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All 31 Banks Pass First Round of Federal Reserve ‘Stress Test’
Author: Samantha Guzman in Daily Dose, Featured, Government, News, Origination March 6, 2015 0
The top 31 banks in the U.S. passed the first round of the Federal Reserve “stress test,” with none of the banks falling below the Fed’s capital requirements, according to data released by the Fed on March 5. This marks the first time all banks with more than $50 million in assets passed since the Fed began conducting the test in 2009.
“The largest U.S.-based bank holding companies continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility, according to results of supervisory stress tests.” the Fed announced Thursday.
Banks were tested under a hypothetical scenario featuring a deep recession with unemployment peaking at 10 percent, a decline in home prices of 25 percent, a stock market drop of nearly 60 percent and together the banks would see a projected $340 million total in loan losses. Results shows the bank’s aggregate tier 1 common capital ratio, which compares high-quality capital to risk weighted assets, would fall from 11.9 percent in the third quarter of 2014 to a minimum level of 8.2 percent in the scenario. This minimum level is higher than the 5.5 percent measure in 2009 and the 7.9 percent ratio from last year.
"It means our banking sector is pretty healthy right now from the perspective of how much money they are holding," Anna Krayn, head of stress testing for Moody's Analytics, told USA Today. "Some would argue that there's excess capital in the system,"
Bank of America’s tier one common ratio was 7.1 percent, lower than the 8.1 percent the bank projected from its own calculations. Last year, Bank of America got permission to raise its dividends, which the banks used to reward shareholders. The results from this test will factor into the Fed’s decision next week about whether to approve this plan for a second time. Banks that fall closer to the minimum requirement of 5 percent might scale back their dividends or buyback plans before the Fed announces the final results on Wednesday.
Banks have been preparing for stricter Fed regulations by building their capital reserves to protect against losses even before this year’s test. Citigroup brought former executive Gene McQuade out of retirement to increase their chances of passing the test this year. Last year, the bank was the only one to fail the test, making this year’s test a big deal , especially for CEO Michael Corbat, whose future might be determined by Citi’s performance.
This is the fifth round of testing conducted by the Fed since 2009 the third round required by the Dodd-Frank Act. These results are from the first phase of testing. On Wednesday the Fed will announce whether any of the 31 banks still need to rein in capital spending plans.
http://themreport.com/news/origination/03-06-2015/31-banks-pass-first-round-federal-reserve-stress-test
This is from the Cato institute from a while back but I have read it a couple of times to keep things in perspective. It is 51 or so pages in pdf but well worth a read and a save for future reference. I have attached the link to the pdf file.
The Conservatorships of Fannie Mae and Freddie Mac
In this white paper, the conservatorship of Fannie Mae and Freddie Mac by the Federal Housing Finance Authority comes under withering attack by the two authors. Michael Krimminger, a partner with Cleary Gottlieb Steen & Hamilton, and Mark A. Calabria, director of Financial Regulation Studies with the Cato Institute, criticizes FHFA six years into its conservatorship of the two Government Sponsored Enterprises as not moving toward putting them on a "sound and solvent" basis. The paper is produced by the Cato Institute.
Read the Paper at the Cato Institute Site
http://object.cato.org/sites/cato.org/files/pubs/pdf/working-paper-26.pdf
Stegman Redefines Conservatorship Posted by ToddSullivan on March 6th, 2015
Ok, so it is painfully obvious Michael Stegman either has no idea what conservatorship is, or simply doesn’t really give a rats ass what it is. Assuming he is not stupid (I am assuming he is a smart man), we can only surmise that he (and the White House) just don’t care. Below are his remark from yesterday regarding the GSE’s ($FNMA) ($FNMAS). What I have done is place in bold italics next to many of his statements vs what the FHFA told people conservatorship was all about and its goals and my comments. You’ll notice the lack of even remote similarity between the two:
Remarks by Counselor to the Secretary for Housing Finance Policy Dr. Michael Stegman Before the Goldman Sachs Third Annual Housing Finance Conference
3/5/2015
Good morning, and thank you, Carsten, for that kind introduction. It’s a pleasure to be with you today to engage on a very important issue for our country and our economy.
This morning, I want to discuss the state of housing finance reform and the path we see to a more sustainable mortgage finance system that meets President Obama’s principles and creates a housing finance system that will promote stability in the housing market and the broader economy, and therefore, benefits the American people. First, I’d like to briefly explain why Treasury is devoting significant resources to helping market participants create a robust and responsible non-government-guaranteed securitization market and then discuss our thinking about how to move forward on GSE reform.
Private Label Securities Initiative
The Administration believes that private capital should be at the center of the housing finance system. To that end, Treasury has been working with the industry to develop the structural reforms necessary to help bring the private label securities, or PLS, market back, and get investors off the sidelines. A key component of this effort is rebuilding trust among market participants, and to this end, Treasury published the results of an exercise last month that would provide greater transparency around credit rating agency loss expectations for newly originated mortgage collateral. The goal of this exercise and the broader PLS initiative is to improve confidence in post-crisis practices and encourage investors to return to a reformed PLS market.
Treasury views a diverse housing finance system that features multiple execution channels as essential to promoting competition, market efficiency, and consumer choice. We see the development of a healthy and responsible PLS market as an important component of a sustainable housing finance system and a complement to a reformed government-supported channel, an objective I will discuss in the remainder of my speech.
GSE Reform
With that in mind, let me turn my attention to the GSEs. We are now well into the seventh year of Fannie Mae and Freddie Mac’s conservatorship. We cannot forget that the actions taken in the wake of the financial crisis to backstop the GSEs stabilized the housing market, protected the capital markets, and supported the broader economy.
: ?What are the powers of the Conservator?
???A: ?The FHFA, as Conservator, may take all actions necessary and appropriate to (1) put the Company in a sound and solvent condition and (2) carry on the Company’s business and preserve and conserve the assets and property of the Company.
What follows below is the antithesis of the above:
But as I have said many times, the status quo is unsustainable. Taxpayers remain at risk, market participants are uncertain about the government’s longer-term footprint in the mortgage market, and mortgage access and pricing decisions are not in the hands of market participants. The American people deserve better.
They deserve an efficient, sustainable, housing finance system that serves borrowers effectively and efficiently without leaving taxpayers on the hook for potential future bailouts. The critical flaws in the legacy system that allowed private shareholders and senior employees of the GSEs to reap substantial profits while leaving taxpayers to shoulder enormous losses cannot be fixed by a regulator or conservator because they are intrinsic to the GSEs’ congressional charters. And these charters can only be changed by law. That is why we continue to believe that comprehensive housing finance reform is the only effective way forward, not narrowly crafted ad-hoc fixes.
We cannot forget about the important progress made in the Senate during the last Congress and hope that the new Congress will afford the opportunity to again advance bipartisan legislation meeting our principles, even if it is too soon to tell what the ultimate prospects will be. The Administration remains ready, willing, and able to work in good faith with members of both parties to complete this important but unfinished piece of financial reform. As memories of the financial crisis fade, we cannot become complacent. The best time to act is when the housing market is well along the path to recovery and credit markets are normalizing, not on the precipice of a new economic shock when there is little time to be thoughtful.
We do recognize the myriad of challenges to achieving a bipartisan legislative consensus. But as I will explain shortly, we believe that significant progress can be, and is being made, prior to legislation, to help move the housing finance system towards a more sustainable future. While this progress is not a substitute for legislative reform, it can, over time, reduce the challenges to achieving a desired legislative outcome that puts in place a durable and fair housing finance system by advancing us down the path of transition.
Progress under Conservatorship
To that end, I’d like to highlight the steps forward that have been made under the conservatorship – progress that needs to be built upon. Important gains have been and continue to be made in de-risking and preparing the Enterprises for transition. The GSEs’ critical housing finance infrastructure and technology – which was allowed to obsolesce in the years preceding the financial crisis – is being renewed and enhanced.
Furthermore, their business practices are being reformed. Between 1995 and 2008, management grew the GSEs’ retained investment portfolios, which are financed at government-subsidized borrowing costs, fourfold to a combined total of $1.6 trillion. Since entering conservatorship, those portfolios have been nearly halved, and they are required to shrink further to less than $500 billion in total by year-end 2018.
Q: ?Can the Conservator determine to liquidate the Company?
???A: ?The Conservator cannot make a determination to liquidate the Company, although, short of that, the Conservator has the authority to run the company in whatever way will best achieve the Conservator’s goals (discussed above). However, assuming a statutory ground exists and the Director of FHFA determines that the financial condition of the company requires it, the Director does have the discretion to place any regulated entity, including the Company, into receivership. Receivership is a statutory process for the liquidation of a regulated entity. There are no plans to liquidate the Company.
Isn’t this what is happening? A slow motion liquidation?
In addition to being a major source of GSE earnings, these portfolios remain a significant source of financial volatility and potential taxpayer risk. These portfolios, the pursuit of maximum earnings, and the drive to recapture market share through greater risk-taking left taxpayers holding the bag when the bets went wrong. In conservatorship, these practices have been replaced with a recommitment to more effective risk management, prudent underwriting, more appropriate pricing, and a greater emphasis on sustainable mortgage finance.
The Federal Housing Finance Agency (FHFA), as the independent regulator and conservator of the GSEs, is laying the groundwork for a future housing finance system based upon private capital taking the majority of credit risk in front of a government guarantee with greater taxpayer protections, broader access to credit for responsible borrowers, and improved transparency and efficiency. These measures include, among others, expanding and diversifying risk-taking among private actors, further focusing GSE businesses on meeting the mortgage finance needs of middle class households and those aspiring to join the middle class, and developing a securitization infrastructure that can serve as the backbone for the broader mortgage market over time. All of these initiatives are consistent with the long-term vision of providing secure homeownership opportunities for responsible middle-class families.
After the failure of both GSEs, FHFA’s ability to stand in the shoes of their respective boards and senior management as conservator in order to set appropriate, statutorily-guided priorities and ensure follow-through has been good for the Enterprises and good for the American people. Preserving FHFA’s role in the future housing finance system merits serious consideration.
Administrative Vision
With that history in mind, I want to expand upon our vision for reforms that would transition the GSEs further along a path toward a future housing finance system while they still benefit from Treasury’s capital support. In turn, the progress we make today could serve both as a framework for, and reduce certain challenges associated with, achieving bipartisan legislative reform. Within the context of a continuing backstop, further de-risking the Enterprises is common-sense, prudent policy. Other actions that improve market efficiency and liquidity and develop infrastructure that would promote competition are consistent with the Administration’s interest in a durable and fair housing finance system.
The first of these areas is in the shedding of GSE legacy risk, both in their retained portfolios and their guarantee book. Given the strengthened underwriting practices and high credit quality of their new guarantee book, this legacy risk represents the overwhelming majority of taxpayer risk exposure to the GSEs today. Despite asset sales and natural run-off, their retained portfolios remain substantial at over $400 billion each and still constitute a significant line of business. The size and complexity of the retained portfolios also necessitate active hedging, introducing considerable basis risk and earnings volatility and making the GSEs susceptible to potentially relying on a future draw of PSPA capital support.
In light of the strong demand for mortgage credit risk in the market today and the market success of Freddie Mac’s first nonperforming loan (NPL) sale in July of last year, it would be both feasible and beneficial to taxpayers to responsibly accelerate the reduction of the most illiquid assets in the GSE portfolios. In particular, Treasury sees value in cultivating programmatic NPL sales at both Enterprises with a focus on market transparency, improving borrower outcomes, and community stabilization.
Similarly, in light of the GSEs’ expertise in transferring credit risk on their new books of business and recognizing that the bulk of credit risk exposure on their guarantee books is tied to their pre-2009 legacy commitments, the potential for transferring credit risk on their legacy guarantee books also merits consideration despite the unique challenges it may entail.
Continuing with the theme of reducing taxpayer exposure to mortgage credit risk, the second area where we see room for progress is in transferring credit risk on new originations. As I said before, the Administration believes that a sustainable housing finance system must have private capital at its core, and in conservatorship, the GSEs have started down a path of transferring greater mortgage credit risk to private market participants.
