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Here is the link to the actual testimonies and video of the hearings. After watching the hearings yesterday, it boggles my mind that this is what the author of that article took away from it. Frankly no one on that panel wants the functioning of the secondary mortgage market to change in a very fundamental way. Let's also not forget that Mark Zandi is on the Board of MGIC, and therefore has a vested interest in cutting into F and F market share. Even he concludes that wholesale elimination of F and F would have negative consequences....
Senate Banking Committee
True, but eliminating an implicit government backstop with an explicit backstop that is priced into the MBS transaction so that taxpayers aren't "on the hook" and maintaining f and f as the securitizers are not mutually exclusive. In fact reforming but maintaining f and f would seem to be the most direct route to a more stabilized secondary mortgage market.
I've been wondering which way Warren would go. Lots of major Senate dems. have not come out in support of Corker Warner. Interesting that she was with them on the jump start gse bill, but has been silent on Corker-Warner bill. Significant reforms are not the same as winding down.
The last poll that I saw come out about the time that Corker Warner was released. It showed that 52% of people viewed f an f unfavorably, I do not recall the margin of error. This was before any article had come out in major publications linking f and f to the 30 year mortgage, or open eds such as "Don't Kill Fannie" had been published in the New York Times. I would be interested to see what the numbers are now. Interestingly, 52% yes was the margin by which California's Prop 8 was voted in. This was later ruled unconstititional in a case argued by Ted Olsen, who is now defending rights of Fannie Mae shareholders through the Perry Capital Case.
Remember when corker said that he thought they had about a five month window to make a move on gse reform before the window closed? I do, it was probably about 3.5 months ago...
Plenty of warning? Not really, management laid down and shareholders took a bath for the good of the county. If they hadn't we would have had no housing market for the last five years. Having said that, there was a fiduciary duty to shareholders that was not upheld. Given the circumstances at the time the move to conservatorship was reasonable for the good of the country, but it is equally reasonable for some amount of recovery to be allowed at this point given the new financial circumstances and in light of the fact that F an F were not the primary cause of the crisis as hindsight now shows.
From Paulson's On the Brink:
Thursday, September 4, 2008
Do they know it's coming, Hank?" President Bush asked me. "Mr. President," I said, "we're going to move quickly and take them by surprise. The first sound they'll hear is their heads hitting the floor."
It was Thursday morning, September 4, 2008, and we were in the Oval Office of the White House discussing the fate of Fannie Mae and Freddie Mac, the troubled housing finance giants. For the good of the country, I had proposed that we seize control of the companies, fire their bosses, and prepare to provide up to $100 billion of capital support for each. If we did not act immediately, Fannie and Freddie would, I feared, take down the financial system, and the global economy, with them.
I'm a straightforward person. I like to be direct with people. But I knew that we had to ambush Fannie and Freddie. We could give them no room to maneuver. We couldn't very well go to Daniel Mudd at Fannie Mae or Richard Syron at Freddie Mac and say:
"Here's our idea for how to save you. Why don't we just take you over and throw you out of your jobs, and do it in a way that protects the taxpayer to the disadvantage of your shareholders?"
The Zillow interview was BS. Even the interviewer seemed to be struggling to understand exactly why their plan made any sort of real sense. They are trying to perform an unnecessary heart transplant on our financial system, without the tools to do it. This narrative that F and F are inherently bad is absurd. They regulations and management are completely different from pre-crisis F and F. Now they are essentially different companies than they were 5 years ago. I am sure "private capital" other than F an F would do a way better job though, the guys from Countrywide recently IPO'd Penny Mac and are securitizing jumbo mortgages now, they can just take things over...
Did you see this interview with Corker from the 11th? It is about Syria so it may be a bit off topic, but interesting with regards to his relationship with Obama. Scathing...
Corker CNN
That's one way to look at it, the other is that 2 bills have been introduced that will eliminate the gse's and there doesn't seem to be a consensus on either. The worst possible scenarios are already on the table, and they are still trying to figure out what to do. It's not their top priority to look out for shareholder interest, but in this case I think that the solution that is best for all stakeholders in our housing finance sytem will benefit shareholders ultimately. I don't think a new bill from the senate is going to move in the direction of the path act. Of Zandi's propsosed top 2 solutions to the senate, both essentially preserve f and f functionally as a mechanism for securitization to avoid market disruption. 1 would require raising the debt ceiling 30% from where we are now, and would still introduce a fair degree of market uncertainty. Is it worth it? Occam's razor...
