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It was posted a few times. Navy posted it last.
'Middle Ground' GSE Reform Proposal Would Keep Fannie, Freddie Alive
in From The Orb > Required Reading
by Patrick Barnard Wednesday July 02 2014
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A trio of Democratic congressmen who serve on the House Committee on Financial Services next week will formally introduce a "middle ground" housing finance reform proposal that uses private sector market forces to appropriately price risk while putting the scale and security of a government guarantee behind the program.
The alternative plan by Reps. John K. Delaney, D-Md., John Carney, D-Del., and Jim Himes, D-Conn., a draft of which was unveiled in January, would establish a new government reinsurance agency that would back all qualified mortgages, but at the same time, all issuers would be required to maintain a 5% private capital reserve to cover first losses.
As per the draft proposal, after securing the minimum level of private capital, issuers would be able to securitize their mortgages through Ginnie Mae. Separately, private insurers would be invited to contract with Ginnie Mae and share the reinsurance pricing and risk, with the private insurer assuming a minimum 10% on a pari passu basis. In addition, the bill would return government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac back to the private market - thus ending the government's "monopoly" in the mortgage business - however, the companies would no longer write guarantees and would only serve as issuers.
"We're going to introduce [the final bill] the week after the Fourth of July holiday," Rep. Delaney said during an interview with MortgageOrb, adding that the congressmen are currently working hard to revise the bill's text and that it should have a name and number by then. (However, Rep. Delaney's communications director later told MortgageOrb that the timing of the introduction of the bill was still somewhat uncertain.)
Currently, there are several proposals in the House and Senate - each prescribing a slightly different approach to the challenge of housing finance reform. Arguably, the most popular of these is the amended Housing Finance Reform and Taxpayer Protection Act of 2014, introduced by Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, which builds on last year's proposal by Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va. Then there is the Protecting American Taxpayers and Homeowners (PATH) Act of 2013, introduced by Financial Services Committee Chairman Jeb Hensarling, R-Texas. And then there is the Housing Opportunities Move the Economy (HOME) Forward Act, also known as the Waters draft bill, introduced earlier this year by Rep. Maxine Waters, D-Calif.
Should the Delaney-Carney-Himes proposal be adopted, it would likely need to be reconciled with one or more of these other proposals - not a simple task considering that each prescribes a slightly different structure for what is a very complicated market.
Rep. Delaney said his proposal is a "good middle-ground solution" that addresses many of the flaws in the other proposals. What's more, he said he thinks his bill has a better chance of gaining bipartisan support and making it out of the Republican-controlled House.
"I think we had a successful markup of the Senate version [of the Johnson-Crapo bill]," Delaney said, adding that the PATH Act also made it out of committee in July of last year.
"I think the problem is that, as usual, we're stuck in a bit of an ideological track, which is the House version [PATH Act] wants the government out - and the Senate version [Johnson-Crapo] has issues that anger people on both sides - mainly that the government guarantee won't be priced appropriately. People see that structure and see shadows of Fannie and Freddie.
"That's why I think our proposal has a lot of merit - because we realistically allow for a government guarantee to stay in housing, but we insist on it being priced in the private market," Delaney added. "I think the housing debate is looking for a compromise - and I think our bill could be that compromise - not so much in terms of watering down the two other bills and mashing them together, but, rather, a new and innovative approach that appeals to each side's principles."
When asked whether or not the introduction of this bill makes the task of housing finance reform more difficult - simply because there are so many proposals on the table - Delaney says he and his colleagues are mostly concerned with coming up with an alternative proposal that will gain Republican support, as opposed to how the bills will be reconciled.
"I think strategically we're focused on working with our Republican colleagues to bring something out of the House," he said. "I think [Committee] Chairman [Jeb] Hensarling deserves a lot of credit for having the first proposal fully baked and passed by committee, but I think there is a fundamental issue with that proposal which will make it harder for it to move out of the House - which is that it removes the government guarantee. What we're hoping is that the private market discipline that is embedded in how we introduce the guarantee will appeal to both the chairman and his conservative colleagues - that this is an appropriate way for the government to be engaged in housing."
Regardless of which proposal is adopted, one of the main concerns running through the mortgage industry is that the transition to a new housing finance system could be costly and may ultimately impact credit availability. This is a huge concern for an industry that is still struggling to help the housing market back on its feet following the 2008 crash.
Delaney, however, said the industry's fears that GSE reform will be "too disruptive" are "way overstated."
"I think markets adapt much more quickly than people believe," Delaney said. "The mortgage industry likes the way it works now, not because it's a matter of policy but because they understand it, they know what numbers to look at on the screen, and they know what forms to fill out, and they don't want that to change because it's just a pain for them. I think we need to consider that in the context of the size of this market - this is a trillion dollar a year market - and we shouldn't just let some paperwork issues - and forcing the market to think differently - disrupt the implementation of meaningful policy. There are plenty of incentives for this market to come up with a new system and get up to speed."
So how does Delaney respond to those originators who say that any GSE reform will invariably make lending more expensive for consumers because it requires the lenders to upgrade systems and train people?
"Who cares? I don't believe that," he snapped. "Listen, I was in the lending business - and I can tell you that the big operators will figure it out and reorganize their business accordingly. They have way too much financial incentive not to do that."
On the other hand, Delaney conceded that a proposal that removes the government guaranty completely and hands that responsibility over to private capital practically overnight could potentially have disastrous consequences.
"Turning the second largest fixed income market in the world immediately over to the private market without natural organic transition to more private capital, sure, you could get that wrong," he said. "But as long as your fundamental building blocks remain sound, and you've created enough supply and demand balance in the market so it operates efficiently, these operational concerns that people raise, I think they are so overstated.
"If we're creating a slightly different way of aggregating mortgages and securitizing them, can you imagine going to the manager of a large bank and saying 'We're not going to participate in the second largest fixed income market in the world because we can't build new systems and reorganize our teams?' You'd get thrown out of the room," Delaney said. "Of course, we're going to build in transition - we have to. So these concerns about market transition - these are coming from people who fundamentally want the status quo - they just want to throw a wet blanket on any reform."
So does Delaney feel his proposal is the least disruptive, as it keeps the government backstop in place and keeps Fannie and Freddie more or less intact?
"Well, what [Fannie and Freddie] are going to do is going to be very, very different because they won't be able to write guarantees - they're only going to be issuers," he said. "You know, this is going to help the small issuers - our system will be better for that. When you talk to a lot of the big players in the market, everyone thinks this can be transitioned pretty easily.
One interesting aspect to the Delaney-Carney-Himes alternative is that it gives investors who continue to hold shares in Fannie Mae and Freddie Mac a chance to recoup on those investments, as the GSEs will be returned to the private market. In June 2013, a group of private shareholders of Fannie and Freddie filed a complaint against the U.S. government claiming that when the GSEs were placed into conservatorship in September 2008, it obliterated the value of their common and preferred stock.
The complaint, filed by Hagens Berman Sobol Shapiro LLP and Spector Roseman Kodroff & Willis PC (SRKW) in the U.S. Court of Federal Claims, seeks $41 billion in damages. It claims the government owes shareholders who suffered financial losses as a result of the takeover "just compensation under the Fifth Amendment."
Meanwhile, Fannie and Freddie continue to post record profits after returning to the black last year.
"We're not commenting on any of the investors' claims - because that will play out on its own path, that is, if we let Fannie and Freddie stick around," Delaney said. "They're going to be in a completely different business, fundamentally. If Fannie and Freddie are worth anything, after all is said and done, that's fine - then it will get distributed the way it will get distributed."
Delaney said that if his bill is adopted "as is," it would take several years for the transition to take place.
"I think you could get started on it within six months - and I think it could happen pretty quickly," he said, adding that it could take far less than the five years suggested under other proposals.
"Effectively what we're doing is we're providing a government guarantee - but we're doing it through a new agency," Delaney emphasized. "It's a fairly simple process to look at pools of mortgages, decide if they're eligible and then write a government guarantee. The complex part of it is creating the mechanism for the government to offload a piece of its exposure onto the private market. What we're looking at there is effectively the reinsurance model - which is effectively what the government is doing today: providing insurance against defaults."
http://www.mortgageorb.com/e107_plugins/content/content.php?content.15641
Is a new housing bubble possible?
Alex J. Pollock | Townhall
July 01, 2014
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Now is definitely not the time for the Fed or politicians to promote further rapid house price inflation.
Would it be possible to have a new housing bubble? Yes, of course. How long does it take to forget the lessons of the last crisis? By the historical record, about 10 years, and it is already eight years since the peak of the great U.S. housing bubble of 1999-2006, and five years since the end of the financial crisis of 2007-2009. As former-Federal Reserve Chairman Paul Volcker wittily observed, “About every 10 years, we have the biggest crisis in 50 years.”
Real estate is often at the center of financial crises, both here and in other countries, because it has the most leverage, that is, the most debt relative to value, of any economic sector. This makes it vulnerable to cyclical downturns in which prices go down when people thought they would go up. The U.S. had big real estate busts in the 1970s, 1980s, 1990s, and of course, the 2000s. Next?
Real estate is also a huge sector, so its troubles have big financial consequences. Housing in particular is politically potent and attracts government efforts to subsidize and expand debt. Of the $9 trillion in mortgage loans in this country, the 79.9 percent government-owned and heavily subsidized Fannie Mae and Freddie Mac represent $5 trillion.
When the government pushes credit at housing, it makes house prices go up. This leads to a push for yet more credit. Washington discussions are now turning to lowering mortgage loan standards to encourage more loans, especially to riskier borrowers. The Senate Banking Committee has approved a bill to have the government explicitly guarantee mortgages. The new head of the regulatory agency for Fannie and Freddie appears to be more interested in being a promoter of housing debt than a guardian of financial soundness.
All the principal central banks of the world, including the Federal Reserve, have committed themselves to perpetual inflation. They have also manipulated interest rates to extremely low levels. Central banks now routinely make what would historically have been shocking statements that inflation is too low. But they have succeeded in generating a lot of one kind of inflation: asset price inflation. This is certainly true in bonds, in stocks, in collectibles, and in houses.