As you are aware, beginning in 2013, the GSEs have cultivated their respective credit risk transfer programs. These programs and their effectiveness in transferring credit risk have grown substantially in under two years. The GSEs have also engaged in other innovative forms of risk transfers including reinsurance contracts and recourse agreements.
Although the GSEs are directionally on the right path, there is more to be done on this front. Despite issuing 16 credit risk transfer transactions since 2013 referencing $530 billion notional balance, this amounts to approximately 20 percent of the GSEs’ combined guarantees over this time period and roughly 12 percent of the GSEs’ combined books of business. And while recent transactions have made progress by selling first-loss exposure for the first time, these transactions still rely on a defined credit event and fixed severity schedule.
The closer the GSEs can come to transferring the majority of risk to private market participants, the better. Such credit risk transfer activities serve to field-test the role of government as a guarantor of catastrophic risk while private capital bears the risk of the majority of potential losses. We are also sensitive to existing constraints to rapidly expanding credit risk transfer activities today and are supportive of additional, measured efforts to foster this market sustainably over time.
This is why we support the conservator’s efforts to responsibly expand credit risk transfer efforts through continued structural innovation and counterparty strengthening in order to broaden and diversify the investor base and optimize pricing efficiency and stability. Credit risk transfer activities should not be concentrated in any one mechanism or entity. Rather, they should seek to develop a variety of mechanisms and entities in order to improve pricing efficiency and transparency, provide the lowest cost to borrowers, and ultimately, inform the framework of the future housing finance system. We see great value in leveraging the unique investment needs and competencies of the broad spectrum of market participants in shaping a sustainable model for putting first loss mortgage credit risk in private hands.
Finally, under the direction of FHFA, the GSEs have embarked upon a cutting-edge project to develop a Common Securitization Platform (CSP) and a fungible To-Be-Announced, or TBA, contract. We are broadly supportive of these efforts, which in the immediate future will modernize the GSEs’ collective securitization infrastructure and improve the liquidity and efficiency of the market.
However, given the CSP’s joint ownership by the GSEs and scope narrowly focused on their businesses, the near-term CSP initiative would not succeed at separating the industry’s critical securitization infrastructure from the GSEs’ credit risk-taking activities. This separation is necessary to enhance the stability of the housing finance system. Nor will it use its full potential to reshape the broader housing finance landscape by facilitating standardization, transparency, and competition, and serving as a market gateway for both guaranteed and non-guaranteed securities.
This is why we would support opening up the CSP as early as it can be responsibly done to accommodate non-GSE users, which should be reflected not just in the Platform’s functionality but also in its governance structure. Greater transparency, more concrete timelines, broader engagement with private stakeholders, and ultimately, expanded governance of the CSP joint venture to include non-GSE stakeholders are all in the interests of moving towards a more sustainable future housing finance system.
The nation’s housing finance system is too critical to remain in a state of limbo without a clear, legislated vision for the future. However, the activities I outlined today are representative of the progress that can be made without legislation. By pursuing these and other activities that de-risk the Enterprises, we can put the housing finance system on a course aligned with the Administration’s priorities that would promote greater stability for the housing market and broader economy.
All of the above are appropriate goals for the GSE’s and housing. The problem is they have nothing to do with conservatorship, nothing. They are all actions that should be taken place outside of it after the GSE’s were allowed to recapitalize and pay off the SPSA which they all could have done by now. The irony here is that were they able to do that, the taxpayers would be made whole, because the GSE’s were then adequately capitalized, the taxpayers would have been in a far better position than they are now AND the Treasury would be making a healthy profits off the appreciation in the stock prices.
Capital
With the recent release of the GSEs’ 2014 fourth quarter earnings, there seems to be increased interest in the subject of GSE capital. But before we discuss this, it is worth taking a step back to review the purpose of the Senior Preferred Stock Purchase Agreements, commonly referred to as the PSPAs. The PSPAs were put in place as both companies were placed into conservatorship. These agreements were established to protect the solvency of the two companies and to allow them to continue to operate. This was necessary to protect financial stability and to ensure the continued flow of mortgage credit. The PSPAs gave market participants confidence in the GSEs’ debt and MBS obligations through which they fund the majority of the mortgage credit in this country. Without this capital support, it is clear that both GSEs would have been insolvent and that mortgage credit would have dried up as a result.
With this as a backdrop, I want to frame for this group how we think about capital at the GSEs while they are in conservatorship and continue to rely on the PSPAs to support their activities.
Currently, the GSEs operate with a minimal amount of capital at each Enterprise. These capital reserve amounts were established in order to provide protection against unexpected losses related to their retained investment portfolios. This capital amount will amortize to zero by 2018 when we would expect the GSEs to have wound down their legacy investment business. And, from Treasury’s standpoint, we would like to see these retained portfolios wound down even faster to further reduce risk. Liquidation?
Q: ?What are the goals of this conservatorship?
???A:
?The purpose of appointing the Conservator is to preserve and conserve the Company’s assets and property and to put the Company in a sound and solvent condition. The goals of the conservatorship are to help restore confidence in the Company, enhance its capacity to fulfill its mission, and mitigate the systemic risk that has contributed directly to the instability in the current market.
There is no reason for concern regarding the ongoing operations of the Company. The Company’s operation will not be impaired and business will continue without interruption.
??Q: ?When will the conservatorship period end?
???A: ?Upon the Director’s determination that the Conservator’s plan to restore the Company to a safe and solvent condition has been completed successfully, the Director will issue an order terminating the conservatorship. At present, there is no exact time frame that can be given as to when this conservatorship may end.
Despite having only minimal retained capital levels at the GSEs, investors continue to have confidence in their securities due to the ongoing backstop the PSPAs provide each company. The substantial remaining capital support left under the PSPAs gives market participants the confidence to buy 30-year GSE securities on a day-in and day-out basis. This is despite the fact that the companies remain in conservatorship and have minimal capital levels.
However, as a result of the ongoing capital support through the PSPAs, taxpayers remain exposed to potential future losses at the GSEs. Let me remind you, both recapitalization of the GSEs and draws against the existing Treasury backstop due to potential future losses would come at taxpayers’ expense.
Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support through the PSPAs exposes taxpayers to great risk and is irresponsible. As we have said repeatedly, the only way to responsibly end the conservatorship of the GSEs is through legislation that puts in place a sustainable housing finance system with private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns. Again, not the goal of conservatorship…
NONE of these statements are the goals of any conservatorship, NONE of them. These are all appropriate actions to take regarding the GSE’s but they can be done outside of the conservatorship and the GSE’s cannot be held hostage while they are attempted
One final point for those who advocate a recapitalization of Fannie Mae and Freddie Mac while in conservatorship and subsequent privatization. If in the future the GSEs were to operate as they did prior to conservatorship, the GSEs’ size and significance would certainly attract broad regulatory attention due to the financial stability implications of their possible failure. Given this and the associated economic and regulatory ramifications, simply returning these entities to the way they were before is not practical nor is it a realistic consideration.
But it is the singular goal of conservatorship….
Conclusion
In closing, I want to return to the issue of timing and the urgency of enacting housing finance reform legislation. We know from experience that mortgage credit will be broadly accessible until it’s not; that capital markets will be liquid until they’re not. When the next crisis hits, it is unlikely that we will have the benefit of advance warning, and at that point, it will be too late for thoughtful reform. Our options will be limited, our hands will be tied, and we will be destined to relive the mistakes of the past.
Reforming a system as complex and as far-reaching as housing finance in a sensible and sustainable way takes time to get things right and to ensure a smooth transition from the existing system to the new, safer, fairer system. The point I want to make today is that there is an enormous amount of very good work underway to de-risk the enterprises, enhance liquidity, and protect taxpayers in a direction aligned with the Administration’s principles for long-term reform.
Nevertheless, institutionalizing these and other critical reforms in bipartisan legislation is by far the better course. Let’s be prudent; let’s have foresight; let’s find a bipartisan pathway to preventing another GSE bailout, which continuation of the status quo guarantees. We can do this, and we must do this.
Stegman and Treasury have taken it upon themselves to simply redefine conservatorship as its fits into their political goals. Rather that stabilizing the entity and returning it to operation within the existing framework it operates (the ONLY goal of conservatorship) they have decided to hold it hostage until they can change the framework.
This is akin to the Fed Injecting capital into the major banks (which they did via TARP) and then forcing the banks to operate under their authority without being able to pay back the TARP loans until Dodd/Frank was fully implemented. For reference, most banks fully repaid TARP in 2009 and Dodd/Frank is still not fully implemented (as of Q4 2014 only 59% of rulemakings have been finalized).
http://www.valueplays.net/2015/03/06/stegman-redefines-conservatorship/
price is up at lunch time. Glad I bought some this morning. After hours news?
Here is a question for anybody. Or rather questions. So far is it the DOJ that has sued all of the financial institutions supposedly on the behalf of FnF? If so is it possible for FnF to sue the big banks for slightly different legally/technically/loophole reasons over the mortgage fraud fiasco? If so is there a statute of limitations after which FnF can not sue? Are we being held in conservatorship so we can't sue? Is release going to happen after the statute of limitations runs out to hold the banks liable? Am I barking up the wrong tree?
Fannie Mae and Freddie Mac: The Hedge Funds Weigh In
By Alexander MacLennan | More Articles | Save For Later
March 6, 2015 | Comments (0)
Shares of Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac (NASDAQOTCBB: FMCC ) are among the most talked-about shares not listed on a major exchange. But don't let that be mistaken for lack of interest -- big investors are weighing in and being heard on the mortgage giants. But is it worth listening?
Bill Ackman
The activist investor behind Pershing Square is now one of the biggest investors in Fannie Mae and Freddie Mac, holding just under 10% of the common shares of each. On top of that, Ackman has taken out agreements with counterparties to effectively give him even more exposure to the value of Fannie and Freddie shares.
Although Ackman's Pershing Square took a hit last year when a case against the government to end the net worth sweep was thrown out, Ackman has not backed down and remains bullish on this investment. Not only is Ackman still bullish but he recently called the Fannie and Freddie investment the "best trade ... in capital markets."
No new word of additional Fannie or Freddie share accumulation has surfaced from Ackman but this is understandable given the current size of his investment in the government-sponsored enterprises.
In January, Ackman successfully pushed to have one of his cases voluntarily dismissed so that the ruling from the September Lamberth decision would not dispose of Pershing Square's claims as well. Nonetheless, he is still pressing forward with efforts to end the net worth sweep of Fannie and Freddie by challenging it in the courts.
Bruce Berkowitz
The man behind Fairholme Funds has been quite prominent in the Fannie Mae and Freddie Mac investment discussion. Like Ackman, Berkowitz is also suing the federal government to end the net worth sweep of the GSEs and has cases currently active in the courts.
But unlike Ackman, Berkowitz has primarily focused on the preferred shares of Fannie and Freddie, which currently comprise about 7.6% of Fairholme's investments. More recently, Berkowitz has begun adding common shares of the GSEs and added to his holdings again, as noted in Fairholme's annual report.
In the report, Fairholme added nearly 5 million GSE shares (3.1 million from Freddie Mac and 1.8 million from Fannie Mae). With the latest additions, the common shares account for just over 1% of Fairholme's portfolio.
According to Bloomberg, Berkowitz has remained bullish, saying on a recent conference call, "We've had our ups and downs, but we are making considerable progress in the court of federal claims." Berkowitz looks ready to continue the court battle, which is no surprise, given the potential upside he sees and the amount of money he has invested into the GSEs.
Richard Perry
Perry Capital was among the first of the hedge funds to push for an end to the net-worth sweep of Fannie Mae and Freddie Mac, and the effort continues today. After having its case dismissed in September, Perry Capital is appealing the ruling.
Compared to Ackman and Berkowitz, Richard Perry has been less vocal on the Fannie and Freddie situation recently, but the efforts to appeal the last ruling show he is still very much involved in the court battle.
Should you buy them?
Having big hedge fund investors on board is a positive for most investors, but one should still examine the underlying investment. As it currently stands, Fannie and Freddie are making billions of dollars each on an annual basis, but none of this is finding its way back to shareholders due to the net-worth sweep being conducted by the Treasury.