I think that if the only difference in the bills was that the percentage of the capital requirement will be changed a new bill would not be warranted. Why not just amend CW in that case. I would imagine that a new bill would be substantially different, most likely backing off of placing f and f into receivership and taking an additional 5trillion in debt on the governments books unnecessarily in the middle of a debate on the debt ceiling and a potential government shutdown.
Just to clarify. The reference is to the PATH act by Hensarling in the House. Warner and Corkers bill is a senate bill. He was not referring to his bill when he stated that it was an idealogically pure exercise.
Agreed.
This report was a great find. Frames the situation fairly well for Congress to read while on recess, also glad to see that there is so much in it that points to the fact that these were and are still publicly traded companies and takes the existence of and implications to shareholders into account throughout the history of conservatorship.
Also enjoyed this:
"In the event of receivership, it would appear unlikely that the senior preferred stock would have
much value."
As long as F and F remain profitable, and barring any sort of economic downturn that would render them insolvent the most likely cause for them to go into receivership in the short term would be through direct congressional action. They would have to legislate a default based on a change to the PSPA agreements. I don't think that is going to happen, particularly once taxpayers have received dividends equivalent to draws.
"Even if the GSEs were to return
to stockholder control, it is not clear how much appeal their common and preferred stock would
have for investors"
...Interesting that this came out on August 13th and 2 days later on August 15th Berkowitz announced very publicly that he might buy $800,000,000 worth of securities because he thought they were undervalued.
The precedent for "Winding Down" of a GSE from the US Treasury:
www.treasury.gov/about/organizational-structure/offices/Documents/SallieMaePrivatizationReport.pdf
Goggle Sallie Mae GSE wind down. The first link you will find is from the US Treasury. The document outlines the wind down of the gse into a fully private entity. I would post the link myself but I am on my phone...
What Fannie Mae does, just found it interesting... Who would replace them...
Fannie Mae Doc
Not only that, but who is the direct financial beneficiary of the losses that aren't being realized...the treasury (executive branch).
Who is in direct control of f and f, and dictates their foreclosure activities and accounting practices...the fhfa (executive branch).
No conflict of interest there.
So basically, they are "hiding" losses in order to siphon off more money to send the treasury now in the form of dividends. Money which should be retained now by the companies in the form of loss reserves. Way to conserve...
Any monies attained from lawsuits awarded to f and f (publicly traded private companies)for illegal actions which occurred prior to c-ship goes to the treasury....
The Fed prints money to buy MBS from F and F. Proceeds from the Fed go to the treasury...
The government has essentially cornered the secondary mortgage market. All of the money that used to go to private taxpayers now goes to the US treasury.
The "taxpayers" are going to make a profit off of these "bailouts", all of that money is coming directly from taxpayers...
Ted Olsen is going to have a field day with this case when it goes in front of the supreme court. A can of worms is about to get opened up that I would imagine the Fed, the Treasury, the FHFA, the President, and Congress would prefer not to see the light of day.
About to get checked and balanced...
Hilarious that the gov is desperately trying to figure out how to bring "private capital" back to the system, meanwhile "private capital" (mutual funds, hedge funds, pension funds, etc.) are taking it to the supreme court through numerous lawsuits to get their property back and buying up more shares while they wait....gonna get interesting.
From Fairholm website:
Fairholm Report Link
Exactly. It was essentially an interest only adjustable rate loan in which principal could never be paid.
Hey Fannie we will give you a loan at 10% interest to save your house, and since you are not fit to make decisions we will put you under conservatorship and sign all of your loan documents for you...
Great, but what if I can't pay the 10% for the next few years?...
no problem, we will just loan you more that you can literally send right back to us and we will just add it to your add it to your total bill...
hey guess what! I can pay the interest and more now!...
okay fannie, but we decided to add some fine print. Now that 10% teaser rate is going to adjust to 100% of everything you have, -3b you can hold onto to pay bills...until we decide to foreclose on your house because you are evil.
Predatory lending at is finest. Irony...
Most definately. Honestly, I have watched hours and hours of "expert testimony" in the house. I feel that the conclusions being drawn publicly are months behind what has been thought of by the more astute members of this board. The most compelling thing that Berk. wrote was that his investment thesis has not changed. Mine hasn't either, and until it does....there still is no substitute.