Looking around the world a bit, we find this: “The biggest domestic risk is the nation’s housing market, where prices are rising fast and buyers are taking on more debt.” That was the view recently expressed by the governor of the Bank of England in discussing what one astute financial commentator called “the runaway U.K. housing market.” This is after England had a housing bubble and bust in the last decade, just like we did. The Bundesbank is worried about inflated house prices in Germany. Brazil is said to have a housing bubble. And China is already experiencing the opening stages of the painful deflation of its housing bubble. When central banks create a lot of money, it goes somewhere—often enough to house prices.
What about the U.S.? House prices on average have been rising rapidly since the 2012 bottom. The fourth quarter 2013 Case-Shiller 20-major city house price index was up 13 percent for the year. The broader 380-market CoreLogic-Case-Shiller Index was up 11 percent for the same period. From their trough, national average house prices are up about 20 percent. On the other hand, they are still 21 percent below their 2006 peak—not that we want to get back there anytime soon! Overall, does the current level look too high or too low? We need some historical perspective.
Graph 1 is the Case-Shiller National Home Price Index from its beginning in 1987. The bubble, the ensuing shrivel, and the recovery are readily apparent. The trend line is based on the period 1987-1999—the trend is about 3 percent annual price increases. The recent price increases have brought us just about back to the trend line.
Graph 2 gives us a lot more history—60 years, back to 1953. It compares the growth in the consumer price index to estimated national average house prices, with the egregious bubble obvious. The strong correlation of house prices to inflation is also obvious. On this longer look, house prices got down just to their trend, and have now pushed back somewhat above it.
I think we can conclude that we are not at this point in a housing bubble again, but now is defi nitely not the time for the Fed or politicians to promote further rapid house price inflation. A new housing bubble in the future is certainly possible, but the every-10-years crisis may arise from something entirely different—something now unthought of.
Alex J. Pollock is a resident fellow at the American Enterprise Institute in Washington, D.C. He was president and CEO of the Federal Home Loan Bank of Chicago 1991-2004.
http://www.aei.org/article/economics/financial-services/housing-finance/is-a-new-housing-bubble-possible/
HSBC reaches $10 mln settlement over foreclosure charges
NEW YORK | Tue Jul 1, 2014 11:16am EDT
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NEW YORK (Reuters) - HSBC Holdings Plc (HSBA.L) has agreed to pay $10 million to settle U.S. civil fraud claims over foreclosure-related charges it submitted to the government, federal prosecutors said on Tuesday.
The accord resolves claims under the False Claims Act concerning government allegations that HSBC failed to oversee the reasonableness of the charges it submitted to the U.S. Department of Housing and Urban Development's Federal Housing Administration and Fannie Mae (FNMA.OB).
HSBC spokesman Rob Sherman declined immediate comment.
The office of Manhattan U.S. Attorney Preet Bharara, which announced the settlement, has been investigating several banks over whether they overcharged the government for expenses incurred during foreclosures on federally-backed home loans.
These loans are either insured by the Federal Housing Administration, which is part of HUD, or guaranteed by government-controlled mortgage companies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).
A typical foreclosure can cost $1,000 to $3,000, with much of the sum going to legal fees.
http://mobile.reuters.com/article/idUSKBN0F64GQ20140701?irpc=932
Thanks for that post. Some of you people are very adept and straight to the point. It makes life easier for those of us who (oh not have way...I guess) Steve Martin.
Anyhow, much appreciated.
HaHa...they. You know...They (them). I do that and try to catch myself. It is pretty vague but I suppose we are all susceptible to common mistakes like this. But really, was somebody talking about an injunction over last weekend?
HAHA. Your cousin doesn't agree but I like the cut of your jib. FnF are cornerstones of the U.S. economy. The lawsuits will set FnF and us free. To da moon as they say. This whole charade that is being played by financial institutions and the federal government will be over soon. I say charade because the FnF scapegoats are getting the attention and blame for the housing crisis. Meanwhile seemingly behind the scenes banks are already paying back some of the $$$ that they obtained illegaly through ongoing lawsuits. Unfortunately no ceo will pay back one red cent of bonus $$$. More than likely nobody will be prosecuted but U.S. tax payers will get something back. It is all slight of hand. It makes me sick.
P.S. get a haircut or change your photo or something.
Stockproffiter, Alwayswondering, Blanka, Obit, everybody
I was wondering about what everyone thinks about Judge (Judy)Sweeny. It seems to me that she is taking her time to be sure that the defendant has little wiggle room for appeals in the future. I apologize in advance for my layman terminology. She is appeasing the defendants by giving more time but is it for the benefit of the plaintiffs? Or not for the benefit but to the benefit of the plaintiffs in the future. It obviously is not her first rodeo and she laid down the law early on concerning the defendant's attempts to have the case dismissed.
It seems to me that she is crossing and dotting to make sure there are less loop holes.
I call her Judge Judy because she appears to be a NO NONSENSE judge and will not be intimidated by the gmen. I could be swayed by my own bias so all opinions are appreciated. Just because your alias is not up at the top does not mean that I don't want to hear your opinion. Chime in.
Mortgage Bets Get Riskier
As investors reach for more yield, the dangers become greater
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Michael Aneiro
June 28, 2014 12:20 a.m. ET
Having caused, and survived, the financial crisis, mortgage bonds are back in a familiar position: The safest offer paltry yields, and that's pushing investors into more complex structures that enhance return but magnify risk.
Since the crisis, savvy fund managers have loaded up on mortgage-backed securities (MBS), particularly those underwritten by government-sponsored enterprises Fannie Mae (ticker: FNMA ) and Freddie Mac (FMCC). These GSE bonds offer an implicit guarantee of federal government support while yielding more than comparable Treasuries. After a bull run that's seen agency-backed mortgage bonds gain 3.7% this year, they look overbought. "Agency mortgage bonds are rich," says Scott Mather, head of global portfolio management at Pimco, which has reduced its holdings lately. "The market suffers from weak origination and the Fed is buying everything that's produced."
Being rich doesn't distinguish them from a lot of other bonds today, but it means that fund managers who rode agency mortgage bonds to steady, low-risk gains in recent years need new tactics.
Non-agency mortgage bonds–private-market securities that lack government support–have had time to heal since causing the financial crisis, and big bond shops, which pride themselves on the sort of technical credit analysis these securities require, have found bargains along the way.
"The non-agency mortgage market is an all-legacy market of stuff left over from the last cycle," says Tad Rivelle, chief fixed-income investment officer at TCW, who manages the $30 billion MetWest Total Return fund (MWTRX). Rivelle says these securities now combine 5% or 6% yields with some upside. "You want securities that you can feel good about owning for the long term."
Bill Irving, who oversees $34 billion in mortgage and government bonds at Fidelity, likes some newer market areas. He says real-estate investment trusts and private- equity shops have been buying homes and renting them out, and they've sold floating-rate bonds to finance the purchases.
"The repayment of the debt is securitized by the homes, and we think the credit quality is very high," Irving says, adding that Fidelity sees growth potential for the sector.
Another niche market involves companies that buy nonperforming mortgages from banks at a discount and either negotiate payment plans with the homeowners or foreclose and refurbish the homes to sell. "Basically, the bond gets paid off as they liquidate the properties," Irving says.
MUCH OF THE MORTGAGE market's future still depends on the trajectories of the big GSEs, which once looked likely to be dissolved in favor of private securitization, perhaps like the bank-issued covered bonds that predominate in Europe. Now it looks as if GSEs are here for the long haul, and they've branched into new products, namely so-called risk-sharing MBS. Since last year, Freddie Mac has offered a handful of bonds under a new program called Structured Agency Credit Risk, while Fannie Mae has offered three bonds under a similar program. The basic idea is to slice up the credit risk of underlying mortgage bonds and share it with investors at different levels.
"The liquidity and depth of the GSE market is second only to Treasuries, and this is one way to keep the market as it is and transfer some of the risk to the private market," says Irving, who observes that such alternative types of bonds "could be the future of housing finance." Still, he's skeptical of the current offerings. "You could easily imagine a scenario in which they get impaired," he says.
Vitaliy Liberman, who manages MBS portfolios at DoubleLine, has steered clear of these bonds so far. "The initial issuance was really clean [collateral] as they try to prime the pump and build a market," he says. "It will be interesting to see whether they start to reduce the quality of the collateral from here."
http://online.barrons.com/news/articles/SB50001424053111904544004579642560520709496
True but no investor wants to out of it over a weekend. News at any time could surprise us all.
Glta
Risky/Navy stay focused. I know what you are thinking. He/She started it. HaHaHa. Let it go.
I don't have much more $$ but I got 350 more shares @ 3.78 this morning. Holding till restoration, lawsuit settlements, uplist and dividends in any order no matter how long it takes.
thank you for the updates
I think that it is possible just because govt. can't release documents that plaintiffs want. Too much exposure. Govt. may find themselves backed into a corner where settlement is the only option.
A brand new central bank wheeze
: Bill Bonner 17/06/2014
The longer the world lives with its funny money, the funnier things get.
Here’s a headline from yesterday’s Financial Times: “Central banks pour money into equities.”
We paused. We collected our thoughts. And we wondered:
What the hell…?
“A cluster of central banking investors has become major players on world equity markets”, reads a report.
That was the conclusion of a group called the Official Monetary and Financial Institutions Forum, which goes on to warn that this trend “could potentially contribute to overheated asset prices”.
The Omfif says these public sector investors have already invested more than $1trn into the stock market. The number could go much, much higher, inasmuch as “central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues”.
We’ve devoted a good deal of The Daily Reckoning to chronicling the tangled web of finance woven by central planners. We see curiosities aplenty, the sort people get up to when they have access to free money.
It is against the law to manipulate stocks. But the Fed does it in broad daylight, lowering interest rates so as to increase the value of streams of income, no matter how tricky and unreliable. Companies earn money. Now, the money they earn is more valuable than ever
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A brand new central bank wheeze
A brand new central bank wheeze
By: Bill Bonner 17/06/2014 Post a Comment
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The longer the world lives with its funny money, the funnier things get.
Here’s a headline from yesterday’s Financial Times: “Central banks pour money into equities.”
We paused. We collected our thoughts. And we wondered:
What the hell…?
“A cluster of central banking investors has become major players on world equity markets”, reads a report.
That was the conclusion of a group called the Official Monetary and Financial Institutions Forum, which goes on to warn that this trend “could potentially contribute to overheated asset prices”.
The Omfif says these public sector investors have already invested more than $1trn into the stock market. The number could go much, much higher, inasmuch as “central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues”.