There have been various estimates of what Fannie and Freddie would be worth if shareholders prevail in their cases against the government. Assuming the 79.9% warrant stake is exercised, Ackman, in a colorfully titled presentation "It's Time to Get Off Our Fannie," has estimated shares will be worth $23 to $47 each outside of conservatorship. I have reviewed Ackman's calculations -- and I encourage potential investors to do so as well -- and I see them as reasonable and useful in establishing a range.
Of course, there are other risks to the companies. If the shareholder lawsuits fail, their profits will continue to flow to the Treasury, and shareholders will only receive something if Congress decides to give up this source of income. Fannie and Freddie are also subject to downturns in the housing market, as they are backing trillions of dollars in mortgages and have not been allowed to rebuild adequate capital due to the net-worth sweep.
Potential investors should also take into account the risk of a shakeup in the capital structure. Additional common shares may need to be sold to raise capital if the GSEs are released from conservatorship, or the senior preferred stake may end up being converted into common shares, as was done with the government-owned preferred stakes in American International Group and Citigroup.
Despite their recent share price increases, Fannie Mae and Freddie Mac remain high-risk, high-potential-return investments, and investors should only buy shares with money they can afford to lose. Overall, I am bullish on Fannie and Freddie for their upside potential but keep them in the high-risk part of my portfolio due to the wide range of possible outcomes.
What this means
Despite a setback last September, the biggest hedge fund players in the Fannie Mae and Freddie Mac cases are still bullish on their positions. This is demonstrated by the fact that their stakes were either maintained or increased as these investors put their money where their mouths are.
The court cases put forth by these investors are also continuing as the Lamberth decision is appealed and the case in the U.S. Court of Federal Claims under Judge Sweeney continues. Currently, investors should watch the progress of the Sweeney case where information will continue to be gathered as the government's request to put the case on hold was denied.
But what is also clear from fundamental analysis and the strategies of the hedge funds is that the Fannie and Freddie play is a long-term investment that will be decided through future court cases.
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http://www.fool.com/investing/general/2015/03/06/fannie-mae-and-freddie-mac-the-hedge-funds-weigh-i.aspx
Fannie and Freddie Hopes Hit the Buffers By John Carney
So much for the pipe dream of Fannie Mae FNMA -4.93% and Freddie Mac FMCC -5.32% being recapitalized and released from government control.
In a speech delivered Thursday at a Goldman Sachs GS +0.22% conference in Washington, D.C., Treasury Department housing finance counselor Michael Stegman repudiated the idea that the companies might be able retain earnings to build capital buffers, saying any change in their status would require new legislation. Currently, both companies pay all of their profits to the government each quarter. In order for them to build capital, Treasury would have to agree to change the terms of their bailout. That is clearly off the table.
Critics of the current conservatorship arrangement had recently seized on the plunge in first-quarter earnings at Fannie and Freddie, arguing that their lack of capital might leave the companies needing to once again draw on taxpayer support.
The recapitalization idea, however, has been floating around at least since last October, when Civil and Human Rights Coalition head Wade Henderson pushed for it in a letter to the Federal Housing Finance Agency.
Mr. Stegman pointed out in his speech that recapitalization also would come at taxpayer expense. The only difference is that a recap would be borne by taxpayers immediately while a backstop draw is a future contingency.
http://blogs.wsj.com/moneybeat/2015/03/05/fannie-and-freddie-hopes-hit-the-buffers/
Administration rejects GSE recapitalization ideas
Mar 5 2015, 14:29 ET | By: Stephen Alpher, SA News Editor
"Let me remind you, both recapitalization of (OTCQB:FNMA and OTCQB:FMCC) and draws against the existing Treasury backstop due to potential future losses would come at taxpayers’ expense,” says Michael Stegman, Treasurys counselor to the secretary for housing finance policy, speaking at a Goldman Sachs housing-finance conference.
He notes both have significant remaining credit to draw on should capital run low.
In the absence of any housing finance reform from Congress, Stegman suggests he would like to see the two GSE wind down their mortgage portfolios at a faster pace than is currently happening. He also likes recent efforts to offload some of their credit risk to the private sector, and would like to see more of such deals.
http://seekingalpha.com/news/2349586-administration-rejects-gse-recapitalization-ideas
It is nice to see that all of these negative articles are not causing a lot of selling. Not really anything new if you think about it. Govt. won't give up the cash cow.
Fannie, Freddie Recapitalization Rejected
WSJ.com: What's News US, Wall Street Journal: Home US
Thu, 03/05/2015 - 11:32am
A top U.S. Treasury Department official suggested the White House wouldn’t allow mortgage titans Fannie Mae and Freddie Mac to rebuild capital, rejecting some advocates’ wishes that the companies would move past being government wards.
http://www.wopular.com/fannie-freddie-recapitalization-rejected
UPDATE 2-U.S. officials push to speed up sale of Fannie, Freddie assets
Michael Flaherty
19 Mins Ago
Reuters WASHINGTON, March 5 (Reuters) - Two U.S. government officials on Thursday said the nation's biggest mortgage finance companies need to speed up the sale of their non-performing loans.
Michael Stegman, the counselor to the Treasury's secretary for housing finance policy, advocated for programmatic sales of non-performing loans at Fannie Mae and Freddie Mac and for a faster reduction in the most illiquid assets held by the two government-sponsored enterprises (GSEs).
"The closer the GSEs can come to transferring the majority of risk to private market participants, the better," Stegman told a Goldman Sachs conference. He said the only way to fix the government-controlled mortgage finance firms was through legislative reform.
Fannie Mae, the nation's largest source of mortgage funds, and its sister firm Freddie Mac were bailed out by the government in 2008.
Speaking at the same conference, Federal Housing Finance Agency Director Mel Watt said Fannie and Freddie have been directed "to make significant efforts in 2015 to reduce the number of severely delinquent loans they hold and to do so in a responsible way."
Stegman pointed to what he called a cutting-edge project to develop a common securitization platform (CSP), which he said would modernize the GSEs' securitization infrastructure. But he said the best way for the initiative to succeed was by opening it up to include other stakeholders.
"Expanded governance of the CSP joint venture to include non-GSE stakeholders are all in the interests of moving towards a more sustainable future housing finance system," Stegman said.
Since entering conservatorship in 2008, Fannie and Freddie's investment portfolios have been nearly halved, and they are required to shrink further to less than $500 billion in total by year-end 2018, the Treasury official pointed out.
But without a legislative overhaul, the GSEs still pose a risk that needs to be fixed now, and not in the middle of the next crisis, he said.
Watt said the agency has gathered feedback into its Single Security initiative and will offer more details into the structure of the plan in the second quarter of this year.
"We believe this update report will be a significant milestone in defining the structure and processes necessary to successfully transition to a Single Security in the future," Watt said.
The Single Security initiative was launched as a way to improve the overall liquidity of Fannie Mae and Freddie Mac securities, which currently are not interchangeable with one another.
http://www.cnbc.com/id/102481267
Treasury Official Says Fannie Mae, Freddie Mac Won’t Build Up Capital
The Obama administration outlined its plans for Fannie and Freddie for the first time on Thursday
Posted By: Clayton BrownePosted date: March 05, 2015 01:46:17 PMIn: BusinessNo Comments
A U.S. Treasury Department official suggested on Thursday that the Obama administration wouldn’t allow Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to rebuild capital. In a speech at a Goldman Sachs Group Inc (NYSE:GS) housing-finance conference, Dr. Michael Stegman, the Treasury’s counselor to the secretary for housing finance policy, spelled out what the Obama administration would like to see happen since it looks like a comprehensive housing-finance overhaul is unlikely.
Stegman’s speech is in essence a tacit admission by the White House that legislation to reform the housing-finance system is a long shot at best. The speech also made it clear that the administration had no intentions of allowing the firms recapitalize, dashing the hopes of some investors.
Fannie Mae, Freddie Mac
Statement from Treasury’s Michael Stegman
“Let me remind you, both recapitalization of [Fannie Mae and Freddie Mac ] and draws against the existing Treasury backstop due to potential future losses would come at taxpayers’ expense,” Stegman noted. He also pointed out that Fannie and Freddie still have a large credit line to draw on if their capital buffers run short.
Next steps for Fannie Mae and Freddie Mac
In his speech, Stegman discussed several steps that the White House wants Fannie Mae and Freddie Mac to take in the near future. For example, he noted that the GSEs large mortgage investment portfolios could be wound down more expeditiously.
Both firms have also developed new types of securities that they sell to private investors in an effort to reduce their mortgage credit risk, and Stegman said he would like to see more of these risk transfer activities.
Fannie and Freddie both reported unexpectedly poor earnings for the fourth quarter. Fannie reported earnings of $1.3 billion, while Freddie said it earned $227 million.
The deal with the Treasury Department requires the GSEs to shrink their capital buffers every year. For now, each GSE has a buffer of $1.8 billion, but the buffers will be reduced to zero by 2018. Of note, the smaller the buffer, the higher the probability that a major loss could mean Fannie Mae or Freddie Mac might require more cash from the U.S. Treasury.
http://www.valuewalk.com/2015/03/treasury-official-says-fannie-mae-freddie-mac-wont-build-up-capital/
Remarks by Counselor to the Secretary for Housing Finance Policy Dr. Michael Stegman Before the Goldman Sachs Third Annual Housing Finance Conference
3/5/2015
?
As prepared for delivery
Good morning, and thank you, Carsten, for that kind introduction. It’s a pleasure to be with you today to engage on a very important issue for our country and our economy.
This morning, I want to discuss the state of housing finance reform and the path we see to a more sustainable mortgage finance system that meets President Obama’s principles and creates a housing finance system that will promote stability in the housing market and the broader economy, and therefore, benefits the American people. First, I’d like to briefly explain why Treasury is devoting significant resources to helping market participants create a robust and responsible non-government-guaranteed securitization market and then discuss our thinking about how to move forward on GSE reform.
Private Label Securities Initiative
The Administration believes that private capital should be at the center of the housing finance system. To that end, Treasury has been working with the industry to develop the structural reforms necessary to help bring the private label securities, or PLS, market back, and get investors off the sidelines. A key component of this effort is rebuilding trust among market participants, and to this end, Treasury published the results of an exercise last month that would provide greater transparency around credit rating agency loss expectations for newly originated mortgage collateral. The goal of this exercise and the broader PLS initiative is to improve confidence in post-crisis practices and encourage investors to return to a reformed PLS market.
Treasury views a diverse housing finance system that features multiple execution channels as essential to promoting competition, market efficiency, and consumer choice. We see the development of a healthy and responsible PLS market as an important component of a sustainable housing finance system and a complement to a reformed government-supported channel, an objective I will discuss in the remainder of my speech.
GSE Reform
With that in mind, let me turn my attention to the GSEs. We are now well into the seventh year of Fannie Mae and Freddie Mac’s conservatorship. We cannot forget that the actions taken in the wake of the financial crisis to backstop the GSEs stabilized the housing market, protected the capital markets, and supported the broader economy. But as I have said many times, the status quo is unsustainable. Taxpayers remain at risk, market participants are uncertain about the government’s longer-term footprint in the mortgage market, and mortgage access and pricing decisions are not in the hands of market participants. The American people deserve better.
They deserve an efficient, sustainable, housing finance system that serves borrowers effectively and efficiently without leaving taxpayers on the hook for potential future bailouts. The critical flaws in the legacy system that allowed private shareholders and senior employees of the GSEs to reap substantial profits while leaving taxpayers to shoulder enormous losses cannot be fixed by a regulator or conservator because they are intrinsic to the GSEs’ congressional charters. And these charters can only be changed by law. That is why we continue to believe that comprehensive housing finance reform is the only effective way forward, not narrowly crafted ad-hoc fixes.
We cannot forget about the important progress made in the Senate during the last Congress and hope that the new Congress will afford the opportunity to again advance bipartisan legislation meeting our principles, even if it is too soon to tell what the ultimate prospects will be. The Administration remains ready, willing, and able to work in good faith with members of both parties to complete this important but unfinished piece of financial reform. As memories of the financial crisis fade, we cannot become complacent. The best time to act is when the housing market is well along the path to recovery and credit markets are normalizing, not on the precipice of a new economic shock when there is little time to be thoughtful.
