Status and Strategy for Creating a Texas-only Fannie Mae – by Rick Baron

I met with Commissioner Doug Foster of the Texas Department of Savings and Mortgage Lending last Monday (2/28/11) and TDSML attorney Chris Schneider. They were gracious enough to hear me out and completely understood and saw the value in all of my points. The Commissioner has been working on another project to address the brewing systemic risk among our banks, and he liked my approach as well. I really enjoyed the meeting.
So now I’ve met with officials from TAR, TDHCA, and TDSML, and the official response from all three is:

“We think the concept has merit and deserves serious further consideration”.

I’ve run the legal and conceptual traps past the entities and agencies that will likely influence and regulate the company, and no one has told me yet why this can’t happen or given me any reason why this won’t work. I have nothing but green lights so far. It makes too much sense, it addresses several issues simultaneously and benefits just about everyone.

This week, I managed to secure a meeting with Dr. Mark Dotzour and Gerald Klassen at the Texas A&M Real Estate Center in College Station on March 15th. They’ve been working on a proposal to reform the national mortgage system, and they’ve agreed to hear me out. I’m hoping they will see the merits of the non-profit structure and possibly incorporate the concept into their proposal. I’m most concerned about Texas, though, so my main priority is to get their blessing on the Texas-backed non-profit corporation business model. If I can get their support, I feel TAR will get behind it which will give the project some serious muscle.

For those of you who are interested, I’d like to share with you my overall strategy and timeline:

1) Run the numbers – Determine if Texas has the economies of scale needed to support its own securitization entity. Yep, it does. See previous posts. With enough scale, it’s an extremely lucrative business.

2) Develop a business model that re-creates the good and safeguards against the bad – The Non-Profit Corporation removes shareholder pressure to increase profits by taking undue risks or raising fees. Proper legislation incorporated into its creation will prevent political meddling. It also takes advantage of existing infra-structure and systems, is 100% transparent and easy to regulate. With tax exempt status and no payouts to shareholders, all net operating profits can be banked in an ever growing guaranty reserve fund. Assuming $10 million in gross profits per $1 billion in securitizations, revenues can easily exceed $200 million per year. An ever growing reserve fund eliminates taxpayer risk and ensures sustainable affordable financing and systemic liquidity. It can become the Fort Knox of mortgage banking.

3) Set standards for credit quality and operations – All loans must be assessed and documented to determine a borrower’s ability and willingness to repay the obligation as well as determine the quality of the collateral. Human underwriters will have final decision making authority over software findings and will be held accountable for their decisions. The company’s purpose is to purchase home loans from lenders, pool them into securities, and sell them to global investors. It should never become an outright investor of its own securities. It should be a leader in public financial education. Excess reserves should be used to support housing initiatives.

4) Run the traps and get a feel for support – It helps to have lived in Austin for over 20 years. I have several friends and clients who work for or with the state. I also know lots of people who know lots of people. Gaining access to the people who will be involved if this project takes off has been much easier than I anticipated. It’s actually been quite fun up to this point. So far no red lights, all green lights.

5) Solicit support from industry groups and associations – The Texas Association of Realtors, the Texas Association of Home Builders, the Texas Mortgage Bankers Association, The Texas Association of Mortgage Brokers (& Professionals), the Independent Bankers Association of Texas, the Texas Credit Union League, the Texas Bankers Association, etc. should all be interested in supporting the concept. I started with TAR, and will be contacting the remainder in the next few weeks.

6) Develop a social networking strategy to rapidly gain broad awareness – This blog, email, FaceBook, Linked-In, and YouTube all need to be utilized to the fullest extent possible to explain the concept and ramp up support. Right now I’m working on both a video explanation and a PowerPoint presentation of the concept. My skills are rudimentary in both, but I hope to have something decent posted by mid March or so. The concept needs to go viral among Texas real estate industry professionals and state politicians. I’m encouraging all who have contacts with officeholders to open dialogue about the concept.

7) Develop data to support the probability of the positive impact this project will have on state and school district budgets – I’m currently gathering data to illustrate the lost equity in the $500k to $1 million price range due to the lack of available and affordable financing in this range over the last three years. A Texas conforming loan amount of $750k with common sense guidelines will go a long way toward restoring this lost equity and will increase property tax revenues without raising property tax rates. A more normalized lending environment will also allow many more people to refinance to lower rates and payments, freeing up more disposable income for Texans to spend with the result being increased sales tax revenues. If this case is well established, this project stands a good chance to become a budget item and dramatically increases its odds of being created.

8) Identify and target possible sponsors to file the charter – I have four gentlemen in mind right now, but I’m still researching. I plan on attempting to make contact with some of them after the A&M meeting to begin preliminary discussions.

9) Determine the timeline – I’m meeting with the A&M guys on March 15th. After that I plan to post a video followed by a PowerPoint presentation. I hope to have gained the support of TMBA, TAMP, TAHB, TBA, IBAT, TCUL and hopefully TAR by the first week of April. The Texas Association of Realtors has its Capitol Grounds Day on April 12th, and nothing would please me more than for this project to be the main topic of conversation.

10) Close the deal – If I’m able to get in front of the right people, I’m confident I can persuade them to act and file the charter. It won’t cost the state any money to create, it’s self-funding and self-strengthening, it helps avoid systemic risk in our state and local banking systems, it keeps financing affordable relative to private market rates, it positively impacts property and sales tax revenues, it can be up and running inside of a year, and it can be a model for other states or regions to duplicate. It also builds a protective fence around the Texas real estate market and pokes a finger in the eye of Washington and Wall Street. What’s not to love? We can do this, we should do this, and we must do this.

My goal is to have it officially in play by the end of April and formally established by June. I’d like to see fund-raising started by sometime in July but no later than August. Please help spread the word and show your support by becoming a subscriber to my blog at http://goodcapitalism.wordpress.com . rb

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