All the Devils Are Here [14]
Fannie, in what would become its response whenever it was challenged, wrapped itself in the mantle of homeownership. It argued that its low costs also lowered mortgage rates for consumers, and that forcing it out of the market would make homes more expensive. In a March 1987 speech to the Mortgage Bankers Association, Maxwell said that the attack on Fannie Mae was part of a campaign by Wall Street and the big thrifts to “restore inefficiency to the housing finance system in order to increase their profits through higher home mortgage rates.” He added, “They don’t seem to care if this would close the door on homeownership for thousands upon thousands of American families.”
In the end, Pierce ruled that Fannie could issue up to $15 billion in REMICs over the following fifteen months. Vartanian’s clients trumpeted it as a victory, because the number wasn’t unlimited, but as he says today, “it was a short-term victory. We lived to fight another day, and we lived to lose another day.” Sure enough, by late 1988, Fannie had been granted “permanent and unlimited authority” to issue REMICs.
How did Fannie Mae persuade Pierce to rule in its favor? Not by sweet-talking, that’s for sure; Maxwell had an iron fist inside that velvet glove of his. “We essentially gutted some of HUD’s control over us in a bill that passed the House housing subcommittee,” Maloni says today. In that bill HUD’s ability to approve new programs was revoked. HUD went to Fannie, and essentially pleaded for mercy. “In return for us asking the Congress to drop the provision, HUD approved Fannie as issuers,” says Maloni.
Maloni also called Lou Nevins and told him that if Salomon didn’t back off, Fannie wouldn’t do business with the bank anymore. (Maxwell denies knowing about the call.) For all their conflicts, Salomon Brothers had been Fannie Mae’s banker, bringing its mortgage-backed deals to market and underwriting its debt offerings, making millions in fees as a result. This was a major threat. “It’s like the post office saying we won’t deliver your mail!” Nevins says. He remembers thinking to himself, “If they get away with this, there won’t be a private company in the world that will stand up to them.”
With the benefit of hindsight, it’s hard to argue that REMIC authority was the cataclysmic event that either party feared it was at the time. While Fannie issued its own securities, Wall Street made immense amounts of money marketing and selling them—Fannie never had the ability to find the Japanese bank or the Midwest insurance company that might want a specific tranche. And Fannie was always going to play an important role in the mortgage-backed market because of its guarantees, which were prized by investors. Essentially, it got to decide which mortgages were worthy of securitization and which were not, and mortgage lenders had to offer mortgages that conformed to the GSEs’ strict standards. Indeed, after all the hype over REMICs, a series of big losses at several Wall Street firms—trader talk had it that Merrill Lynch lost over $300 million, which at the time was a big sum—caused the market to cool on carving up cash flows in such extraordinarily complex ways. At least for a time, the Street returned to old-fashioned pass-through securities, the ones that didn’t tranche the bonds, but simply sent the cash flow along to investors. The hedge fund manager David Askin, who lost hundreds of millions of investors’ money buying mortgage-backed securities that were supposed to have very low risk, told Institutional Investor that “not all this stuff is for kids in the studio audience to try and do at home.”
On the other hand, the future of the mortgage market might have been very