We do recognize the myriad of challenges to achieving a bipartisan legislative consensus. But as I will explain shortly, we believe that significant progress can be, and is being made, prior to legislation, to help move the housing finance system towards a more sustainable future. While this progress is not a substitute for legislative reform, it can, over time, reduce the challenges to achieving a desired legislative outcome that puts in place a durable and fair housing finance system by advancing us down the path of transition.
Progress under Conservatorship
To that end, I’d like to highlight the steps forward that have been made under the conservatorship – progress that needs to be built upon. Important gains have been and continue to be made in de-risking and preparing the Enterprises for transition. The GSEs’ critical housing finance infrastructure and technology – which was allowed to obsolesce in the years preceding the financial crisis – is being renewed and enhanced.
Furthermore, their business practices are being reformed. Between 1995 and 2008, management grew the GSEs’ retained investment portfolios, which are financed at government-subsidized borrowing costs, fourfold to a combined total of $1.6 trillion. Since entering conservatorship, those portfolios have been nearly halved, and they are required to shrink further to less than $500 billion in total by year-end 2018.
In addition to being a major source of GSE earnings, these portfolios remain a significant source of financial volatility and potential taxpayer risk. These portfolios, the pursuit of maximum earnings, and the drive to recapture market share through greater risk-taking left taxpayers holding the bag when the bets went wrong. In conservatorship, these practices have been replaced with a recommitment to more effective risk management, prudent underwriting, more appropriate pricing, and a greater emphasis on sustainable mortgage finance.
The Federal Housing Finance Agency (FHFA), as the independent regulator and conservator of the GSEs, is laying the groundwork for a future housing finance system based upon private capital taking the majority of credit risk in front of a government guarantee with greater taxpayer protections, broader access to credit for responsible borrowers, and improved transparency and efficiency. These measures include, among others, expanding and diversifying risk-taking among private actors, further focusing GSE businesses on meeting the mortgage finance needs of middle class households and those aspiring to join the middle class, and developing a securitization infrastructure that can serve as the backbone for the broader mortgage market over time. All of these initiatives are consistent with the long-term vision of providing secure homeownership opportunities for responsible middle-class families.
After the failure of both GSEs, FHFA’s ability to stand in the shoes of their respective boards and senior management as conservator in order to set appropriate, statutorily-guided priorities and ensure follow-through has been good for the Enterprises and good for the American people. Preserving FHFA’s role in the future housing finance system merits serious consideration.
Administrative Vision
With that history in mind, I want to expand upon our vision for reforms that would transition the GSEs further along a path toward a future housing finance system while they still benefit from Treasury’s capital support. In turn, the progress we make today could serve both as a framework for, and reduce certain challenges associated with, achieving bipartisan legislative reform. Within the context of a continuing backstop, further de-risking the Enterprises is common-sense, prudent policy. Other actions that improve market efficiency and liquidity and develop infrastructure that would promote competition are consistent with the Administration’s interest in a durable and fair housing finance system.
The first of these areas is in the shedding of GSE legacy risk, both in their retained portfolios and their guarantee book. Given the strengthened underwriting practices and high credit quality of their new guarantee book, this legacy risk represents the overwhelming majority of taxpayer risk exposure to the GSEs today. Despite asset sales and natural run-off, their retained portfolios remain substantial at over $400 billion each and still constitute a significant line of business. The size and complexity of the retained portfolios also necessitate active hedging, introducing considerable basis risk and earnings volatility and making the GSEs susceptible to potentially relying on a future draw of PSPA capital support.
In light of the strong demand for mortgage credit risk in the market today and the market success of Freddie Mac’s first nonperforming loan (NPL) sale in July of last year, it would be both feasible and beneficial to taxpayers to responsibly accelerate the reduction of the most illiquid assets in the GSE portfolios. In particular, Treasury sees value in cultivating programmatic NPL sales at both Enterprises with a focus on market transparency, improving borrower outcomes, and community stabilization.
Similarly, in light of the GSEs’ expertise in transferring credit risk on their new books of business and recognizing that the bulk of credit risk exposure on their guarantee books is tied to their pre-2009 legacy commitments, the potential for transferring credit risk on their legacy guarantee books also merits consideration despite the unique challenges it may entail.
Continuing with the theme of reducing taxpayer exposure to mortgage credit risk, the second area where we see room for progress is in transferring credit risk on new originations. As I said before, the Administration believes that a sustainable housing finance system must have private capital at its core, and in conservatorship, the GSEs have started down a path of transferring greater mortgage credit risk to private market participants.
As you are aware, beginning in 2013, the GSEs have cultivated their respective credit risk transfer programs. These programs and their effectiveness in transferring credit risk have grown substantially in under two years. The GSEs have also engaged in other innovative forms of risk transfers including reinsurance contracts and recourse agreements.
Although the GSEs are directionally on the right path, there is more to be done on this front. Despite issuing 16 credit risk transfer transactions since 2013 referencing $530 billion notional balance, this amounts to approximately 20 percent of the GSEs’ combined guarantees over this time period and roughly 12 percent of the GSEs’ combined books of business. And while recent transactions have made progress by selling first-loss exposure for the first time, these transactions still rely on a defined credit event and fixed severity schedule.
The closer the GSEs can come to transferring the majority of risk to private market participants, the better. Such credit risk transfer activities serve to field-test the role of government as a guarantor of catastrophic risk while private capital bears the risk of the majority of potential losses. We are also sensitive to existing constraints to rapidly expanding credit risk transfer activities today and are supportive of additional, measured efforts to foster this market sustainably over time.
This is why we support the conservator’s efforts to responsibly expand credit risk transfer efforts through continued structural innovation and counterparty strengthening in order to broaden and diversify the investor base and optimize pricing efficiency and stability. Credit risk transfer activities should not be concentrated in any one mechanism or entity. Rather, they should seek to develop a variety of mechanisms and entities in order to improve pricing efficiency and transparency, provide the lowest cost to borrowers, and ultimately, inform the framework of the future housing finance system. We see great value in leveraging the unique investment needs and competencies of the broad spectrum of market participants in shaping a sustainable model for putting first loss mortgage credit risk in private hands.
Finally, under the direction of FHFA, the GSEs have embarked upon a cutting-edge project to develop a Common Securitization Platform (CSP) and a fungible To-Be-Announced, or TBA, contract. We are broadly supportive of these efforts, which in the immediate future will modernize the GSEs’ collective securitization infrastructure and improve the liquidity and efficiency of the market.
However, given the CSP’s joint ownership by the GSEs and scope narrowly focused on their businesses, the near-term CSP initiative would not succeed at separating the industry’s critical securitization infrastructure from the GSEs’ credit risk-taking activities. This separation is necessary to enhance the stability of the housing finance system. Nor will it use its full potential to reshape the broader housing finance landscape by facilitating standardization, transparency, and competition, and serving as a market gateway for both guaranteed and non-guaranteed securities.
This is why we would support opening up the CSP as early as it can be responsibly done to accommodate non-GSE users, which should be reflected not just in the Platform’s functionality but also in its governance structure. Greater transparency, more concrete timelines, broader engagement with private stakeholders, and ultimately, expanded governance of the CSP joint venture to include non-GSE stakeholders are all in the interests of moving towards a more sustainable future housing finance system.
The nation’s housing finance system is too critical to remain in a state of limbo without a clear, legislated vision for the future. However, the activities I outlined today are representative of the progress that can be made without legislation. By pursuing these and other activities that de-risk the Enterprises, we can put the housing finance system on a course aligned with the Administration’s priorities that would promote greater stability for the housing market and broader economy.
Capital
With the recent release of the GSEs’ 2014 fourth quarter earnings, there seems to be increased interest in the subject of GSE capital. But before we discuss this, it is worth taking a step back to review the purpose of the Senior Preferred Stock Purchase Agreements, commonly referred to as the PSPAs. The PSPAs were put in place as both companies were placed into conservatorship. These agreements were established to protect the solvency of the two companies and to allow them to continue to operate. This was necessary to protect financial stability and to ensure the continued flow of mortgage credit. The PSPAs gave market participants confidence in the GSEs’ debt and MBS obligations through which they fund the majority of the mortgage credit in this country. Without this capital support, it is clear that both GSEs would have been insolvent and that mortgage credit would have dried up as a result.
With this as a backdrop, I want to frame for this group how we think about capital at the GSEs while they are in conservatorship and continue to rely on the PSPAs to support their activities.
Currently, the GSEs operate with a minimal amount of capital at each Enterprise. These capital reserve amounts were established in order to provide protection against unexpected losses related to their retained investment portfolios. This capital amount will amortize to zero by 2018 when we would expect the GSEs to have wound down their legacy investment business. And, from Treasury’s standpoint, we would like to see these retained portfolios wound down even faster to further reduce risk.
Despite having only minimal retained capital levels at the GSEs, investors continue to have confidence in their securities due to the ongoing backstop the PSPAs provide each company. The substantial remaining capital support left under the PSPAs gives market participants the confidence to buy 30-year GSE securities on a day-in and day-out basis. This is despite the fact that the companies remain in conservatorship and have minimal capital levels.
However, as a result of the ongoing capital support through the PSPAs, taxpayers remain exposed to potential future losses at the GSEs. Let me remind you, both recapitalization of the GSEs and draws against the existing Treasury backstop due to potential future losses would come at taxpayers’ expense.
Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support through the PSPAs exposes taxpayers to great risk and is irresponsible. As we have said repeatedly, the only way to responsibly end the conservatorship of the GSEs is through legislation that puts in place a sustainable housing finance system with private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns.
One final point for those who advocate a recapitalization of Fannie Mae and Freddie Mac while in conservatorship and subsequent privatization. If in the future the GSEs were to operate as they did prior to conservatorship, the GSEs’ size and significance would certainly attract broad regulatory attention due to the financial stability implications of their possible failure. Given this and the associated economic and regulatory ramifications, simply returning these entities to the way they were before is not practical nor is it a realistic consideration.
Conclusion
In closing, I want to return to the issue of timing and the urgency of enacting housing finance reform legislation. We know from experience that mortgage credit will be broadly accessible until it’s not; that capital markets will be liquid until they’re not. When the next crisis hits, it is unlikely that we will have the benefit of advance warning, and at that point, it will be too late for thoughtful reform. Our options will be limited, our hands will be tied, and we will be destined to relive the mistakes of the past.
Reforming a system as complex and as far-reaching as housing finance in a sensible and sustainable way takes time to get things right and to ensure a smooth transition from the existing system to the new, safer, fairer system. The point I want to make today is that there is an enormous amount of very good work underway to de-risk the enterprises, enhance liquidity, and protect taxpayers in a direction aligned with the Administration’s principles for long-term reform.
Nevertheless, institutionalizing these and other critical reforms in bipartisan legislation is by far the better course. Let’s be prudent; let’s have foresight; let’s find a bipartisan pathway to preventing another GSE bailout, which continuation of the status quo guarantees. We can do this, and we must do this.
http://www.treasury.gov/press-center/press-releases/Pages/jl9987.aspx
Fannie-Freddie Profit Sweep Defended as Treasury Seeks Wind Down
Thursday, March 05, 2015
(Bloomberg) -- The government sweep of profits from Fannie Mae and Freddie Mac was defended by the top Treasury Department housing official, who called again for Congress to replace the U.S.-owned mortgage-finance giants.
Michael Stegman, a senior adviser at Treasury, used his speech Thursday at a Goldman Sachs housing-finance conference in New York to respond to shareholders who have sued to stop the sweep and called for the companies to be freed from U.S. conservatorship.
“Simply returning these entities to the way they were before is not practical nor is it a realistic consideration,” Stegman said in his prepared remarks.
Concerns about whether Fannie Mae and Freddie Mac may need more taxpayer support have mounted as their profits and capital cushions have shrunk in recent quarters. Stegman said that taxpayers would face costs either by allowing them to recapitialize or with new draws from the Treasury. The companies, which have been under U.S. control since they were seized in 2008, got $187.5 billion in bailout funds before they became profitable again.
The financial arrangement that allows the companies to draw on Treasury funds if they require capital is “necessary to protect financial stability and to ensure the continued flow of mortgage credit,” Stegman said.