We’ve devoted a good deal of The Daily Reckoning to chronicling the tangled web of finance woven by central planners. We see curiosities aplenty, the sort people get up to when they have access to free money.
It is against the law to manipulate stocks. But the Fed does it in broad daylight, lowering interest rates so as to increase the value of streams of income, no matter how tricky and unreliable. Companies earn money. Now, the money they earn is more valuable than ever.
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The stock market has hit all-time highs even as the source of its profits – the economy beneath it – struggles to find its footing.
The intention – ostensibly – is to light a fire under the economy by encouraging people to put their money in higher risk, and presumably higher reward, investments.
Why the authorities think they know what other people should do with their money has never been fully revealed. Nor it is at all clear that the world would be a better place if people made riskier investments.
Still, in today’s world nothing succeeds like failure. The Pentagon has not won a war in 60 years, but it keeps getting the go-ahead to enter another one. As near as we can tell, central bankers’ record of failures is just as strong. It never anticipates the trouble it causes, and then reacts in an inappropriate and ineffective way when the trouble starts.
In the present case, the FT appears to think that the central banks have been hoist on their own petard. Rather than manipulate stock prices through the back door of quantitative easing, the banks are being forced to go at it directly.
Now, with money they create out of nowhere, they buy real companies. Otherwise, the companies might have been owned by real people, who earned real money providing real goods and services.
And so, dear reader, more and more of the world’s real wealth shifts from the people who make it, to the people who take it.
http://moneyweek.com/bill-bonner-a-brand-new-central-bank-wheeze/
Federal Reserve and other central banks own close to half of all stock markets (see link)
Courtesy of aei-ideas.org
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June 15, 2014
In a new study set to be released next week, the Official Monetary and Financial Institutions Forum (OMFIF) reports that central banks, including the Federal Reserve, account for more than $29 trillion in investments in equity markets around the world. As the global market capitalization of all stock markets was $54.57 trillion as December 2012, this means that the central banks have not only pumped up and inflated equity markets through their myriad of Quantitative Easing programs, but these private entities now own close to, or more than, half of all stocks in the entire world.
Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions.
“A cluster of central banking investors has become major players on world equity markets,” says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif), a central bank research and advisory group. The trend “could potentially contribute to overheated asset prices”, it warns.
The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries. - Financial Times
For years, small voices within the investment community, as well as big organizations like GATA, have been talking about market manipulation, and the central bank's pumping up of stocks outside of normal market trading. This has led to an artificially high stock market, and an over-analysis of the real value of tradable equities.
With this new confirmation, it is apparent that retail investors have remained outside of the current bull market, and it has primarily been central bank investment, as well as influence, that have kept stocks and stock markets at all-time highs at a time when the general economy is in deep recession and negative growth. And with this new report coming out by the OMFIF showing that the Federal Reserve, ECB, Chinese Central Bank and a slew of other controlled institutions own up to, or more than, half of the equities in the global stock market, the question to ask is, are there any markets at all that are not manipulated bubbles, or a centrally controlled systems?
http://www.examiner.com/article/federal-reserve-and-other-central-banks-own-close-to-half-of-all-stock-markets
Central Banks Goose Stock Markets
Posted on June 16, 2014 by Lambert Strether
By Chris Becker, a proprietary trader and investing strategist. Originally posted at MacroBusiness
You don’t have to be Einstein or Charlie Munger to work out that since March 2009, central banks have led the recovery (and then some) in global stock market prices (I won’t say value, because they are not the same, just like mistaking volatility for risk).
But it turns out it’s not just money printing and lower (or negative) interest rates that are doing the cooking!
An interesting report to be published this week by the OMFIF claims that because of record low interest rates, central banks have “lost” around $200-250 billion in foregone revenue in interest income on their reserves, with the shortfall being made up by directly investing into the world’s stock markets – from the FT:
The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries.
China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials quoted by Omfif. “In a new development, it appears that PBoC itself has been directly buying minority equity stakes in important European companies,” Omfif adds.
In Europe, the Swiss and Danish central banks are among those investing in equities. The Swiss National Bank has an equity quota of about 15 per cent. Omfif quotes Thomas Jordan, SNB’s chairman, as saying: “We are now invested in large, mid- and small-cap stocks in developed markets worldwide.” The Danish central bank’s equity portfolio was worth about $500m at the end of last year.
Overall, the Omfif report says “global public investors” have increased investments in publicly quoted equities “by at least $1tn in recent years” – without saying from what level, or how the figure is split between central banks and other public sector investors such as sovereign wealth funds and pension funds.
The Bank of Japan (BOJ) has publicly led the way with its announcement in April this year, jumping straight into buying 60-70 trillion yen of stocks and ETFs each year, trying to incite inflation and a general recovery:
N225QE
The Bank of England (BOE) has stated it has not bought direct equities among its nearly 400 million GBP QE, although a small quantity maybe some private unlisted stock, the effect has been the same as in the US:
fstseqe
Of course, there are well founded fears that such intervention, including massive growth in reserves, has led to such a benign period of volatility and the expectation of continued price appreciation is cooking “the goose” that laid the golden egg.
In Europe, two years of stimulus from the ECB has pushed the various bourses to record valuations, as measured by the price-to-earnings ratio, which is also pushing the boundaries of delusion when it comes to chasing yield. From Bloomberg:
Gains have pushed the Stoxx Europe 600 Index to 17.5 times annual earnings, the highest since 2002, data compiled by Bloomberg show.
While corporate dividends are higher than bond yields after two years of stimulus by European Central Bank President Mario Draghi, they’re luring investors to companies with unjustified valuations, according to Graham Bishop, an equity strategist at Exane BNP Paribas inLondon. Payouts that exceed the interest on German bunds by more than 2 percentage points will be little comfort as earnings growth falters and the economic recovery sputters, he said.
The advance in the Stoxx 600 since June 2012 has pushed the gauge up 48 percent and sent its price-earnings ratio 26 percent above its decade average relative to reported earnings, according to Bloomberg data.
Of course, one can’t keep one’s own stimulus down as this liquidity has spilled over into record bids for European bonds – yields now below that of US Treasuries – and indirectly into US shares:
Draghi’s policies have encouraged investors to bid up European assets from bonds to stocks and avoid cash. They’ve added $43 billion to European mutual and exchange-traded funds traded in the U.S. this year, according to EPFR Global data tracked by Bank of America Corp. Meanwhile, they poured $3.3 billion into American equities funds.
And the US is guilty as charged when it comes to the general goose and turkey feasts for stock traders, where “good” forecasts are seen as bad for stock prices, and a “dovish” economy good for stock prices, all because of the perception of less or more intervention from the Fed that follows such views, respectively.
Theres no better way to explain the moves of stock markets with intervention than this chart of the S&P500:
SPXQE
Which brings us to QE3 or “QEforever”, where the Fed buys $40 billion worth of bonds each and every month for an “undisclosed” period of time. There has been some “tapering” since mid-June last year as the Fed firms its forecast of a recovery in the economy.
Last month’s statement was a little cagey on the “bad news is good for stocks” meme, but this week’s FOMC meeting (tomorrow morning, Australian time) could see a tapering statement that sets a fire to the fragile stock markets around the world. From CNBC:
The Federal Reserve is widely expected to announce another $10 billion monthly reduction in quantitative easing in Wednesday’s FOMC statement. But the focus will be on the Fed’s economic assessment, which could end up dramatically realigning investor expectations about when the Fed will hike rates.
The economic outlook certainly seems to have improved since …. The last two employment reports showed monthly nonfarm payrolls growth of 282,000 and 217,000. And after a severely weak first quarter, several economists are looking forward to Q2 GDP growth around 4 percent.
… the Fed acknowledges that the American economy may be entering into a period of above-trend growth, that could distort expectations about the future target of the federal funds rate, the highly influential rate at which banks lend to each other.
This is a time to be cautious. If central banks start pulling the rug out in the form of stopping, or even slowing down stimulus – heaven forfend they raise rates – it could be a rocky ride for the rest of the year for stocks.
http://www.nakedcapitalism.com/2014/06/central-banks-goose-stock-markets.html
Does anybody know if central banks own FnF? see link
June 16, 2014, 4:30 a.m. EDT
Central banks becoming major investors in stock markets
Opinion: Public institutions reaching for yield could overheat asset prices
LONDON (MarketWatch) — Some leading central banks have become major players on world equity markets in a development that could potentially contribute to overheated asset prices.
The buildup of central-banking interest in equities is one of the unexpected consequences of the last few years’ fall in interest rates, which has depressed the returns on central banks’ foreign exchange reserves and driven them to find alternative investment targets.
In the years since the financial crisis, central banks have leapt to the forefront of public policy making. They have taken responsibility for lowering interest rates, for maintaining stability of financial institutions, and for buying up government debt to help economies recover from recession.
Now it seems that they have become important in another area, too, in starting to build up holdings of equities.
Bloomberg
Jens Weidmann, president of the Deutsche Bundesbank.
Central banks as investors need to cope with demands wrought by sheer size — competition, complexity and cost. Many of these challenges are self-feeding. Whereas 20 years ago only a small number of public investors carried genuine weight in investment marrkets, the proliferation of such institutions is now a fact of life. Central banks’ foreign-exchange reserves have grown unprecedentedly fast, especially in the developing world.
The same authorities that are responsible for maintaining financial stability are often the owners of the large funds that add to liquidity in many markets. Large and similar-minded public-sector investors can show herd-like behavior, seeking the illusive return, for example in the “search for yield” in many markets and thus creating fresh volatility.
Evidence of an increase in equity-buying by central banks and other public-sector investors has emerged from a survey of publicly owned or managed investments compiled by the Official Monetary and Financial Institutions Forum (OMFIF), a global research and advisory group.
The OMFIF research publication, Global Public Investor (GPI) 2014, launched on June 17, is the first comprehensive survey of $29.1 trillion worth of investments held by 400 public-sector institutions in 162 countries. The report focuses on investments by 157 central banks, 156 public pension funds and 87 sovereign funds.
There are worries that central banks may be over-stretching themselves by operating in too many areas.
Jens Weidmann, president of Germany’s Bundesbank — which retains a highly important, conservative role in the euro area in spite of the establishment of the supranational European Central Bank to run the continent’s single currency — spoke yearningly last week of the need for “central banks to shed their role as decision-makers of last resort and, thus, to return to their normal business.”