Agreed. This is why we have checks and balances. Will be interesting to see how this plays out. Slowly but surely though the public persona of f and f are being shifted from representing "wall street greed" to being the foundation of the 30 year mortgage. I like the direction it is headed, regardless of short term swings. I couldn't stop watching if I wanted to, too epic. Almost Shakespearean...
No formal legislative action can occur during recess, so it cant be introduced in a formal sense. Details could be floated however.
I got this email about 2 hrs ago:
From inside Mortgage Finance email today:
link
What We’re Hearing: Fannie About to Reduce Maximum LTV / Rate Rise Causing the Phones to Stop Ringing? / Arch Capital Wants to be a Player in MI / Cole Taylor Continues to Hire / Waiting for Godot and Sen. Reed’s GSE Bill / Can Ellie Mae Get Sold?
Just when the mortgage insurance industry was ready to take on more risk, Fannie Mae has to come along and lowered its maximum loan-to-value ratio to 95 percent from 97 percent for non-HARP products. Sources tell Inside Mortgage Finance that an official announcement is on the way. In all fairness, it should be pointed out that Fannie wasn’t buying too many 97 percent LTV loans any way – but at least it was buying. Freddie stopped a while ago. As IMF noted in a recent issue, the four private MIs that survived the housing bust reported combined earnings of $38 million in the second quarter, the first positive result for the group in six long years. Two new MIs, Essent and National MI, are now in the space with $500 million in backing each. Investors – including Goldman Sachs – clearly believe in the business. And with the coming QRM rule expected to be kind to the MI industry, it might be safe to say the future is looking bright for MIs. But they need the GSEs just as much as the GSEs need them. With Fannie lowering its LTV maximum, it will reduce the pool of eligible borrowers. It can be argued that these same borrowers can go over to FHA. Okay, but can they afford the MIP? We understand that a few MI executives are hopping mad over the Fannie news. Look for a formal statement early next week…
Maybe, we’re making too much about the coming Fannie Mae news, but as one senior housing lobbyist told us it’s the “symbolism” that counts, especially when you consider that the White House is making public statements about easing loan underwriting standards so normal folks can get a mortgage. The White House also wants to jettison Fannie and Freddie, thinking that the private sector will provide for all. Maybe so, but at what interest rate?...
Meanwhile, we hear that Arch Capital, which earlier this year, bought CMG Mortgage Insurance, has major expansion plans. “They’re hiring a lot of people of late,” one MI official told us…
On Friday morning the yield on the benchmark 10-year Treasury bond started at 2.80 percent before dropping a micro-hair to 2.79 percent. Meanwhile, the business desks of many (general) media outlets are running headline stories that say rates haven’t been this high in two years. As might be expected, a few mortgage bankers we spoke with are nervous. One loan officer from New Jersey said that thanks to higher rates he’s already losing clients who were contemplating purchases. He added that three wholesale account executives visited him the other day telling him that it’s been “scary quiet” of late…
However, here’s one explanation why business is slow, from Don Frommeyer, president of National Association of Mortgage Brokers: “I think that a lot of business has slowed the last 45-60 days due to summer vacation, time off and a general relaxing of loan originators enjoying the summer. I have noticed in my office that we slowed down because everyone was going on vacation and now that they are back, we are starting to build a bigger pipeline. I am sure that this is going on all over the nation”...
Even though Cole Taylor Mortgage is on the verge of being sold, one executive there told us the firm continues to hire. It recently added two wholesale account executives…
Despite plenty of chatter, we have yet to hear from anyone who has actually seen the GSE bill being worked on by Sen. Jack Reed of Rhode Island. As already noted, the measure is being compared to the Corker-Warner bill with Fannie and Freddie actually surviving. Reed is a Democrat…
As we all know, mortgage technology provider Ellie Mae is on the auction block. But can a deal get done before loan volumes fall off the table? New documents filed with the SEC show it had operating income of $5.2 million in the last quarter compared to $5.8 million and $6.2 million in the prior two…
CUNA Mutual Group this week filed five different civil fraud suits in federal court against Wall Street firms, seeking $285 million in damages tied to nonprime residential MBS gone bad. The defendants include Banc of America Securities and Merrill Lynch, now a BofA subsidiary.
Me too...
