was the possibility of having a single GSE, maybe “Franny”. It would seem that on the appraisal side of things both competed in a race to the bottom by relaxing appraisal requirements. Waivers were given to WAMU and Lehman Brothers among others. Your thoughts?
McLEAN: I’m neutral on this because I think I could make an argument either way. Having one GSE sounds like a great idea for precisely the reason you mention. The race to the bottom drove everyone into crisis in the mid-2000s. And yet, when I spoke to lenders, several of them voiced great concern with the idea of having just one GSE because of the power that would accrue to that single company.
Thank you Bethany McLean for speaking with us today.
To purchase “Shaky Ground, The Strange Saga of the U.S. Mortgage Giants,” Click Here.