He said this “would help to preserve the independence of central banks, which is a key precondition to maintaining price stability in the long run.”
It has long been recognized that sovereign wealth funds and public pension funds around the world have become large holders of company shares. The best-known example is the Norwegian sovereign fund, Norges Bank Investment Management (NBIM), with $880 billion under management, of which more than 60% is invested in equities. The fund owns on average 1.3% of every listed company globally, and 2.5% of listed companies in Europe.
Rivaling NBIM is now the State Administration of Foreign Exchange (SAFE), part of the People’s Bank of China, the biggest overall public-sector investor, with $3.9 trillion under management, well ahead of the Bank of Japan and Japan’s Government Pension Investment Fund (GPIF), each with $1.3 trillion.
SAFE’s investments include significant holdings in Europe. In a new development, it appears that the PBoC itself has been directly buying minority equity stakes in important European companies.
Another large public-sector equity owner is Swiss National Bank, ranked the world’s No. 10 GPI measured by market assets, with $480 billion under management. The Swiss central bank had 15% of its foreign exchange assets — or $72 billion — in equities at the end of 2013. Thomas Jordan, SNB president, writes in the GPI 2014 publication: “We are now invested in large-, mid-, and small-cap stocks in developed markets worldwide…. The decision to introduce new asset classes should always be taken with the aim of improving the long-term position, and with the awareness that a change should be sustainable, even in more difficult times.”
One of the reasons for the move into equities reflects central banks’ efforts to compensate for lost revenue caused by sharp falls in interest rates driven by official institutions’ own efforts to repair the financial crisis.
According to OMFIF calculations, based partly on extrapolations from published data, central banks around the world have foregone $200 billion to $250 billion in interest income as a result of the fall in bond yields in recent years. This has been partly offset by reduced payments of interest on the liabilities side of their balance sheets.
GPIs as a whole appear to have built up their investments in publicly quoted equities by at least $1 trillion in recent years.
With regard to asset-management operations, Bank of Korea, the No. 19 GPI according to this year’s ranking, with $346 billion in assets, has become a benchmark for many central banks in different jurisdictions. It has been building up emerging-market assets, gold and equities as part of a new approach to risk management.
Heung Sik Choo, the central bank’s former reserve management chief and deputy governor, now chief investment officer at Korea Investment Corp., says in the GPI report that central banks around the world require “a new paradigm in foreign reserve management. ….We need to reconsider the investment universe for central banks. We may need to break away from rigid fixation on bonds of the highest credit ratings, and become more open-minded about expanding the investment sphere into non-traditional asset classes.”
Writing about the general tendency towards diversification, Roberto Violi, Francesco Potente and Alfonso Puorro of the Banca d’Italia (the No. 44 GPI, with assets under management of $146 billion) say in GPI 2014: “Over time, many central banks around the world have enlarged the investment range of their portfolios. Rapid reserve accumulation by emerging market countries has coincided with growing interest in the strategic and tactical portfolio allocation of external assets. Two major developments have been increased diversification and expanded use of derivatives. Banca d’Italia has gradually built over the years a significant allocation to equities, making up about 6% of its euro-denominated financial portfolio.”
Highlighting the general problem of lagging transparency on governmental assets, Edwin “Ted” Truman, a former senior Federal Reserve official who is now a senior fellow of the Peterson Institute for International Economics, writes: “One of any government’s major responsibilities is managing the country’s international assets. Reforms are urgently needed to enhance the domestic and international transparency and accountability for this activity — in the interests of a better-functioning world economy."
http://www.marketwatch.com/story/central-banks-becoming-major-investors-in-stock-markets-2014-06-16?pagenumber=1
Fannie #13 in fortune 500 links
http://fortune.com/fortune500/wal-mart-stores-inc-1/?xid=msnfortune
http://fortune.com/fortune500/fannie-mae-13/?xid=msnfortune
13
Fannie Mae
Mark Wilson—Getty Images
Rank 13
Previous Rank 12
CEO Timothy J. Mayopoulos
Address 3900 Wisconsin Ave. N.W., Washington, DC 20016
Website www.fanniemae.com
FNMA 4.09 -0.19 (-4.44%) Jun 16 7:59 PM UTC
Fannie Mae rode a much-improved housing market in 2013 to its second straight year of record profits while passing an important milestone by paying back the U.S. government more than the company has received in government bailout funds. The mortgage giant posted $83.9 billion in profits last year, up from $17.2 billion in 2012, thanks to a housing market that saw its largest price-jump — 11.3% — since 2005. CEO Tim Mayopoulos said again this year that he expects Fannie Mae to be “profitable for the foreseeable future,” though two years of record-setting gains have done little to stop plans for a potential government overhaul of the agency.
Key Financials
$ Millions % change
Revenues 125,696 -1.2%
Profits 83,963 387.6%
Total Assets 3,270,108
Total Shareholder Equity 9,541
Market Value (on March 31, 2014) 4,516.50
Profit as a % of
Sales 66.8
Assets 2.6
Stockholders' Equity 880
Earnings Per Share
Earnings Per Share ($) -0.25
EPS % Change (from 2012) -204.2
EPS % Change (5 year) -
EPS % Change (10 year) -
Total Return to Investors
%
Total Return to Investors 1,080.40
Total Return to Investors (5 year, annualized) 31.7
Total Return to Investors (10 year, annualized) -26.5
Rip it apart but don't shoot the messenger (me).
David Brat Gets It Right About Subprime Crisis
Economics: The Beltway hates it when Tea Party pols speak the truth. So when David Brat blamed the recession on Washington, it of course set up an intellectual firing squad to stop him. But it's shooting the same old blanks.
In upsetting House Majority Leader Eric Cantor in Virginia's GOP primary, Brat never wavered from his position that government caused the financial crisis and has stunted the recovery with more of the same bad policies. And he's not backing away from it, despite media bashing.
Here's how the economics professor turned politician explained it in a post-victory interview:
"The American people want to take the country back, and what motivated the race for me was after the financial circumstance, we had Fannie (Mae) and Freddie (Mac) collapse. I thought surely our political leaders, we're on our knees economically, we'll learn some lessons and get it right, and they didn't. We're still roughly in the same mess."
Brat added, "I don't think a lot of folks in D.C. understand what free markets are, so that's the most important piece. Fannie and Freddie made two-thirds of all subprime mortgages. That is not a free-market institution. That entity ... caused the housing collapse. So we need to take free markets seriously."
Bravo. Finally, someone with eyes wide open may be joining a legislative body that for too long has had its eyes closed shut over one of the most important issues of our time.
With little resistance from Republicans, Democrats and their media toadies have been able to hijack the crisis narrative and demonize private banks. The Wall Street bashing helped the Obama administration justify financial "reform" and centralize credit in the hands of the state.
Market defenders such as Brat are a serious threat to the left's final goal of turning banks into public utilities, so it unleashed its pundits, including David Corn, who hurled brickbats about Brat repeating "the conservative canard that Freddie Mac and Fannie Mae brought down the housing market."
Only the historical evidence is clear that the toxic twins — and their affordable-housing mission regulator, HUD — polluted the mortgage and securities industry with high-risk paper.
Here are the incontrovertible facts the left continues to overlook:
• By 2008, government-sponsored Fannie and Freddie held $1.84 trillion in subprime and other nonprime mortgages and securities.
• Of the 27 million bad loans outstanding, Fannie and Freddie held almost 12 million, while the Federal Housing Administration and other federal agencies held more than 5 million, with another 2.2 million originated by lenders under federal anti-redlining mandates.
Washington housing policies and regulations were responsible for more than 72% of the risky lending, while private institutions on their own accounted for 28%.
While Brat would be more technically accurate arguing that more than two-thirds of the toxic loans were generated by not just Fannie and Freddie but also FHA, HUD and the Community Reinvestment Act, he is correct to lay the subprime mess chiefly at the feet of Fannie and Freddie.
The mortgage giants, under pressure from HUD and its escalating affordable-housing quotas, loosened the underwriting standards and down-payment requirements followed by the entire mortgage industry. Their government-created hunger for subprime purchases spurred a frenzy of subprime originations in the private market. They also drove the private market for subprime securities on Wall Street.
Sorting out blame isn't an academic debate. Because the evidence was never publicly litigated, the crisis was misdiagnosed — and the economy is taking the wrong prescriptions for preventing another.
Brat understands that more government is not the answer. It's just more poison.
http://news.investors.com/ibd-editorials/061614-704894-left-miffed-as-david-brat-fingers-correct-subprime-culprits.htm
White House Reluctance
Afraid to Be Successful?
(I am not sure in what sequence to arrange the following sections, since they all seem to scream the same message and overlap, rather than feed seamlessly into one another. So let me just run them as I wrote them and let you enjoy the prose, mine and other’s.)
I admit to being frustrated by this White House and its approach to mortgage finance reform.
There are lots of ways to engage in reform. Metaphorically, sometimes reform isn’t blowing a tunnel through a gnarly, granite filled mountain. It just could be posting better directions on how to drive around the elevation.
With mortgage finance, we seem to be at that juncture right now.
No matter what partisan hassling occurs before the 2016 elections--which will produce this nation’s next and our 45th President—Fannie Mae and Freddie Mac likely will be a fact of mortgage finance life through the end of the Obama Administration.
Some in Congress will bitch and moan, but the nation’s primary and secondary mortgage markets lenders will continue to utilize F&F, much as they have for the past three and a half decades and as they have for the nearly six years following F&F “conservatorship.”
The OMB and Treasury like F&F revenue and the two mortgage giants are here and operationally successful.
My hope, no matter who controls the Senate after November, who is the next House Majority Leader, and maybe who the next House Banking Committee Chairman is--if Jed Hensarling somehow moves into the House Majority Leader’s job—is that White House policy makers will concentrate on how the Administration—without Congress--efficiently and safely can expand the pool of eligible mortgagors, drive additional homeownership. This also means adding to the inventory of rental housing for those who can’t or don’t want to buy.
The answer “at the Administration’s fingertips” is greater utilization of Fannie Mae and Freddie Mac. If done thoughtfully and with urgency, success can produce burgeoning economic activity and more jobs in and around those new households.
That’s not or shouldn’t be, exclusively, a Republican or Democratic goal, but a responsible public policy objective which politicians in both parties can endorse.