Agreed. Until last week the debate has been between CW and Hensarlings Path act. Hopefully a new bill will help frame the debate between CW and the old GSE model and we will wind up with a private f and f in the middle. CW would require private entities to stand between banks and FMIC to securitize mortgages. It does not specify who though. Ideally, and since they are already under gov. control, f and f could be fully privatized and made to become the first entities in this new system. That makes the most sense to me in terms of an orderly transition. It just depends on whether or not doing so would honor equity of shareholders. The good news is that more and more people are speaking about the necessity of a gov. backstop. FMIC would simply make sure that it is paid for up front. It would not replace f and f as the entities that securitize mortgages. Even Tim Pawlenty yesterday promoted this setup, although he discussed eliminating gses. banks want to continue selling mortgages to a third party without having to retain risk. The new QM rules as reported in Bloomberg yesterday to be releases in August reinforce this notion. The function of f and f is here to stay IMO, although I think we will see the former explicit guarantee f and f had be priced into the transaction.... reform. Other market participants will enter the system and compete for f and f market share. The million dollar question is what happens to the part of f and f that were private and built by private capital and will shareholder equity rights be upheld. My perspective is that from where the issue stood even 3 months ago we are closer to that. The legislative details are what will matter. What f and f do is necessary, what they came to represent politically is a totally different thing.
Not Harry Reid, although he has come out saying that he is opposed to eliminating the gse's and didn't like the presidents remarks on their face.
Jack Reed is working on a bill. It was reported months ago in the wall street journal and again yesterday in inside mortgage finance saying that details could be released Friday.
Both are senior senators. One is the majority leader.
Haven't seen this posted on here yet, came out last night. I apologize if it is redundant.
Softer Mortgage Rules-Bloomberg
It seems to say that new QM rules to be released in August will only require banks to have risk retention requirements on loans where the recipient is spending over 43% of their income (subprime). It will "carveout" (spinoff) risk retention for banks on loans traditionally backed by F and F. If the requirements are going to soften proposed regulations on banks, who are the well regulated "private capital" entities going to be? Also FMIC or whatever proposed explicit government backstop that will be put in place will require a well regulated private first loss insurer to stand in front of FMIC to absorb losses before they attach to FMIC with a 10% capital buffer, doesn't seem like banks are going to be it.
Fed Reservce, FHFA, etc. are on the panel who put together these rules. Interesting that this is proposed to be released at the end of August. The debate is going to be reframed when Congress gets back from recess...
Could come Friday in the form of Jack Reed's Bill. If it is more moderate (which by all accounts it should be), backed by Majority Leader Harry Reid and other Senate Dems. who haven't weighed in, and Obama does throw his support behind it it could be a total game changer with regards to GSE reform. The devil is in the details though, esp. for shareholders...
Just saw that on inside mortgage finance:
Tide is turning....
http://www.insidemortgagefinance.com/imfnews/1_163/daily/-1000024109-1.html?ET=imfpubs:e3656:54795a:&st=email&s=imfnews
More and more common sense points of view entering the debate in a broader forum. Senate majority leader openly opposing dismantling. Obama's views cloudy at best, although the media spun the debate towards elimination and the Phoenix speech. Have hardly seen mention of the more in depth zillow discussion. Housing represents 30% of our economy, and f and f are at the epicenter of it all. Its not over until it is over, it is just going to keep getting more interesting...
In NYC. Just walked past the Dow Jones building and the ticker in times square keeps running "Freddie Mac posts 5bil profit"
Kept waiting for it to say "Obama said 'reform'! PQH! Buy FNMA!"...
Maybe he has been reading ihub? Some have been saying that here for months... ; )
Earnings please...