The agreement requires Fannie Mae and Freddie Mac to gradually reduce their financial cushions until 2018, when they won’t be allowed to hold any capital. Together, they’ve sent the Treasury about $40 billion more than they got in aid.
Provide Liquidity
Fannie Mae and Freddie Mac provide liquidity to the housing market by packaging mortgages into guaranteed bonds. Outside of that core business, they each also have retained asset portfolios of about $400 billion each that they’re under regulatory orders to wind down to $250 billion.
Volatility in those portfolios could cause the companies to require more taxpayer aid, and therefore they should accelerate sales of illiquid assets, Stegman said, calling for more bulk auctions of delinquent loans. Freddie Mac has so far sold about $1 billion in defaulted debt, while Fannie Mae has yet to initiate such sales.
Stegman called for the government-sponsored enterprises to increase transfers of credit risk on new loans to private investors and to explore the step for older loans. They also should open the new securitization platform they’re building to private-label bond issuers, he said.
Regulators alone can’t change the housing-finance system, so Congress has to do it, Stegman said.
“Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support” exposes taxpayers to risk and “is irresponsible,” he said.
To contact the reporter on this story: Clea Benson in Washington at cbenson20@bloomberg.net To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net Gregory Mott, Steve Geimann
http://www.garp.org/risk-news-and-resources/risk-headlines/story.aspx?newsId=129708
Washington Strips New York Fed’s Power
Secret ‘Triangle Document’ gives control of big-bank regulation to committee
By Jon Hilsenra WASHINGTON—The Federal Reserve Bank of New York, once the most feared banking regulator on Wall Street, has lost power in a behind-the-scenes reorganization at the nation’s central bank.
The Fed’s center of regulatory authority is now a little-known committee run by Fed governor Daniel Tarullo, which is calling the shots in oversight of banking titans such as Goldman Sachs Group Inc. and Citigroup Inc.
http://www.wsj.com/articles/washington-strips-new-york-feds-power-1425526210
Washington banished the New York Fed from the big boy regulators club
New York Fed President William C. Dudley.
In a previously unreported shakeup, the Federal Reserve has quietly taken control of Wall Street bank regulation — right out of the hands of the New York Fed, The Wall Street Journal’s Jon Hilsenrath reported.
“This reserve bank doesn’t breathe any more without asking Washington if it can inhale or exhale,” Hilsenrath quoted one person in the banking community as saying.
Initiated back in 2010 and rooted in the Dodd-Frank bank regulation act, the idea of the power shift was to cut down on the number of regulators working on-site at banks, and take a step back — like, all the way to Washington — to gain more perspective, according to Daniel Tarullo, the Fed governor who runs the committee now in charge of bank supervision.
But it’s caused a serious stir with the New York Fed, which has traditionally been responsible for many aspects of Wall Street oversight.
In the years leading up to the financial crisis, the Federal Reserve, not the New York Fed, was responsible for overseeing the firms that caused the most trouble, including Bear Stearns, Fannie Mae, Freddie Mac, AIG, and Lehman.
Since then, Washington has stopped inviting the New York Fed to the high-level regulatory policy meetings it used to attend, Hilsenrath reported.
Another awkward moment arose last year when the Fed failed Citigroup for its stress test, an annual assessment designed to gauge how prepared banks are for market upsets. Meanwhile, the New York Fed had reportedly told Citi not to worry and that it would have more time to get things together.
On that front, there won’t be any confusion this year: stress test results come out later on Thursday, and Citi CEO Michael Corbat is accutely aware of how high the stakes are — he’s widely expected to step down if the bank fails again this year.
http://www.businessinsider.com.au/new-york-fed-not-regulating-wall-street-2015-3
U.S. housing regulator promises update to new liquidity plan
WASHINGTON, March 5 Thu Mar 5, 2015 1:00pm EST
(Reuters) - The top U.S. housing regulator said on Thursday that the Federal Housing Finance Agency (FHFA) has gathered feedback into its Single Security initiative and will offer more details into the structure of the plan in the second quarter of this year.
"While the Single Security remains a multi-year initiative, we believe this update report will be a significant milestone in defining the structure and processes necessary to successfully transition to a Single Security in the future," FHFA Director Mel Watt said in prepared remarks at a Goldman Sachs conference.
The Single Security initiative was launched as a way to improve the overall liquidity of Fannie Mae and Freddie Mac securities, which currently are not interchangeable with one another.
http://www.reuters.com/article/2015/03/05/usa-fanniemae-watt-idUSL1N0W71WM20150305
Remarks by Counselor to the Secretary for Housing Finance Policy Dr. Michael Stegman Before the Goldman Sachs Third Annual Housing Finance Conference
3/5/2015
?
As prepared for delivery
Good morning, and thank you, Carsten, for that kind introduction. It’s a pleasure to be with you today to engage on a very important issue for our country and our economy.
This morning, I want to discuss the state of housing finance reform and the path we see to a more sustainable mortgage finance system that meets President Obama’s principles and creates a housing finance system that will promote stability in the housing market and the broader economy, and therefore, benefits the American people. First, I’d like to briefly explain why Treasury is devoting significant resources to helping market participants create a robust and responsible non-government-guaranteed securitization market and then discuss our thinking about how to move forward on GSE reform.
Private Label Securities Initiative
The Administration believes that private capital should be at the center of the housing finance system. To that end, Treasury has been working with the industry to develop the structural reforms necessary to help bring the private label securities, or PLS, market back, and get investors off the sidelines. A key component of this effort is rebuilding trust among market participants, and to this end, Treasury published the results of an exercise last month that would provide greater transparency around credit rating agency loss expectations for newly originated mortgage collateral. The goal of this exercise and the broader PLS initiative is to improve confidence in post-crisis practices and encourage investors to return to a reformed PLS market.
Treasury views a diverse housing finance system that features multiple execution channels as essential to promoting competition, market efficiency, and consumer choice. We see the development of a healthy and responsible PLS market as an important component of a sustainable housing finance system and a complement to a reformed government-supported channel, an objective I will discuss in the remainder of my speech.
GSE Reform
With that in mind, let me turn my attention to the GSEs. We are now well into the seventh year of Fannie Mae and Freddie Mac’s conservatorship. We cannot forget that the actions taken in the wake of the financial crisis to backstop the GSEs stabilized the housing market, protected the capital markets, and supported the broader economy. But as I have said many times, the status quo is unsustainable. Taxpayers remain at risk, market participants are uncertain about the government’s longer-term footprint in the mortgage market, and mortgage access and pricing decisions are not in the hands of market participants. The American people deserve better.
They deserve an efficient, sustainable, housing finance system that serves borrowers effectively and efficiently without leaving taxpayers on the hook for potential future bailouts. The critical flaws in the legacy system that allowed private shareholders and senior employees of the GSEs to reap substantial profits while leaving taxpayers to shoulder enormous losses cannot be fixed by a regulator or conservator because they are intrinsic to the GSEs’ congressional charters. And these charters can only be changed by law. That is why we continue to believe that comprehensive housing finance reform is the only effective way forward, not narrowly crafted ad-hoc fixes.
We cannot forget about the important progress made in the Senate during the last Congress and hope that the new Congress will afford the opportunity to again advance bipartisan legislation meeting our principles, even if it is too soon to tell what the ultimate prospects will be. The Administration remains ready, willing, and able to work in good faith with members of both parties to complete this important but unfinished piece of financial reform. As memories of the financial crisis fade, we cannot become complacent. The best time to act is when the housing market is well along the path to recovery and credit markets are normalizing, not on the precipice of a new economic shock when there is little time to be thoughtful.
We do recognize the myriad of challenges to achieving a bipartisan legislative consensus. But as I will explain shortly, we believe that significant progress can be, and is being made, prior to legislation, to help move the housing finance system towards a more sustainable future. While this progress is not a substitute for legislative reform, it can, over time, reduce the challenges to achieving a desired legislative outcome that puts in place a durable and fair housing finance system by advancing us down the path of transition.
Progress under Conservatorship
To that end, I’d like to highlight the steps forward that have been made under the conservatorship – progress that needs to be built upon. Important gains have been and continue to be made in de-risking and preparing the Enterprises for transition. The GSEs’ critical housing finance infrastructure and technology – which was allowed to obsolesce in the years preceding the financial crisis – is being renewed and enhanced.
Furthermore, their business practices are being reformed. Between 1995 and 2008, management grew the GSEs’ retained investment portfolios, which are financed at government-subsidized borrowing costs, fourfold to a combined total of $1.6 trillion. Since entering conservatorship, those portfolios have been nearly halved, and they are required to shrink further to less than $500 billion in total by year-end 2018.
In addition to being a major source of GSE earnings, these portfolios remain a significant source of financial volatility and potential taxpayer risk. These portfolios, the pursuit of maximum earnings, and the drive to recapture market share through greater risk-taking left taxpayers holding the bag when the bets went wrong. In conservatorship, these practices have been replaced with a recommitment to more effective risk management, prudent underwriting, more appropriate pricing, and a greater emphasis on sustainable mortgage finance.
The Federal Housing Finance Agency (FHFA), as the independent regulator and conservator of the GSEs, is laying the groundwork for a future housing finance system based upon private capital taking the majority of credit risk in front of a government guarantee with greater taxpayer protections, broader access to credit for responsible borrowers, and improved transparency and efficiency. These measures include, among others, expanding and diversifying risk-taking among private actors, further focusing GSE businesses on meeting the mortgage finance needs of middle class households and those aspiring to join the middle class, and developing a securitization infrastructure that can serve as the backbone for the broader mortgage market over time. All of these initiatives are consistent with the long-term vision of providing secure homeownership opportunities for responsible middle-class families.
After the failure of both GSEs, FHFA’s ability to stand in the shoes of their respective boards and senior management as conservator in order to set appropriate, statutorily-guided priorities and ensure follow-through has been good for the Enterprises and good for the American people. Preserving FHFA’s role in the future housing finance system merits serious consideration.
Administrative Vision
With that history in mind, I want to expand upon our vision for reforms that would transition the GSEs further along a path toward a future housing finance system while they still benefit from Treasury’s capital support. In turn, the progress we make today could serve both as a framework for, and reduce certain challenges associated with, achieving bipartisan legislative reform. Within the context of a continuing backstop, further de-risking the Enterprises is common-sense, prudent policy. Other actions that improve market efficiency and liquidity and develop infrastructure that would promote competition are consistent with the Administration’s interest in a durable and fair housing finance system.
The first of these areas is in the shedding of GSE legacy risk, both in their retained portfolios and their guarantee book. Given the strengthened underwriting practices and high credit quality of their new guarantee book, this legacy risk represents the overwhelming majority of taxpayer risk exposure to the GSEs today. Despite asset sales and natural run-off, their retained portfolios remain substantial at over $400 billion each and still constitute a significant line of business. The size and complexity of the retained portfolios also necessitate active hedging, introducing considerable basis risk and earnings volatility and making the GSEs susceptible to potentially relying on a future draw of PSPA capital support.
In light of the strong demand for mortgage credit risk in the market today and the market success of Freddie Mac’s first nonperforming loan (NPL) sale in July of last year, it would be both feasible and beneficial to taxpayers to responsibly accelerate the reduction of the most illiquid assets in the GSE portfolios. In particular, Treasury sees value in cultivating programmatic NPL sales at both Enterprises with a focus on market transparency, improving borrower outcomes, and community stabilization.
Similarly, in light of the GSEs’ expertise in transferring credit risk on their new books of business and recognizing that the bulk of credit risk exposure on their guarantee books is tied to their pre-2009 legacy commitments, the potential for transferring credit risk on their legacy guarantee books also merits consideration despite the unique challenges it may entail.
Continuing with the theme of reducing taxpayer exposure to mortgage credit risk, the second area where we see room for progress is in transferring credit risk on new originations. As I said before, the Administration believes that a sustainable housing finance system must have private capital at its core, and in conservatorship, the GSEs have started down a path of transferring greater mortgage credit risk to private market participants.
As you are aware, beginning in 2013, the GSEs have cultivated their respective credit risk transfer programs. These programs and their effectiveness in transferring credit risk have grown substantially in under two years. The GSEs have also engaged in other innovative forms of risk transfers including reinsurance contracts and recourse agreements.