Since events have conspired to make congressional cooperation a rarity, the Obama White House should seize that opportunity and-- working with the Federal Housing Finance Agency’s Director, Mel Watt--use Fannie Mae’s and Freddie Mac’s ample capacity to do good and well, at the same time, seeking to expand the number of eligible borrowers and generate additional jobs.
Sure, Mr. President, your guys cut a political deal with Sen. Bob Corker (R-Tenn.) — which I am sure God and Tip O’Neil will forgive—but how about putting the same energy into picking up the cudgels on your end NOW and move aggressively with regulation to finance more rental and homeownership activity and allow the country to reap the attendant commercial and employment benefits, too?
As Jim Millstein (pronounced “Mill-stEYEn” for those who don’t know) and others have suggested, the ball is in the Obama court, the bat in his hands, he’s behind wheel with no real obstacles fronting him.
He needs a few good lawyers—and one or two good pols-- and then just has to do it.
Mary Miller Speaks; the Result Floats!
Yet it appears that the White House is timid and may not be ready to listen to Watt and the industry groups.
This past week Treasury tried to throw cold water on burgeoning calls to energize Fannie and Freddie through regulatory action.
In remarks claiming inability to properly capitalize them, outgoing Treasury official Mary Miller took a weak shot at derailing industry and other requests for Obama Admin F&F action through regulation, claiming it would take “20 years” to refill their capital coffers. (See below.)
http://www.reuters.com/article/2014/06/13/us-usa-housing-idUSKBN0EO1FU20140613?feedType=RSS&feedName=businessNews
The lady may be the best of the best at Treasury, but seriously, who can accurately measure what’s going to happen—financially and economically—in the next 20 years?
Treasury couldn’t even see that F&F were poised to earn major revenue in 2012 and 2013.
The OMB this year projects that F&F will earn about $155 Billion over the next 10 years. The enterprises already have paid back all that $187.5 they were given, with a still-growing cash cherry on top.
If this Admin--which says it can change the “conservatorship rules”--would let F&F keep some/most of that $150 Billion that alone would be a pretty good dose of recapitalization.
But Miller tries to induce doubt and fear when saying it will take a generation to build F&F’s capital.
Ms. Miller must have forgotten that her White House and Treasury bosses endorsed—and still are rooting for--the (“heh, heh, heh”) CWJC legislation, which calls for raising $500 Billion in new protective capital in its first five years for the private insurance which is supposed to make the nation’s mortgage finance system far less dependent on Uncle Sam?
Really Mary, that bill is “Francisco Franco” dead, but from where/whom did you think all that money would come?
Mary Miller is leaving the Administration and I think she was sent out to “take one for the team” with her transparent suggestion.
Poor Mary, we hardly knew ye!
The Hammer “Hammers”
Just after completing this final blog draft, I received an email from, David Fiderer, whom I call, “The Hebrew Hammer,” writing about Mary Miller’s remarks.
Well that's complete idiocy. The GSEs make money, not only from financing new mortgages, but by holding and insuring the mortgages on their books. So the revenue from their core business should not plummet like it would for originate-to-distribute banks.
The GSEs would be well capitalized but for the cash drain imposed on them by the senior preferred stock agreements.
Also, the extraordinary profits of the last 15 months are really prior period adjustments to illusory GSE losses during 2008-2010. Rumors of the GSEs collapse were greatly exaggerated.
So sayeth “The Hammer.”
FHFA Steps in It, Again
I am sure that most of FHFA’s F&F 2013 report sent to Congress on Friday was done before Mel Watt came on board—at least I hope so.
But at some point Watt might want to look into why this agency keeps peddling bad news stories and doesn’t want to take credit for F&F successes. (See Tim Howard’s comment above, sent before this report was made public last Friday.)
No other federal financial regulatory agency is that chary, reluctant to praise itself and belligerent to its regulated institutions. Are the agency GSE-haters—who exist in senior spots at FHFA--so insecure and baffled?
Shut them down or root them out, Mr. Director, or you could end up “wearing” their disparaging opinions like an unwanted cheap suit.
http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Releases-2013-Report-to-Congress.aspx
Tim Howard Weighs In
In a similar vein, writing about the “FHFA F&F Stress Test,” I was dismayed with what I thought was a lack of regulatory candor and honesty (just like the aforementioned “2013 report to the Hill”). Sure, FHFA had to discuss how the two night fare in hypothetical bad times, but the agency must have a keener eye than it lets on.
In describing what I thought FHFA ignored, I wrote that F&F have acquired 5 years’ worth of outstanding, very safe “books” of business (annual securitization business activity) since being forced into “conservatorship” in 2008.
I pointed to the first fact generating substantial revenue and how the 2012 “dividend sweep” decision—now being contested in court--repaid the taxpayers the entire $187.5 Billion initially infused in F&F, in less than 3 years.
More money gets added to that overall payment every business quarter, as F&F to date have sent $18 Billion above the original $187.5 Billion debt to the government’s general fund.
A few days ago, Tim Howard and I went to lunch with an accomplished DC-based financial services analyst and we talked briefly about that same issue.
With Tim’s permission, below is his near verbatim follow up communication he sent to our lunch companion telling him why Howard thinks the chances are unlikely that Fannie and Freddie again will become another 2008 financial basket case.
Those peddling this line of thought seriously lack understanding of how F&F’s mortgage business works or have an alternative agenda. Here is what Tim wrote.
Thanks again for lunch; I appreciated getting your insights on the current goings-on with mortgage reform.
There was one topic I thought we might get to but didn't, that I wanted to follow up on. It was the argument, which I first read in an op-ed by Mark Zandi and Jim Parrot in the Post, that one reason the status quo is not sustainable is that with Fannie and Freddie not being permitted to hold any capital another bailout is inevitable-- and that this second bailout will both shake investor confidence and trigger an adverse reaction from Congress.
Zandi and Parrot say: "Mortgage defaults will increase again in the next recession, and Fannie and Freddie will suffer losses. Without capital, they will have no choice but to borrow again from the Treasury to meet their obligations." It's easy to read their first sentence as a mere statement of fact. It isn't. Yes, Fannie Mae and Freddie Mac's credit losses will very likely rise during the next recession, but credit losses are a far cry from corporate losses. For credit losses to become corporate losses, they would have to grow larger than all of Fannie's and Freddie's other sources of income (less administrative expenses) combined. That's highly unlikely.
Consider the numbers for Fannie Mae. Because it's been raising guaranty fees on its new business, it now is making about $12 billion per year in guaranty fee income. It gets another $4 billion or so in net interest income from its portfolio business (although that number will decrease over time as the portfolio continues to shrink). Its fee and other income average about $1.5 billion per year. With G&A expenses of around $2.5 billion annually, Fannie Mae's pre-tax net income is about $15 billion per year, and growing (even with the portfolio shrinking).
Put aside for the moment the remaining losses on Fannie Mae's pre-2009 books of business (but remember, the company has a $45 billion loan loss allowance--a form of capital-- which should be more than enough to cover them). What are the chances that losses on the post-2008 books will rise to $15 billion per year at any time in the foreseeable future?
I believe they are almost non-existent. The post-2008 books were very conservatively underwritten (too conservatively, in my view). The quality of these loans is at least as high as the loans Fannie Mae put on when I was CFO, and during the 1990-2004 period those loans had an average annual credit loss rate of 2 basis points. Fifteen billion in credit losses, on today's balance of $2.8 trillion in outstanding guarantees, would be a credit loss rate of 54 basis points. You really can't get there from here. Today's Fannie Mae has far too much income for losses on QM loans to threaten its bottom line, even in a recession.
I understand why one (or in this case, two--Zandi and Parrot) might want to make the political argument that having Fannie Mae and Freddie Mac operate in conservatorship with no capital is a knife-edge that could topple into disaster, and therefore a reason why an imperfect Johnson-Crapo is the better alternative. But I wanted to make sure you knew that, economically, if Fannie and Freddie are kept in conservatorship with a net worth sweep, there is almost no chance taxpayers will get the losses critics predict; they instead will receive a very large stream of deficit-reducing income for a very long period of time.
Although that wasn’t his goal, I think Howard’s comments about F&F’s current ability to manage business losses—with adherence to their current product acquisition rules--underscores the point I made in my challenge to the Obama Administration to encourage greater F&F financing activity.
Since the Admin will not shut down Fannie and Freddie and Congress won’t blow them up, an Obama limited F&F revival would be supported by Governors, Mayors, other public officials, commercial developers, residential builders, minority advocates, Realtors, lenders of all kinds, including the major banks.
And, who knows, maybe make this Administration look good, which it hasn’t for two years.
It also would not preclude anyone from returning later to the Fannie and Freddie reform/restructuring discussion.
The GSEs aren’t disappearing, use them well!
http://malonigse.blogspot.com/2014/06/admin-bs.html
Fannie Mae, Freddie Mac 2013 One-Time Event – FHFA
by ManiJune 16, 2014, 5:00 pm
The Enterprises’ record high net income was driven by reversal of previously accrued losses associated with DTA and ALLL
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The Federal Housing Finance Agency in its 2013 report to Congress points out Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s record net income in 2013 are greater than at any prior time in their respective histories and these record income were driven largely by certain unique and very large benefits to income.
Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA) Bove
The FHFA doesn’t anticipate such unique benefits to be repeated in future years and hence the 2013 levels of net income won’t be approached anytime in the foreseeable future.
DTA and ALLL benefits
The report points out that both the Enterprises have historically reported large net deferred tax assets (DTAs) on their balance sheets. The DTAs are recognized based on the anticipated future tax consequences of existing temporary differences between the financial reporting and the tax-reporting basis of assets and liabilities.
The report highlights that the applicable accounting standard requires entities to reduce DTAs using a valuation allowance (VA) if, based on all available evidence, it is more likely than not that some or all of the DTAs will not be realized.
The report points out that during 2013, both Enterprises concluded that the weight of all available evidence, both positive and negative, indicated their VAs were no longer necessary. Moreover, enterprise management considered updated estimates of future taxable income, which indicated that it was more likely than not that the DTA would be realized in the future. The VA release amounted to over half of 2013 net income for both Enterprises.