Blurb from Inside Mortgage Finance:
Has anyone in Washington noticed that Fannie Mae and Freddie Mac are now earning money hand-over-fist? Perhaps not, when you consider that even President Obama, a Democrat (Democrats are usually pro-housing), is calling for their demise. Then again, the irony cannot be missed: The White House wants to kill the geese laying golden eggs of profits each quarter – money that is going directly into the coffers of the Treasury Department. Freddie Mac, as reported by IMFnews early Thursday morning, earned $5 billion in 2Q. Annualized that’s $20 billion. Fannie is doing even better. Go figure…
Meanwhile, Tim Rood of the Collingwood Group, a former Fannie Mae executive in his own right, had this to say about all the GSE bashing that continues inside the Beltway: “I have to tell you that this false narrative around the GSEs and FHA as the culprits that caused the housing crisis is getting pretty laughable. I'm not an apologist for any or all of those organizations. They were flawed and we should learn from their mistakes. But it's pretty darn difficult, albeit convenient, to claim that the implicit government guaranty of Fannie Mae and Freddie Mac debt, and the explicit guaranty of FHA insurance caused the housing crisis. Everybody knows what caused the housing crisis – reckless and insane underwriting and loan product development that went unchecked”…
Compare the 3 month f and f charts on top of each other. The don't just follow each other...they are welded together. Very minor intraday differences, but overall fr. stays about 10? behind fan. and they move together without fail so far since the first run began. Very interesting. Almost coordinated if you ask me. Pairs trading, arbitrage? Not sure, but smart money is smart...
And make the Es pay G for the S.....
Agreed. The question is do they spin off the loan portfolios of f and f to be the private companies with a 10% capital buffer or do they give it all to the banks. Jim Millstein proposed privatizing the core business of the companies, CW leaves it to chance. The speculative investment portfolios were always going to be wound down. If they give it to the banks it is the biggest heist of our lifetime. Gov prop up f and f, staving off trillions of dollars in losses on CDS, banks agree to admitting liability for selling the bad paper, pay 25? on the $ for the transgression and the gov. hands them the housing market...
Either way it is news and will get us closer to a resolution. Just not sure if it is the one we want. We will see...
Speaking of coincidences...I was reading about Treasury Sec. Jack Lew. He would probably be in an interesting position to once again amend the PSPA agreement that the treasury has with f and f. Before he became treasury sec. in Feb. of this year he worked in the Clinton and Obama admins and was the COO of citigroup. I read that he got the job there based on the recommendation of former treasury sec and citigroup CEO Robert Rubin.
So strange that Robert Rubin's former goldman sachs protege,babysitter, and teaching assistant at NYU Richard C Perry is now suing the treasury. Small world.
Agreed. Been watching this board for a long time, but rarely post. Very interesting that the 3rd Amendment to the PSPA occurred 1 month before the Fed decided to start an open ended buying spree of 40b worth of agency MBS/month. And since F and F were allowed to realize DTAs they will have returned dividends equal to drawns from the treasury much faster than anyone could have anticipated. I think the Fed said they will begin to start tapering off when the economy shows stable positive economic data. They are anticipating beginning somewhere around Sept I think. So weird that that falls right around the time that F and F will reach net 0, probably just a coincidence. It sure does make liquidation more complicated though from a legal standpoint. Doubt that was the intention, guess it was just an oversight...
Requested links from earlier post:
Reed Rumor:
online.wsj.com/article/SB10001424127887324021104578549682228860970.html
Jim Millstein (restructured AIG) House Testimony:
financialservices.house.gov/calendar/eventsingle.aspx?EventID=329901
Rihard Perry Info:
money.cnn.com/2008/10/07/magazines/fortune/vickers_perry.fortune/
gawker.com/550733/richard-perry
http://www.bloomberg.com/news/2013-04-23/scene-last-night-clintons-streisand-cohn-blavatnik.html
It has been rumored that Jack Reed is working on a proposal to revamp, but not eliminate f and f. He is old gaurd. He also went on record in response to corker Warner saying they would prefer to tackle fha reform before discussing f and f. That just happened. My prediction is that f and f will both realize dtas this q bringing them to or within a few b of net 0 and then a more reasonable bill will come out of the senate restructuring but not
eliminating the gse's. Also worth
noting that Richard Perry and Ted
Olsen are deep Washington insiders.
Olsen has been involved with the
repubs since Reagan and Obama
met Caroline Kennedy at Perry's
house. Perry is also a protege of
Robert Rubin. Its less important to me what the small time players are
doing loudly than what the big time
players seem to be doing quietly. The Path act passage barely moved the pps. Will earnings cause a run...perhaps, perhaps not. If taxpayers are made whole this quarter, it very well could. The admin has been strangely quiet on the subject since 2011, to avoid political gridlock. Obama has been on record saying that he is willing to circumvent congress if necessary. Perhaps if the powers that be have realized that restructuring at this
point makes more sense than
liquidation, and having some well heeled
allies bring suit challenging the authority to maintain conservator ship would help to sidestep the circus that is congress. Pay no attention to the man behind the curtain....