Although the GSEs are directionally on the right path, there is more to be done on this front. Despite issuing 16 credit risk transfer transactions since 2013 referencing $530 billion notional balance, this amounts to approximately 20 percent of the GSEs’ combined guarantees over this time period and roughly 12 percent of the GSEs’ combined books of business. And while recent transactions have made progress by selling first-loss exposure for the first time, these transactions still rely on a defined credit event and fixed severity schedule.
The closer the GSEs can come to transferring the majority of risk to private market participants, the better. Such credit risk transfer activities serve to field-test the role of government as a guarantor of catastrophic risk while private capital bears the risk of the majority of potential losses. We are also sensitive to existing constraints to rapidly expanding credit risk transfer activities today and are supportive of additional, measured efforts to foster this market sustainably over time.
This is why we support the conservator’s efforts to responsibly expand credit risk transfer efforts through continued structural innovation and counterparty strengthening in order to broaden and diversify the investor base and optimize pricing efficiency and stability. Credit risk transfer activities should not be concentrated in any one mechanism or entity. Rather, they should seek to develop a variety of mechanisms and entities in order to improve pricing efficiency and transparency, provide the lowest cost to borrowers, and ultimately, inform the framework of the future housing finance system. We see great value in leveraging the unique investment needs and competencies of the broad spectrum of market participants in shaping a sustainable model for putting first loss mortgage credit risk in private hands.
Finally, under the direction of FHFA, the GSEs have embarked upon a cutting-edge project to develop a Common Securitization Platform (CSP) and a fungible To-Be-Announced, or TBA, contract. We are broadly supportive of these efforts, which in the immediate future will modernize the GSEs’ collective securitization infrastructure and improve the liquidity and efficiency of the market.
However, given the CSP’s joint ownership by the GSEs and scope narrowly focused on their businesses, the near-term CSP initiative would not succeed at separating the industry’s critical securitization infrastructure from the GSEs’ credit risk-taking activities. This separation is necessary to enhance the stability of the housing finance system. Nor will it use its full potential to reshape the broader housing finance landscape by facilitating standardization, transparency, and competition, and serving as a market gateway for both guaranteed and non-guaranteed securities.
This is why we would support opening up the CSP as early as it can be responsibly done to accommodate non-GSE users, which should be reflected not just in the Platform’s functionality but also in its governance structure. Greater transparency, more concrete timelines, broader engagement with private stakeholders, and ultimately, expanded governance of the CSP joint venture to include non-GSE stakeholders are all in the interests of moving towards a more sustainable future housing finance system.
The nation’s housing finance system is too critical to remain in a state of limbo without a clear, legislated vision for the future. However, the activities I outlined today are representative of the progress that can be made without legislation. By pursuing these and other activities that de-risk the Enterprises, we can put the housing finance system on a course aligned with the Administration’s priorities that would promote greater stability for the housing market and broader economy.
Capital
With the recent release of the GSEs’ 2014 fourth quarter earnings, there seems to be increased interest in the subject of GSE capital. But before we discuss this, it is worth taking a step back to review the purpose of the Senior Preferred Stock Purchase Agreements, commonly referred to as the PSPAs. The PSPAs were put in place as both companies were placed into conservatorship. These agreements were established to protect the solvency of the two companies and to allow them to continue to operate. This was necessary to protect financial stability and to ensure the continued flow of mortgage credit. The PSPAs gave market participants confidence in the GSEs’ debt and MBS obligations through which they fund the majority of the mortgage credit in this country. Without this capital support, it is clear that both GSEs would have been insolvent and that mortgage credit would have dried up as a result.
With this as a backdrop, I want to frame for this group how we think about capital at the GSEs while they are in conservatorship and continue to rely on the PSPAs to support their activities.
Currently, the GSEs operate with a minimal amount of capital at each Enterprise. These capital reserve amounts were established in order to provide protection against unexpected losses related to their retained investment portfolios. This capital amount will amortize to zero by 2018 when we would expect the GSEs to have wound down their legacy investment business. And, from Treasury’s standpoint, we would like to see these retained portfolios wound down even faster to further reduce risk.
Despite having only minimal retained capital levels at the GSEs, investors continue to have confidence in their securities due to the ongoing backstop the PSPAs provide each company. The substantial remaining capital support left under the PSPAs gives market participants the confidence to buy 30-year GSE securities on a day-in and day-out basis. This is despite the fact that the companies remain in conservatorship and have minimal capital levels.
However, as a result of the ongoing capital support through the PSPAs, taxpayers remain exposed to potential future losses at the GSEs. Let me remind you, both recapitalization of the GSEs and draws against the existing Treasury backstop due to potential future losses would come at taxpayers’ expense.
Allowing the GSEs to exit conservatorship within the existing framework that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support through the PSPAs exposes taxpayers to great risk and is irresponsible. As we have said repeatedly, the only way to responsibly end the conservatorship of the GSEs is through legislation that puts in place a sustainable housing finance system with private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns.
One final point for those who advocate a recapitalization of Fannie Mae and Freddie Mac while in conservatorship and subsequent privatization. If in the future the GSEs were to operate as they did prior to conservatorship, the GSEs’ size and significance would certainly attract broad regulatory attention due to the financial stability implications of their possible failure. Given this and the associated economic and regulatory ramifications, simply returning these entities to the way they were before is not practical nor is it a realistic consideration.
Conclusion
In closing, I want to return to the issue of timing and the urgency of enacting housing finance reform legislation. We know from experience that mortgage credit will be broadly accessible until it’s not; that capital markets will be liquid until they’re not. When the next crisis hits, it is unlikely that we will have the benefit of advance warning, and at that point, it will be too late for thoughtful reform. Our options will be limited, our hands will be tied, and we will be destined to relive the mistakes of the past.
Reforming a system as complex and as far-reaching as housing finance in a sensible and sustainable way takes time to get things right and to ensure a smooth transition from the existing system to the new, safer, fairer system. The point I want to make today is that there is an enormous amount of very good work underway to de-risk the enterprises, enhance liquidity, and protect taxpayers in a direction aligned with the Administration’s principles for long-term reform.
Nevertheless, institutionalizing these and other critical reforms in bipartisan legislation is by far the better course. Let’s be prudent; let’s have foresight; let’s find a bipartisan pathway to preventing another GSE bailout, which continuation of the status quo guarantees. We can do this, and we must do this.
http://www.treasury.gov/press-center/press-releases/Pages/jl9987.aspx
Ok. I have been asking her out to dinner. I think she is just playing hard to get.
Home » Housing’s critical problems are “intrinsic to the GSEs’ charters”
Private capital is the cornerstone of the housing reform movement, as the U.S. Treasury and other housing regulators push for more reform to ensure that the financial crisis will never occur again, at least not at the same level.
Michael Stegman, counselor to the secretary for housing finance policy with the Treasury, said at the Goldman Sachs (GS) Housing Finance Conference Thursday morning, that the current status quo is unsustainable and taxpayers are still on the hook.
“The critical flaws in the legacy system that allowed private shareholders and senior employees of the GSEs to reap substantial profits while leaving taxpayers to shoulder enormous losses cannot be fixed by a regulator or conservator because they are intrinsic to the GSEs’ congressional charters,” Stegman said.
“And these charters can only be changed by law. That is why we continue to believe that comprehensive housing finance reform is the only effective way forward, not narrowly crafted ad-hoc fixes,” he added.
Since Fannie Mae and Freddie Mac went into conservatorship, their investment portfolios have been nearly halved, and they are required to shrink further to less than $500 billion in total by year-end 2018.
In order to get to this point, Stegman explained that the Federal Housing Finance Agency is laying the groundwork for a future housing finance system based upon private capital taking the majority of credit risk in front of a government guarantee with greater taxpayer protections, broader access to credit for responsible borrowers and improved transparency and efficiency.
While there is a lot of debate over the future of the government-sponsored enterprises, Stegman said that their reform would not be wise or feasible within the existing frameworks that includes their flawed charters, conflicting missions, and virtual monopolistic access to a government support.
“As we have said repeatedly, the only way to responsibly end the conservatorship of the GSEs is through legislation that puts in place a sustainable housing finance system with private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns,” said Stegman.
On the side of recapitalization of Fannie and Freddie while in in conservatorship and subsequent privatization, Stegman argued that if in the future the GSEs were to operate as they did prior to conservatorship, the GSEs’ size and significance would certainly attract broad regulatory attention due to the financial stability implications of their possible failure.
“Given this and the associated economic and regulatory ramifications, simply returning these entities to the way they were before is not practical nor is it a realistic consideration,” he said.
http://www.housingwire.com/articles/33156-housings-critical-problems-are-intrinsic-to-the-gses-charters
Breaking Down The 2015 Fed Stress Test Of Big Banks
March is the month for the annual Fed stress test for the biggest banks
Posted By: Clayton BrownePosted date: March 05, 2015 08:16:35 AMIn: BusinessNo Comments
It’s that time of the year again. That’s right, it’s March, time for the Federal Reserve’s annual Comprehensive Capital Analysis and Review of major financial institutions. Research firm Sterne Agee published an Industry Report on February 35th focusing on the upcoming Fed stress test and what it means to the banks involved.
SA analysts Terry McEvoy and Austin Nicholas give an overview of the Fed stress test process and offer their perspective on selected names in their big bank coverage universe. “With the press already reporting that both Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DB) and Santander will likely fail the stress test we feel better about the prospects of all the others passing. If one or two other banks were to fail, it could be because of concentration issues…”
http://www.valuewalk.com/2015/03/fed-stress-test-of-big-banks/
Morning Scan: NY Fed Loses Authority Over Big Banks; The Shadow Banking Threat
by Sarah Todd
MAR 5, 2015 8:24am ET
Receiving Wide Coverage ... Blast from the Fed's Past: Newly released transcripts from the Federal Reserve's 2009 policy meetings offer fresh insight in the mindsets of central bank officials during the rocky aftermath of the financial crisis. The New York Times' Neil Irwin condemns the Fed for worrying so much about the consequences of their actions that they hesitated to adopt stronger measures at the time. "By 2009 virtually the entire committee had a clear understanding…
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http://www.americanbanker.com/bankthink/morning-scan-ny-fed-loses-authority-over-big-banks-shadow-banking-threat-1073113-1.html
Ok. In any case it afforded me the opportunity for a morning vent on uncle Sam. thanks
Assuming here that it was meant as "rushing process". It seems that govt. lawyers were complaining that they are now rushing the process to produce documents after they chose not to prepare the documents when they had plenty of time to do so. Or they have the documents ready but are still continuing to stall. They were counting on the stay order to be granted. Since it was not the govt. lawyers will continue to drag their feet to the point that the judge may threaten them with some action. I don't know what that action would be.
That is the best argument that govt. lawyers had and Judge (Judy) Sweeny was having none of it. She is aware that it is all a stall tactic for the treasury to continue to plunder FnF as long as possible.
So am I on track?
Because as long as they are making money and the third amendment is in place FnF are reducing the budget deficit. Legality is irrelevant for the government right now. The court system is in place and the treasury will continue to plunder FnF profits until they are forced to stop. And this is why, there are no repercussions if FnF are proven correct in court. We may win and even be restored and be compensated for an illegal taking but nobody in the government responsible for the current FnF conditions will ever be held accountable in any way. Just like the illegal actions of the banks passing off bad loans. There was never any not even one criminal conviction for the criminal activity. The bank executives even kept their huge bonuses. So...vent...blah...blah...vent. Why would the government release FnF from conservatorship until they are forced?
Bove/Gaspirino I know that I am more informed about the different facets of the FnF arguments than either of these two guys. I know that it is because I have stock in FnF and I have done a lot of research and learned a bunch from individuals on Ihub. That being said I am sure there are several individuals on the FnF boards that could run circles around both of these guys. There were a lot of misstated facts from both of them in that short segment. I am sure you can catch it soon somewhere on the web so I am not going to make this a long post. I will only say that it is kind of funny that what pissed me off more than anything else while I was watching that circle **** is that stupid cow Liz Clamen saying " But the federal government needs the money "
Ackman, Loeb, Einhorn, Recover, With Strong February Returns
Bill Ackman's Pershing Square outperformed David Einhorn's Greenlight Capital and Dan Loeb's Third Point in January
Posted By: Michelle JonesPosted date: March 02, 2015 02:08:47 PMIn: Top StoriesNo Comments
The latest returns statements for David Einhorn’s Greenlight Capital, Bill Ackman’s Pershing Square Capital Management and Dan Loeb’s Third Point are in. Ackman managed a small gain during January, while Einhorn’s and Loeb’s firms each saw their investments decline during the month. All three firms posted strong gains for the month of February, however, recovering from January’s stumble. Copies of the three firms’ returns statements were shared with ValueWalk.