Turning its focus on allowance for loan and lease losses (ALLL), the report notes while Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s ALLL peaked at the end of 2010 Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s ALLL peaked at the end of 2011. However, in the last two years, the converse has occurred as the factors that characterized the early stages of the credit crisis have changed dramatically as is evidenced by the improving economy and strategies to resolve delinquent loans, like FHFA’s servicing alignment initiative, are taking hol
http://www.valuewalk.com/2014/06/fannie-mae-freddie-macs-record-2013-income-cant-repeated-fhfa/
FHFA Report to Congress Reveals Milestones, Problems
Author: Colin Robins June 16, 2014 0
FHFA Report to Congress Reveals Milestones, Problems
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The Federal Housing Finance Agency (FHFA) submitted its 2013 Report to Congress, which detailed findings from the agency's examination of Fannie Mae and Freddie Mac. The report found that although experiencing significant exposure to credit losses from mortgage originations several years prior to the government's conservatorship, the two GSEs had record amounts of net income in 2013.
The report noted that combined net income for Fannie and Freddie totaled $132.7 billion, benefiting from a number of non-recurring items such as "the reversal of the valuation allowance associated with deferred tax assets and various legal settlements."
The FHFA found that the credit quality of new single-family guarantees in 2013 remained high by historical comparisons. They found that higher risk loans, such as no-income documentation or interest-only mortgages, have mostly been eliminated from the GSEs portfolio. Loan-to-value ratios for mortgages in 2013 stood at 73 percent, while the average credit score for purchase money mortgages stood in the 740s.
The group noted that the average FICO score at the end of 2013 was roughly 25 points higher than scores prior to conservatorship.
The FHFA's report also found that although the Treasury's financial support helped stabilize the two companies, they are not in "sound financial condition."
"The Enterprises remain exposed to credit, counterparty and operational risks. Credit risk management remains a key priority for both Enterprises given their substantial amount of remaining legacy distressed assets and ongoing stress in certain housing markets," FHFA said. The agency also noted a growing shift—more mortgage servicing portfolios are being transferred from banking organizations to non-depository institutions.
Record keeping, legacy systems, and human capital all remain concerns for the government agency.
In 2013 alone, the FHFA reported it had completed 448,000 foreclosure alternative actions in 2013, including 243,000 loan modifications. "The Enterprises remain exposed to credit, counterparty and operational risks. Credit risk management remains a key priority for both Enterprises given their substantial amount of remaining legacy distressed assets and ongoing stress in certain housing markets," the agency's report said.
However, the FHFA believes that the Enterprises cannot remain in conservatorship permanently. The agency said that the expansion of private sector participation is essential for the long-term health of the mortgage market, with the goal of executing risk-sharing transactions on $30 billion of mortgages as having been met.
The FHFA believes that, "In particular, it is critical that the Enterprises dedicate appropriate resources to maintaining safe and sound operations in the face of uncertainty regarding the long-term prospects of the Enterprises' operations and charters."
http://dsnews.com/news/06-16-2014/fhfa-report-congress-reveals-milestones-problems
Well I got more at $4.00. We will see which side of the line I am on. That fine line between courage and stupidity.
Definately Obi vs. Yank. What was he thinking? At least Roberto Duran was smart enough to quit and say "NO MAS".
Obi,
You are always stifling irrational, slanted and skewed rants from other posters with your logic and facts and intelligent questions. I am sure that you are making these members quite uncomfortable and confused with all of your ladeda provocative gobblygook. Good job. Keep it up.
I am quite pleased that there are informed members such as you here that help the rest of us so much.
Thanks
Fannie Mae, Freddie Mac: Fairholme Responds to Government
by valueplaysJune 14, 2014, 10:13 pm
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I find it reassuring when I am invested in a Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof) legal case and my line of thinking seems to coincide with the side I am invested with. This isn’t to say “I am right” or that my side will be the winner (it does all comes down to what the judge rules) but it does tell me though that I have a real good grasp of the arguments here. That does help an investor begin to weigh odds of success failure and make investments accordingly. It also allows for more informed thought given the inevitable wild and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof) unpredictable price swings that always accompany this type of investment. If the price tanks due to a news report (the media is famous for getting these cases VERY wrong) or a filing, having a good grasp of what is going on allows one not to panic but rather to make a rational decision.
On June 3rd I said:
Their response is striking in both that they re-argue most of the points Sweeney previously rejected in allowing the discovery in the first place……
On June 10th lawyers for Fairholme responded to the gov’t motion by saying in their opening paragraph regarding Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof):
If a single theme runs throughout the Government’s motion, it is the suggestion that the Court should reverse or substantially narrow its earlier ruling authorizing discovery. Thus, the Government rehashes its arguments that discovery should not go forward because Plaintiffs’ claims fail as a matter of law and would impermissibly interfere with FHFA’s operation of the Companies. The Court has rejected those same arguments before, and it should do so once again.
Regarding FHFA Head Watt’s statements:
On June 3rd:
At this point one must ask Director Watt if he is paying attention to anything going on in Congress? It is now almost a daily drumbeat from Sens Warner, Crapo, Johnson and Corker that the GSE’s must be eliminated. Is there anything more potentially destabilizing to an entity than Congress calling for its obliteration? Didn’t the Johnson/Crapo bill just exit the Senate Banking Committee (although just barely)? Doesn’t that bill call for the wind down of the GSE’s?
Fairholme said regarding Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof):
This assessment is confirmed by the fact that government officials have frequently opined on the Companies’ future without any apparent concern that doing so would adversely affect mortgage markets. The Government has already released reports containing detailed, forward- looking financial projections for the Companies, including as recently as six weeks ago.4 The Government’s assertions, backed by sworn declarations, that the financial markets could be de- stabilized by public disclosure of the Government’s internal “projections of the future profitabil- ity of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof) under a range of economic, business and policy scenarios,” Watt Decl. ¶ 7, raise this all but inevitable inference: either the Government’s public reporting of precisely this same type of information has been misleading, or its alleged concerns about market destabilization are a pretext for some other reason(s) to conceal the re- quested information. Moreover, FHFA and Treasury officials have publicly disclosed their decision to wind up the Companies and not permit them to rebuild capital and exit the conserva- torships.5
The financial calamity the Government predicts has not come to pass. 6
I fully expect the government’s motion against Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof) to be denied. Judges really don’t take too kindly to the basis of your argument being “Judge, we should win this motion because like we’ve said repeatedly, you were wrong in your initial decision………”
Yeah……guess how that is going to go over…
Fairholme Response RE Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof)
The gov’t may again try to request reconsideration of this Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof) ruling when it goes against them but by that time it will have been the 4th attempt to win the same argument and denial of their request will be just a formality. As I’ve said before this really starts getting interesting once full discovery starts after this ruling (no time frame on that). I also think attitudes both in Congress and FHFA/Treasury get a whole lot more cooperative. None of the folks who initiated the conservatorship or the 3rd Amendment are still around. Bush, Geither, Paulson, DeMarco and Lockhart are all long gone. Those currently in their places can easily save an embarrassing discovery process and even more embarrassing trial by simply throwing those before them under the bus and undoing the conservatorship and 3rd amendment “for the good of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) / Freddie Mac (or lack thereof) shareholders, taxpayers, financial markets and American homeowners” and look like heros. In DC that is called “pragmatism”.
However, like all things in DC, they will not come to this solution until their backs are against the wall……….but they will get there
http://www.valuewalk.com/2014/06/fannie-mae-freddie-mac-fairholme-responds-to-government/
See ya.
That is a copy and paste from an author. I am not quoting. I am only sharing info. With the board. You donotunderstand. Just like the old NFL comercials. Where the viewer gets to see a rerun of a controversial play. I post it all. You make the call.
U.S. Tells Citi to Raise Mortgage Settlement Offer
I don't have a subscription.
http://online.wsj.com/articles/u-s-to-file-suit-against-citi-if-it-doesnt-raise-offer-to-settle-probe-1402674315?mod=pls_whats_news_us_business_f
1 Reason to Be Happy About Fannie Mae and Freddie Mac’s Big About-Face …
by admin on Saturday, June 14th, 2014 | No Comments
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Within the last few weeks, a sustained buzz surrounding new changes at the Federal Housing Finance Agency, Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac‘s (NASDAQOTCBB: FMCC ) conservator, have investors optimistic about the future of the two government sponsored entities (GSEs).
But a positive attitude about those changes may be better suited for the businesses directly effected — the nation’s mortgage originators.
Big story, fast-fading response
Back in May, within the hours following an eye-opening speech from FHFA head-honcho Mel Watt, both Fannie and Freddie were up nearly 10% as investors took Watt’s words to mean that the future of the GSEs was solidifying — though my fellow Fool Patrick Morris demystified that notion thoroughly.
Since mid-May investors have cooled a bit on the news, though both GSEs still sit nearly 4% higher than pre-speech share price levels. But with the legislative future still very fuzzy for Fannie and Freddie, another group of stocks may experience a longer lasting boost from the news, though few have examined what Watt’s announcements mean for them — the nation’s biggest mortgage originators.
Battle over buybacks
One of the big revelations of Mel Watt’s speech was the adjustment of guidelines for when either Fannie or Freddie would require a bank to buyback a failing loan.
Acting under a statutory mandate from its conservatorship to attempt to reclaim losses, both GSEs have sued the nation’s biggest mortgage lenders over delinquent and non-performing loans. A total of 18 law suits were filed in relation to $200 billion in mortgage-backed securities. Between 2011 and 2013 alone, lenders had to absorb the costs of $81.2 billion in buybacks.
From 10 settlements, Fannie Mae and Freddie Mac have recorded $19 billion this year alone. Most recently, Bank of America (NYSE: BAC ) settled with Fannie Mae and Freddie Mac to the tune of $9.3 billion ($6.3 billion in cash and $3 billion in securities), the second such settlement for the bank with the GSEs. In total, Bank of America has paid out nearly $20 billion to the GSEs, split between cash settlements and securities or loan repurchases.
Tough standards
It’s no surprise then, as Watt noted in his speech, that the banks are still concerned with the amount of uncertainty surrounding repurchasing risks, resulting in continued use of strict qualification standards.
Since the financial crisis, most banks have enacted standards that include “overlays,” which are requirements above and beyond those required by the GSEs for conforming loans. Overlays may be higher credit score requirements or higher down payments, among other hurdles designed to weed out riskier borrowers. Those overlays are considered a big hindrance to the recovering housing market, dissuading mortgage newcomers from coming into the market or disqualifying borrowers that would historically be creditworthy.
Banking on change
The announced changes for the GSEs’ buyback requirements came in a three-pronged approach to assuage some of the banks’ biggest concerns about loosening credit qualification standards:
Eliminating repurchase liability for banks when loans have successfully passed the 36-month mark, even if there were two late payments during that time period
Enacting spot-checks for mortgages sold to the GSEs, with repurchase liabilities wiped out if the loan passes that inspection
Reducing the frequency of required repurchases by banks to cover losses for bad loans, if mortgage insurers refuse to pay a claim
The new approach will go into effect as of July 1, giving the banks a bit of time to evaluate their position on loosening credit standards for the crucial summer sales season. Nevertheless, though the FHFA and Watt may have given the nation’s banks a good starting point for softening their credit standards, there’s currently nothing that the agency can do to force the issue.
In response to a question about Watt’s comments, Bank of America (NYSE: BAC ) CFO Bruce Thompson stated that the changes are positive from a policy perspective, but as a lender, the bank is interested in generating loans that will provide revenue and avoid the costs of delinquency. Thompson went on further, “[a]s we move forward, we’re just not interested in putting on loans that are going to have heavier-than-average delinquent content.”
Investor takeaway
Though the banks may continue to be leery of forced loan buybacks and cash settlements, despite the proposed changes outlined by Watt, it may be in the best interest of all parties to loosen some credit standards. It’s not a secret that investors have been disappointed by the declining origination figures posted by the nation’s top banks, so expanding the availability of credit to traditionally creditworthy borrowers may help boost the banks back to record profits.
For now, we’ll have to wait until the changes noted by the FHFA’s Watt are finalized and officially enacted to see how the banks move forward.
http://originatortimes.com/freddie-mac/1-reason-to-be-happy-about-fannie-mae-and-freddie-macs-big-about-face/
Motley Fool Billionaires case (see last post)
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This Billionaire's Case For Saving Fannie Mae and Freddie Mac
By Wayne Duggan | More Articles | Save For Later
June 14, 2014 | Comments (0)
Flickr / insider_monkey.
After researching a recent article I wrote on the aftermath of the financial crisis, I decided to dig deeper into the story that Bill Ackman (rockstar hedge fund manager, CEO of Pershing Square Capital, and on-again/off-again arch-nemesis of Carl Ichan) has been boosting a large position in Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac (NASDAQOTCBB: FMCC ) .
To understand why Ackman would choose to bet on these two government-run casualties of the financial crisis, we first need to take a look at some history.
What happened to Fannie and Freddie?
The tailspins in Fannie Mae and Freddie Mac started during the housing bubble when mortgage originators started approving sub-prime mortgages to borrowers with bad credit.
The idea seemed to be that by bundling a bunch of terrible sub-prime mortgages into a mortgage-backed security (MBS), you end up with a security that is not nearly as risky as each of the underlying mortgages itself was.
As it turns out, a bundle of crappy mortgages produces a crappy MBS.
The problem was that the investors that were buying these crappy MBSs had no idea how bad they were because many of them were still AAA-rated by credit agencies, the highest rating possible for a security.
When the sub-prime mortgage borrowers inevitably defaulted on their payments, Fannie and Freddie stopped receiving mortgage payments. That meant that the GSEs did not have the capital to pay the the guarantees they owed to MBS investors, and the market value of MBSs started to tank.
Unfortunately, Fannie and Freddie combined had over $1.5 trillion of these mortgage-related assets on their own balance sheets, which compounded the GSEs massive losses from their guarantee business.
Losses were so overwhelming that Fannie and Freddie required a $187 billion government bailout and were placed under conservatorship by the Federal Housing Finance Agency (FHFA) in 2008.
Initial terms of the bailout
In return for the liquidity to remain operational, Fannie and Freddie initially accepted the following bailout terms from the government. First, the Treasury received warrants to purchase 79.9% of the common shared of the GSEs for a "nominal" price of $0.00001 per share.
In addition, Fannie and Freddie each issued the Treasury $1 billion in shares of preferred stock that pay an annual 10% dividend. In order to make these dividend payments from 2008 to 2011, the GSEs issued even more shares of preferred stock to the Treasury. However, when Fannie Mae and Freddie Mac eventually returned to profitability in 2012, they were finally able to pay the 10% dividend from their own pockets for the first time.
Treasury changes the rules
Things were looking slightly up for Fannie and Freddie shareholders in 2012 until the Treasury dropped a bombshell: they amended the terms of their preferred shares to pay dividends amounting to 100% of the earnings of the GSEs.
In other words, this "net worth sweep" means that every single cent that Fannie and Freddie earn from this point forward will be siphoned off by the government.
Ackman's Case
Bill Ackman and other Fannie and Freddie shareholders believe that this one-sided change in the terms of the bailout agreement is illegal and will eventually be overturned in court.
Ackman believes that, as a conservator, the FHFA has a duty to preserve and conserve the assets of the GSEs.
Last month, Ackman presented his argument that, if the net worth sweep is repealed, he sees plausible price targets for the GSEs ranging from $23 per share to $47 per share.
Source: Ira Sohn Conference Presentation.
Ackman's plan for the GSEs involves dramatically raising their capital requirements and ditching their fixed-income arbitrage business all together. In his presentation, Ackman asserts,
If the GSEs increase their capital levels and become pure mortgage guarantors, they can be a simple, low-risk, and effective solution for housing finance reform.
Ackman argues that relying on the private sector to take over the role that the GSEs currently serve in the housing market, is risky, untested, and impractical. In fact, Ackman shows that potential minimum capital requirements up to $500 billion for the GSEs existing $5 trillion MBS portfolio is more capital than was raised in all the U.S. IPOs from 2004 to 2013 combined!
Even if the private sector could come up with this unprecedented amount of capital, g-fees and interest rates could skyrocket to a level that would discourage mortgage originations and lead to another downturn in the housing market.
What's a shareholder to do?
The takeaway message from Ackman's presentation is not that shareholders should expect their $4 Fannie Mae stock to be trading at $40 in a few years. For Fannie and Freddie shares to get to Ackman's target of $23 to $47, a series of favorable events need to take place first.
In fact, until the net worth sweep is overturned in court, Fannie and Freddie shares aren't worth the paper they're printed on.
One thing seems certain: the potential for large returns on these stocks exists, but for now shareholders are left with nothing more than hope.
http://www.fool.com/investing/general/2014/06/14/this-billionaires-case-for-saving-fannie-mae-and-f.aspx
KBW: Plan to wind down GSEs will fail
Analysts say GSEs' survival chances keep improving
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On Friday, Mary Miller, the Department of the Treasury’s under secretary for domestic finance, said that the administration still supports the wind down of Fannie Mae and Freddie Mac.
“There is no quick fix solution around this,” Miller said at the National Housing Conference Annual Policy Symposium. “Only legislation can protect taxpayers by responsibly winding down the GSEs and replacing them with a system where a government guarantee is transparent and explicitly priced.”
Miller also said that even if rehabilitating the GSEs was possible, recapitalizing the enterprises would be a process that would take “at least” 20 years. “During these 20 years, the taxpayer would remain at risk of having to bailout the GSEs during another downturn,” she said. “We would also be signing up for another 20 years of underserving responsible credit-worthy Americans seeking to buy a home.”
Despite Miller’s affirmation that the administration wants to wind down Fannie and Freddie, analysts from Keefe, Bruyette and Woods said that the GSEs aren’t going anywhere.
“We think the headline will be a negative for the two companies,” KBW’s analysts said. “However, Miller's comments do not change our view that the chances that Fannie and Freddie survive are improving.”
KBW’s analysts predict that the Treasury will eventually shift its focus from winding down the GSEs to seeking to unwind its investment in the companies. But the analysts said that this shift could take several years.
KBW’s analysts also say that Miller’s call to wind down the GSEs won’t be the last of its kind. “We expect to continue to see headlines like Miller's comments but we think legislation to unwind Fannie and Freddie will fail to pass Congress,” KBW’s analysts said.
As for the future of Fannie and Freddie, KBW’s analysts said the GSEs' odds of survival keep going up with each passing day. “Inertia is Fannie and Freddie's best friend,” they said.
http://www.housingwire.com/articles/30321-kbw-plan-to-wind-down-gses-will-fail
THIS MAKES MY HEAD SPIN.
Leftists Miss David Brat on Financial Meltdown
June 13, 2014 · By Robert Romano · 0 Comments
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Fannie Mae Headquarters (Source: Wikimedia Commons)
Fannie Mae Headquarters (Source: Wikimedia Commons)
Formerly unknown congressional candidate Dave Brat has been in the headlines ever since he ousted soon-to-be former House Majority Leader Rep. Eric Cantor for Virginia’s 7th Congressional District Republican nomination.
Now, Brat faces an even greater challenge in the general election. First up is taking on the left-wing political intelligentsia, which is attempting to eviscerate his election chances.
For example, writing for Mother Jones, Molly Redden and David Corn try to discredit Brat’s critique of government policies that led to the financial crisis.
“An economics professor at Randolph-Macon College in central Virginia, Brat frequently has repeated the conservative canard that Freddie Mac and Fannie Mae brought down the housing market by handling the vast majority of subprime mortgages,” write Redden and Corn, adding, “That is, he absolves Big Finance and the banks of responsibility for the financial crisis that triggered the recession.”
Redden and Corn are referring to Brat’s frequent refrain on the campaign trail that “Fannie and Freddie made two-thirds of all subprime mortgages.”
At this point, it is probably best to defer to American Enterprise Institute resident fellow Edward Pinto, former Fannie Mae executive vice president and chief credit officer, on this count. After all, he literally wrote the book on how Government Sponsored Enterprise (GSE), congressional, and Department of Housing and Urban Development (HUD) policies were among the primary causes in the build-up of hundreds of billions of dollars non-traditional mortgages that nearly crashed the global economy.
Now, even if one takes a broad view of “subprime” as “residential mortgages issued to high-risk borrowers, such as those with a history of late payments or bankruptcy,” as the Financial Times does, or simply, mortgages that are not prime, a better term would be Pinto’s non-traditional mortgages.
Also, it would be more accurate to say more than two-thirds of the crappy loans were Fannie, Freddie, the Federal Housing Administration (FHA), Federal Home Loan Bank, and Community Reinvestment Act (CRA) required loans.