Herbalife Bill Ackman speaking
(C) ValueWalk
Update on Einhorn’s Greenlight Capital
Greenlight’s return statement shows a healthy 3.8% net return for the month of February. However, January wasn’t nearly as good for Einhorn, as the year to date gain for his firm is 0.9% through Feb. 28.
As of the end of February, Greenlight’s biggest long positions were Apple Inc. (NASDAQ:AAPL), Consol Energy, gold, Micron Technology, Resona Holdings and Sunedison. The firm reported that its portfolio consisted of about 109% long positions and 78% short positions.
Update on Loeb’s Third Point
Third Point’s Jan. 31 statement indicates a 2.3% decline in January. Loeb did outperform the S&P 500 during the month, however, as the index declined 3%.The firm states that its long exposure was 71.8%, while its short exposure was -18.1%. The net exposure was 53.7% for the month of January.
Third Point lost 3.2% on its long positions but gained 0.2% on its short positions. The net profit and loss was -3% for January. The firm’s top 10 long positions were 38% of its portfolio, while its top 10 short positions were 12%.
Loeb’s firm more than recovered January’s losses in February, however, gaining 4.8% during the month.
Update on Ackman’s Pershing Square
Pershing Square reported a gross gain of 0.8% and net gain of 0.6% during the month of January. The firm had 12 positions that were greater than 0.5%, 10 of which were longs and two of which were shorts. Through the 24th of February, Pershing gained 5.6%.
We know that one of Ackman’s two short positions is Herbalife Ltd. (NYSE:HLF), has he has been selling shares of that company short since late in 2012. Ackman is not disclosing his other short position, although there’s been plenty of debate about what it is. ValueWalk believes that, based on the math, that other short position is NRG, although sanother strong possibility is that the other short is Actavis plc (NYSE:ACT).
http://www.valuewalk.com/2015/03/ackman-letter-feb-2015/
a few hours old Federal National Mortgage AssctnFnni Me (OTCBB:FNMA) Making Moves
By Amy Murphy on March 3, 2015 Micro Cap Insider, Small Caps
Federal National Mortgage AssctnFnni Me (OTCBB:FNMA) continues to move higher on excellent volume as money managers buy up the float on speculation that ex AIG Chief Hank Greenberg will win his case against the federal government over the legality of the financial-crisis bailout of insurer American International Group.
Word is that if Greenberg wins this will open up the door for the long suffering FnF investors, after all if Greenberg can prove the government illegally diluted his stake in AIG, why can’t shareholders of FnF make the same case? The $188 billion bailout was repaid long ago.
FNMA made a spectacular run over the past 2 years from pennies to a high of $6.35. The run collapsed when Judge Royce Lamberth ruled against the Billionaires that includes the likes of iconic Carl Icahn, Bruce Berkowitz, John Paulson, David Tepper, and Bill Ackman claimed the government acted illegally by making FnF pay them all of their massive profits in the form of dividends; the so-called sweep amendment.
Fannie Mae (OTC: FNMA) operates as a government-sponsored enterprise (GSE). The Company conducts business in the U.S. residential mortgage market and the global securities market. It supports market liquidity by securitizing mortgage loans, which means it places loans in a trust and Fannie Mae mortgage-backed securities backed by the mortgage loans are then issued.
Fannie Mae is the largest backer of 30-year fixed-rate mortgages in the Country. FNMA purchases and guarantees mortgages through the secondary mortgage market and pools them to form mortgage-backed securities (MBS). Institutions including insurance companies, pension funds and investment banks purchase its MBS.
Fannie Mae is one of two of the largest purchasers of mortgages on the secondary market. The other is the Federal Home Loan Mortgage Corp., or Freddie Mac. Both are government-sponsored enterprises (GSEs).
Back in 2008 at the height of the credit crisis, FnF were bailed out to the tune of $187.4 Billion and taken over by the federal government. The common stock which was slated to get nothing was delisted to the OTCBB where it initially began trading for $0.30 per share.
Then something really unexpected happened; Fannie Mae returned to profitability and has been hugely profitable now for the last 10 quarters. In the first and second quarters of 2014 the Company earned $5.3 billion and $3.7 billion in net income, respectively.
http://www.microcapdaily.com/federal-national-mortgage-assctnfnni-me-otcbbfnma-making-moves/19235/
Analysts: Mortgage Market Can Handle Twice As Much Default Risk
Author: Brian Honea March 2, 2015 0
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Urban Institute Housing Finance Policy Center Default RiskThe mortgage market could have taken twice the default risk during the first three quarters of 2014 and remained well within the high standards set from 2001 to 2003, according to data released by the Urban Institute on Monday.
An analysis of the Housing Finance Policy Center's Credit Availability Index (HCAI) by Wei Li and Laurie Goodman of the Urban Institute's Housing Finance Policy Center revealed that there was no change in the market's post-crisis overcorrection during the first three quarters of 2014. Rather, the study showed a reluctance on the part of lenders to accept any real borrower risk and a continued absence of loans with risky terms, according to the study.
The HCAI was first introduced by the Housing Finance Policy Center in December to measure the amount of default risk the mortgage market takes on at origination for owner-occupied purchase loans and how much of the risk is due to either loan type or credit risk on the part of the borrower. Default risk is defined as the likelihood that a mortgage loan will go 90 days or more delinquent, with the understanding that not all loans that go 90 days delinquent will end up in foreclosure or liquidation.
The latest HCAI analysis of the first three quarters of 2014 showed that 5 percent of all mortgages originated during that period were likely to default under conditions considered over all economic scenarios, while 6.4 percent of loans originated between 2010 and 2013 were likely to default when placed under the same economic conditions. The lower probability for default for loans originated in 2014 compared to those originated from 2010 to 2013 indicates a tighter credit box in 2014 compared to the three years prior.
Compared with loans originated during 2001 and 2003, which was a time of balanced credit access and default risk, mortgage loans had a default probability of 12.4 percent under similar economic conditions that measured default probability for loans originated in 2014 and 2010 to 2013. When considering just borrower risk, the default likelihood for loans originated to 2001 to 2003 fell to 9.1 percent, while 3.4 percent of the default risk for loans during that time was attributable to risky products.
Li and Goodman concluded that due to the complete absence of risky products in today's mortgage market, doubling the default risk on loans originated in 2014 (5 percent) would still put risk well within the cautious 2001 to 2003 standards.
http://dsnews.com/news/03-02-2015/analysts-mortgage-market-can-handle-twice-much-default-risk
Fannie Mae: Mortgage Serious Delinquency rate declined in January, Lowest since September 2008
By : MrTopStep March 2, 2015 at 3:14 pm
Fannie Mae reported today that the Single-Family Serious Delinquency rate declined slightly in January to 1.86% from 1.89% in December. The serious delinquency rate is down from 2.33% in January 2014, and this is the lowest level since September 2008.
The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.
Last week, Freddie Mac reported that the Single-Family serious delinquency rate was declined in January to 1.86%. Freddie’s rate is down from 2.34% in January 2014, and is at the lowest level since December 2008. Freddie’s serious delinquency rate peaked in February 2010 at 4.20%.
Note: These are mortgage loans that are “three monthly payments or more past due or in foreclosure”.
Fannie Freddie Seriously Delinquent RateClick on graph for larger image
The Fannie Mae serious delinquency rate has fallen 0.47 percentage points over the last year – the pace of improvement has slowed – and at that pace the serious delinquency rate will be under 1% in late 2016.
The “normal” serious delinquency rate is under 1%, so maybe serious delinquencies will be close to normal at the end of 2016. This elevated delinquency rate is mostly related to older loans – the lenders are still working through the backlog, especially in judicial foreclosure states like Florida.
http://redliontrader.com/fannie-mae-mortgage-serious-delinquency-rate-declined-in-january-lowest-since-september-2008-2/
Benmosche former ceo AIG announced dead. Cancer. Credited for AIG repayment to gov.
Well stated. I agree and I am happy that I was able to help you get that off your chest. Now get your blood pressure back under control. LOL but yes it is serious and frustrating and worrisome and now I am getting worked up again.
So this is one reason FnF are hated to this day by elected representatives. FnF did what was asked and then would't stop and then pushed back. Congress got revenge. CONSERVATORSHIP ! Heads on the chopping block ! Plunder of FnF !
Whenever competitors asked Congress to rein in the company, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”
This is an old article. 2008 but interesting
Pressured to Take More Risk, Fannie Reached Tipping Point
David Scull/Bloomberg News
“The market was changing, and it’s our job to buy loans, so we had to change as well.” -Daniel H. Mudd, former chief executive of Fannie Mae, the government-chartered mortgage
By CHARLES DUHIGG
Published: October 4, 2008
“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.“— Daniel H. Mudd, former chief executive, Fannie Mae
The Reckoning
Inflating the Bubble
THE BUILDERS By 2000, chief executives like Franklin D. Raines, above, and the chief financial officer J. Timothy Howard had greatly expanded Fannie Mae.
Ken Cedeno/Bloomberg News
J. Timothy Howard.
When the mortgage giant Fannie Mae recruited Daniel H. Mudd, he told a friend he wanted to work for an altruistic business. Already a decorated marine and a successful executive, he wanted to be a role model to his four children — just as his father, the television journalist Roger Mudd, had been to him.
Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.
But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.
So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.
For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy.
Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.
Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.
“We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”
Last month, the White House was forced to orchestrate a $200 billion rescue of Fannie and its corporate cousin, Freddie Mac. On Sept. 26, the companies disclosed that federal prosecutors and the Securities and Exchange Commission were investigating potential accounting and governance problems.
Mr. Mudd said in an interview that he responded as best he could given the company’s challenges, and worked to balance risks prudently.
“Fannie Mae faced the danger that the market would pass us by,” he said. “We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”
Dealing With Risk
When Mr. Mudd arrived at Fannie eight years ago, it was beginning a dramatic expansion that, at its peak, had it buying 40 percent of all domestic mortgages.
Just two decades earlier, Fannie had been on the brink of bankruptcy. But chief executives like Franklin D. Raines and the chief financial officer J. Timothy Howard built it into a financial juggernaut by aiming at new markets.
Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations.
So Fannie constructed a vast network of computer programs and mathematical formulas that analyzed its millions of daily transactions and ranked borrowers according to their risk.
Those computer programs seemingly turned Fannie into a divining rod, capable of separating pools of similar-seeming borrowers into safe and risky bets. The riskier the loan, the more Fannie charged to handle it. In theory, those high fees would offset any losses.
With that self-assurance, the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010.
All this helped supercharge Fannie’s stock price and rewarded top executives with tens of millions of dollars. Mr. Raines received about $90 million between 1998 and 2004, while Mr. Howard was paid about $30.8 million, according to regulators. Mr. Mudd collected more than $10 million in his first four years at Fannie.
Whenever competitors asked Congress to rein in the company, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”
The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks.
Between 2001 and 2004, the overall subprime mortgage market — loans to the riskiest borrowers — grew from $160 billion to $540 billion, according to Inside Mortgage Finance, a trade publication. Communities were inundated with billboards and fliers from subprime companies offering to help almost anyone buy a home.
Within a few years of Mr. Mudd’s arrival, Fannie was the most powerful mortgage company on earth.
Then it began to crumble.
Regulators, spurred by the revelation of a wide-ranging accounting fraud at Freddie, began scrutinizing Fannie’s books. In 2004 they accused Fannie of fraudulently concealing expenses to make its profits look bigger.
Mr. Howard and Mr. Raines resigned. Mr. Mudd was quickly promoted to the top spot.
But the company he inherited was becoming a shadow of its former self.
‘You Need Us’
Shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.
But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans.
Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.
“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.
“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”
Then Mr. Mozilo offered everyone a breath mint.
Investors were also pressuring Mr. Mudd to take greater risks.
On one occasion, a hedge fund manager telephoned a senior Fannie executive to complain that the company was not taking enough gambles in chasing profits.
“Are you stupid or blind?” the investor roared, according to someone who heard the call, but requested anonymity. “Your job is to make me money!”
Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.
“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”
But Fannie’s computer systems could not fully analyze many of the risky loans that customers, investors and lawmakers wanted Mr. Mudd to buy. Many of them — like balloon-rate mortgages or mortgages that did not require paperwork — were so new that dangerous bets could not be identified, according to company executives.
Even so, Fannie began buying huge numbers of riskier loans.
In one meeting, according to two people present, Mr. Mudd told employees to “get aggressive on risk-taking, or get out of the company.”
In the interview, Mr. Mudd said he did not recall that conversation and that he always stressed taking only prudent risks.
Employees, however, say they got a different message.
“Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little,” said a former senior Fannie executive. “But our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”
Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled. As the market for risky loans soared to $1 trillion, Fannie expanded in white-hot real estate areas like California and Florida.
For two years, Mr. Mudd operated without a permanent chief risk officer to guard against unhealthy hazards. When Enrico Dallavecchia was hired for that position in 2006, he told Mr. Mudd that the company should be charging more to handle risky loans.
In the following months to come, Mr. Dallavecchia warned that some markets were becoming overheated and argued that a housing bubble had formed, according to a person with knowledge of the conversations. But many of the warnings were rebuffed.
Mr. Mudd told Mr. Dallavecchia that the market, shareholders and Congress all thought the companies should be taking more risks, not fewer, according to a person who observed the conversation. “Who am I supposed to fight with first?” Mr. Mudd asked.
In the interview, Mr. Mudd said he never made those comments. Mr. Dallavecchia was among those whom Mr. Mudd forced out of the company during a reorganization in August.
Mr. Mudd added that it was almost impossible during most of his tenure to see trouble on the horizon, because Fannie interacts with lenders rather than borrowers, which creates a delay in recognizing market conditions.
He said Fannie sought to balance market demands prudently against internal standards, that executives always sought to avoid unwise risks, and that Fannie bought far fewer troublesome loans than many other financial institutions. Mr. Mudd said he heeded many warnings from his executives and that Fannie refused to buy many risky loans, regardless of outside pressures .
“You’re dealing with massive amounts of information that flow in over months,” he said. “You almost never have an ‘Oh, my God’ moment. Even now, most of the loans we bought are doing fine.”
But, of course, that moment of truth did arrive. In the middle of last year it became clear that millions of borrowers would stop paying their mortgages. For Fannie, this raised the terrifying prospect of paying billions of dollars to honor its guarantees.
Sustained by Government
Had Fannie been a private entity, its comeuppance might have happened a year ago. But the White House, Wall Street and Capitol Hill were more concerned about the trillions of dollars in other loans that were poisoning financial institutions and banks.
Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and hold those troubled debts, hoping that removing them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply.
The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move.
“I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy,” the chairman of the House Financial Services Committee, Barney Frank, Democrat of Massachusetts, said at the time. “That’s why I’ve supported them all these years — so that they can help at a time like this.”
But earlier this year, Treasury Secretary Henry M. Paulson Jr. grew concerned about Fannie’s and Freddie’s stability. He sent a deputy, Robert K. Steel, a former colleague from his time at Goldman Sachs, to speak with Mr. Mudd and his counterpart at Freddie.
Mr. Steel’s orders, according to several people, were to get commitments from the companies to raise more money as a cushion against all the new loans. But when he met with the firms, Mr. Steel made few demands and seemed unfamiliar with Fannie’s and Freddie’s operations, according to someone who attended the discussions.
Rather than getting firm commitments, Mr. Steel struck handshake deals without deadlines.
That misstep would become obvious over the coming months. Although Fannie raised $7.4 billion, Freddie never raised any additional money.
Mr. Steel, who left the Treasury Department over the summer to head Wachovia bank, disputed that he had failed in his handling of the companies, and said he was proud of his work .
As the housing crisis worsened, Fannie and Freddie announced larger losses, and shares continued falling.
In July, Mr. Paulson asked Congress for authority to take over Fannie and Freddie, though he said he hoped never to use it. “If you’ve got a bazooka and people know you’ve got it, you may not have to take it out,” he told Congress.
Mr. Mudd called Treasury weekly. He offered to resign, to replace his board, to sell stock, and to raise debt. “We’ll sign in blood anything you want,” he told a Treasury official, according to someone with knowledge of the conversations.
But, according to that person, Mr. Mudd told Treasury that those options would work only if government officials publicly clarified whether they intended to take over Fannie. Otherwise, potential investors would refuse to buy the stock for fear of being wiped out.
“There were other options on the table short of a takeover,” Mr. Mudd said. But as long as Treasury refused to disclose its goals, it was impossible for the company to act, according to people close to Fannie.
Then, last month, Mr. Mudd was instructed to report to Mr. Lockhart’s office. Mr. Paulson told Mr. Mudd that he could either agree to a takeover or have one forced upon him.
“This is the right thing to do for the economy,” Mr. Paulson said, according to two people with knowledge of the talks. “We can’t take any more risks.”
Freddie was given the same message. Less than 48 hours later, Mr. Lockhart and Mr. Paulson ended Fannie and Freddie’s independence, with up to $200 billion in taxpayer money to replenish the companies’ coffers.
The move failed to stanch a spreading panic in the financial world. In fact, some analysts say, the takeover accelerated the hysteria by signaling that no company, no matter how large, was strong enough to withstand the losses stemming from troubled loans.
Within weeks, Lehman Brothers was forced to declare bankruptcy, Merrill Lynch was pushed into the arms of Bank of America, and the government stepped in to bail out the insurance giant the American International Group.
Today, Mr. Paulson is scrambling to carry out a $700 billion plan to bail out the financial sector, while Mr. Lockhart effectively runs Fannie and Freddie.
Mr. Raines and Mr. Howard, who kept most of their millions, are living well. Mr. Raines has improved his golf game. Mr. Howard divides his time between large homes outside Washington and Cancun, Mexico, where his staff is learning how to cook American meals.
But Mr. Mudd, who lost millions of dollars as the company’s stock declined and had his severance revoked after the company was seized, often travels to New York for job interviews. He recalled that one of his sons recently asked him why he had been fired.
“Sometimes things don’t work out, no matter how hard you try,” he replied.
http://www.nytimes.com/2008/10/05/business/05fannie.html?pagewanted=all
Kill Off Fannie Mae, Freddie Mac and You Kill the 30-Year Mortgage as Well Brian O'Connell Feb 27, 2015 6:30 AM EST
NEW YORK (MainStreet) — The rumor mill is chugging along over the possibility the federal government could shutter Fannie Mae and Freddie Mac, albeit on a slow, gradual basis.
Earnings at both government-run enterprises have been anemic, and economists and mortgage industry professionals are talking openly about a future without them.
That could change the consumer mortgage landscape dramatically, says bank analyst Dick Bove, an analyst who tracks the mortgage market.
"Is the United States ready to take a shock to housing prices because we're getting rid of 30-year fixed rate mortgages?" Bove asks. He told CNBC that banking executives have told him privately they cannot make money on 30-year fixed-rate home loans anymore due to new rules on capital reserves and securitizing mortgages, and he says the U.S. Treasury Department is aiming to phase out Fannie Mae and Freddie Mac by 2018.
That would take two of the biggest buyers of 30-year mortgages out of the equation. Bove says banks are eager to step in to offer consumer residential mortgages with significantly shorter durations — between five and 10 years — but lending experts (many of whom agree with Bove) say that would drive up the costs of buying a home, driving the American Dream even further out of reach of lower- and middle-class consumers.
Jeff Taylor, managing director at Digital Risk, an independent mortgage processor that handles more than $8 billion per month in mortgages, agrees with Bove and says the end of the GSEs would lead to shorter mortgages and more expensive mortgages. That said, Taylor finds it hard to believe banks would want to be holding a note for 30 years in this rate environment. "Thirty-year mortgages are harder to hedge against," he says. "In a different rate environment, maybe the scenario would be different, but for now there would be no incentive to keep offering 30-years as an option."
http://www.mainstreet.com/article/kill-off-fannie-mae-freddie-mac-and-you-kill-the-30-year-mortgage-as-well
Morgan Stanley Settles for $2.6 Billion – but What Exactly Did They Do?
The settlement is another one in a long string of regulatory steps taken against the company over similar allegations. Forex Magnates traces back the chronology of negligence by due diligence senior officers.
Feb262015
Morgan Stanley has agreed to pay a $2.6 billion settlement to the US Department of Justice over the firm’s creation and sale of residential mortgage-backed securities, leading to the 2008 financial crisis.
The settlement is another one in a long string of regulatory steps taken against the company over similar allegations. Last year the firm settled with the Federal Housing Finance Agency for $1.25 billion over accusations that the bank sold faulty mortgage-backed securities to Fannie Mae and Freddie Mac.
The company reached a similar settlement in July for $275 million with the Securities and Exchange Commission over accusations that the company understated the number of delinquent loans backing subprime mortgage securities.
But what exactly did the bank do to warrant these enormous settlements? Highlights of internal documents revealed in legal proceedings show a frightening level of negligence.
For instance, one due-diligence email read, “The real issue is that the loan requests do not make sense.” It cited an example of one borrower listing his salary as $12,ooo a month while working at a tarot reading parlour. Another email pointed out that “deteriorating appraisal quality is very flagrant.”
Not only did higher-ups pay no heed to these concerns, the situation was made light of by Pamela Barrow, top due diligence executive. Some choice quotes of hers mocking home buyers include, “First payment defaulting straw buyin’ house-swappin first time wanna be home buyers,” and, “We should call all their mommas.” She continues, “Betcha that would get some of them good old boys to pay that house bill.”
In direct response to an email from a due-diligence officer, Bernard Zahn, where he voiced concern that the problem was very widespread, she wrote, “Good find on the fraud :)” but continued with a frank, “Unfortunately, I don’t think we will be able to utilize you or any other third party individual in the valuation department any longer.”
To paint readers a clearer picture we’ve put together a timeline of Morgan Stanley’s role in the years leading to the subprime mortgage crisis.
For reference, New Century Financial Corporation was a real estate investment trust that originated mortgage loans in the United States. As of January 1, 2007, New Century was the second-largest subprime mortgage lender in the US.
JP Morgan timeline-01
This marks the fourth time over the past five years that the company has been forced to reduce earnings in the weeks following an earnings announcement as the company has now cut 2014 income from continuing operations by $2.7 billion due to the increase in legal reserves related to mortgages.
http://forexmagnates.com/morgan-stanley-settles-for-2-6-billion-but-what-exactly-did-they-do/
I did like that part although I think she is playing nice with the defense by giving more time to cough up documents. Maybe she is playing it safe. Less to contest on appeal?
U.S. Home Prices Beat Estimates With 0.8% December Gain by Prashant Gopal 8:31 AM CST February 26, 2015
(Bloomberg) -- U.S. home prices rose more than economists estimated in December as job growth and tight supply drove demand.
Prices climbed 0.8 percent on a seasonally adjusted basis from November, the Federal Housing Finance Agency said in a report from Washington. The average economist estimate was for a 0.5 percent increase, according to data compiled by Bloomberg. Prices advanced 1.4 percent in the fourth quarter from the previous three-month period.
The housing recovery is benefiting from a strengthening job market. Payrolls advanced by 257,000 jump in January, capping the biggest three-month gain in 17 years, according to Labor Department figures. The unemployment rate rose to 5.7 percent from 5.6 percent, the lowest level since 2008, as more Americans looked for work.
The FHFA index measures transactions for single-family properties financed with mortgages owned or securitized by Fannie Mae and Freddie Mac. Another home-price gauge, the S&P/Case-Shiller index of 20 cities, showed this week that values in December climbed 0.9 percent from the previous month and 4.5 percent year over year.
http://www.bloomberg.com/news/articles/2015-02-26/u-s-home-prices-beat-estimates-with-0-8-december-gain
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