Per Pinto’s forensic study: “As of June 30, 2008 over 70 percent of the 26.7 million NTMs with weak or high risk characteristics — 19.25 million loans – were owned or guaranteed by (a) Fannie Mae and Freddie Mac (11.9 million), (b) the Federal Housing Administration and other federal agencies (4.8 million); (c) Federal Home Loan Bank (FHLB) investments in Alt-A and Subprime Private MBS (0.3 million) or (d) banks and other lenders originating loans pursuant to CRA requirements and HUD‘s Best Practices program (2.2 million, net of CRA loans already accounted for in (a) and (b). These numbers suggest that government policies and requirements were the source of the loans with weak or high risk characteristics, and thus the cause of the financial crisis.”
Those quibbles aside, Brat is pretty much right. The federal government was responsible for more than two-thirds of the risky mortgages that were made in the bubble.
Adding to the trouble, the GSEs were undercapitalized as a matter of policy, and enabling them to lead the market in low-income borrowing, according to Pinto: “The GSEs only needed $900 in capital behind a $200,000 mortgage they guaranteed — many of which by 2004-2007 had no borrower downpayment. In order for the private sector to compete with Fannie and Freddie, it needed to find ways to increase leverage.”
When Americans for Limited Government reached out to Pinto in 2010 about a draft version of his forensic study, he told us that the GSEs were driving the market for non-traditional mortgages and that the “market response was: if it’s okay with Fannie and Freddie (the de facto standards setters) it must be okay for us.”
The build up by Fannie and Freddie was deadly, would have never been possible without HUD mismanagement, and had unquestionably negative feedback throughout mortgage markets, Pinto notes: “HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.”
Together with the HUD and the FHA, Fannie and Freddie helped to cause the crisis by weakening underwriting standards, lowering down payments, and generally degrading the quality of credit in both government and private backed loans. Also, because of the implicit backing of taxpayers, the GSE-issued securities were automatically granted AAA bond ratings, and the Fannie and Freddie were even able to misrepresent the quality of mortgages that underlined those securities.
As if that was not bad enough, Fannie and Freddie crafted a marketing plan that promised a higher rate of return than treasuries, but with the same risk associated with a taxpayer guarantee.
It was that implicit guarantee that enabled the GSEs to sell some $4.7 trillion of mortgage-backed securities, $1.5 trillion of which were sold overseas to investors, as reported by the New York Times. As more securities were sold, Fannie and Freddie bought more mortgages and bundled them into securities. As a direct result, Fannie and Freddie were able to acquire about half of all mortgages as of July 2008.
By 2008, Fannie and Freddie held $1.835 trillion in higher-risk mortgages and mortgage-backed securities: $1.646 trillion, were GSE-issued mortgage-backed securities, and $189 billion of subprime and Alt-A private mortgage-backed securities.
Brat is correct to lay the crisis largely at the feet of Fannie and Freddie. They, along with HUD, FHA, and Congress were the ones that loosened the underwriting standards. Private sector leverage was largely a response to what Fannie and Freddie were doing in the market.
To see which institutions had the larger role to play, just look at the size of the bailouts. To date, the Federal Reserve has bought back more than $1.6 trillion of mortgage backed securities (MBS) that were issued by the GSEs, including Fannie, Freddie, and also Ginnie Mae (which guarantees FHA and VA loans), according to the 2010 Federal Reserve audit of the MBS purchase program. In addition, the GSEs received $187 billion directly from taxpayers.
Therefore, the GSEs were responsible for approximately $1.8 trillion of the crisis. Comparatively, AIG needed an infusion of $182 billion of loans from the Federal Reserve and TARP for its role in insuring subprime and other risky loans against default. The Bear Stearns deal was $25 billion. Another $289 billion in TARP loans were made to affected institutions, too. So, on a bailout scale, $1.8 trillion was spent on GSEs in direct bailouts and about $500 billion was lent to the private sector. More than 3 to 1.
The difference is the private sector paid back their emergency loans. The $1.8 trillion spent on Fannie and Freddie was a direct subsidy from the Fed and from Congress. How it will be recouped, for example, if the Fed will simply hold the mortgages to maturity, transmitting interest earned to the Treasury, or the securities are sold to private sector actors, remains to be seen.
http://www.americanclarion.com/leftists-miss-david-brat-financial-meltdown-31497
But on Brat’s primary contention, yes, government policies, including the GSEs, were responsible for 72 percent of the risky lending. Private institutions on their own accounted for 28 percent.
Brat was not absolving anyone, but he could be more specific — perhaps just include Ginnie in the statement “Fannie and Freddie made two-thirds of all subprime mortgages” — but the general idea that the government was responsible for the vast majority of the risky lending is spot on accurate.
This article is printed with the permission of the author(s). Opinions expressed herein are the sole responsibility of the article’s author(s), or of the person(s) or organization(s) quoted therein, and do not necessarily represent those of American Clarion or Dakota Voice LLC.
Recapitalizing Fannie, Freddie not viable: Treasury official
WASHINGTON (Reuters) - A senior U.S. Treasury official on Friday rejected calls to recapitalize Fannie Mae and Freddie Mac, saying it would take at least 20 years to make sure they were adequately funded and that in the meantime taxpayers would be on the hook.
In remarks to a housing conference, Treasury Undersecretary Mary Miller repeated the Obama administration's call that the two so-called government-sponsored enterprises be wound down.
"Critics of reform would suggest that we can simply recapitalize the GSEs and avoid difficult decisions around creating a new system," she said. "Even if truly rehabilitating the GSEs were possible, recapitalizing them adequately would take at least 20 years."
"During these 20 years, the taxpayer would remain at risk of having to bail out the GSEs during another downturn," Miller added
Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them into securities they sell to investors with a guarantee, were seized by the government in 2008 as loan losses threatened their solvency.
They were propped up with $187.5 billion in taxpayer aid, but they have since returned to profitability and have paid more in dividends to the government than they received in support.
Efforts to wind down the two entities, the largest sources of mortgage finance, have foundered on Capitol Hill, spurring the hopes of investors who would like to see them reprivatized.
Miller noted that their recent profits have been driven largely by one-time, tax-related adjustments and legal settlements. She also noted they are required to shrink their loan portfolios, which are also helping drive income, by 15 percent a year.
"The GSEs will not be able to replicate the levels of revenue they achieved over the past two years," she said.
In her remarks, Miller also called for a greater effort to ensure financing was available for affordable rental housing, noting that the financial crisis and recession had led many Americans to choose renting over buying.
She repeated the administration's call on Congress to allow Ginnie Mae, another GSE, to securitize loans made under a program in which the Federal Housing Administration, a government mortgage insurer, shares risks with state and local housing finance agencies or other qualified lenders.
But Miller said the administration was not waiting for congressional action. Instead, it was exploring whether funding might be available from other governmental sources for loans already guaranteed through FHA's risk-sharing program, she said.
"This could present a viable interim solution and we hope to say more in the near future," Miller said.
http://mobile.reuters.com/article/idUSKBN0EO1FU20140613?feedType=RSS&irpc=932
Fannie Mae and Freddie Mac Ruled Exempt From Transfer Tax
Fannie Mae and Freddie Mac (FMCC) are exempt from state and local taxes, including transfer taxes, a Washington appeals court ruled in the latest decision shielding the government-owned mortgage finance companies from attempts to collect levies on property transfers.
An Oklahoma county suing to collect the tax wrongly relied on a U.S. Supreme Court ruling that interpreted an exemption to cover only direct taxation, not a levy on the use or transfer of property, according to a decision for a three-judge panel by U.S. Circuit Judge David Sentelle.
The case cited by the commissioners of Kay County applied to exemptions from tax on specific property, while the law covering Fannie Mae (FNMA) and Freddie Mac applies to them directly, Sentelle said in his opinion.
“This is a distinction with a difference: an unqualified tax exemption for specific property necessarily reaches only those taxes that act directly upon the property itself, while a similarly unqualified exemption for a specific entity may reach any and all taxes that ultimately will be borne by the entity,” Sentelle wrote.
An appeals court in Richmond, Virginia, in January and another in Cincinnati, Ohio in May 2013 reached similar conclusions.
The case is Board of Commissioners of Kay County, Oklahoma v. FHFA, 13-7114, U.S. Court of Appeals, District of Columbia (Washington).
To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net
http://mobile.bloomberg.com/news/2014-06-13/fannie-mae-and-freddie-mac-ruled-exempt-from-transfer-tax.html?cmpid=msnmoney&industry=IND_BANKING&isub=
1 Reason to Be Happy About Fannie Mae and Freddie Mac's Big About-Face -- Whether You're an Shareholder or Not
Within the last few weeks, a sustained buzz surrounding new changes at the Federal Housing Finance Agency, Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac's (NASDAQOTCBB: FMCC ) conservator, have investors optimistic about the future of the two government sponsored entities (GSEs).
But a positive attitude about those changes may be better suited for the businesses directly effected -- the nation's mortgage originators.
Big story, fast-fading response
Back in May, within the hours following an eye-opening speech from FHFA head-honcho Mel Watt, both Fannie and Freddie were up nearly 10% as investors took Watt's words to mean that the future of the GSEs was solidifying -- though my fellow Fool Patrick Morris demystified that notion thoroughly.
Since mid-May investors have cooled a bit on the news, though both GSEs still sit nearly 4% higher than pre-speech share price levels. But with the legislative future still very fuzzy for Fannie and Freddie, another group of stocks may experience a longer lasting boost from the news, though few have examined what Watt's announcements mean for them -- the nation's biggest mortgage originators.
Battle over buybacks
One of the big revelations of Mel Watt's speech was the adjustment of guidelines for when either Fannie or Freddie would require a bank to buyback a failing loan.
Acting under a statutory mandate from its conservatorship to attempt to reclaim losses, both GSEs have sued the nation's biggest mortgage lenders over delinquent and non-performing loans. A total of 18 law suits were filed in relation to $200 billion in mortgage-backed securities. Between 2011 and 2013 alone, lenders had to absorb the costs of $81.2 billion in buybacks.
From 10 settlements, Fannie Mae and Freddie Mac have recorded $19 billion this year alone. Most recently, Bank of America (NYSE: BAC ) settled with Fannie Mae and Freddie Mac to the tune of $9.3 billion ($6.3 billion in cash and $3 billion in securities), the second such settlement for the bank with the GSEs. In total, Bank of America has paid out nearly $20 billion to the GSEs, split between cash settlements and securities or loan repurchases.
Tough standards
It's no surprise then, as Watt noted in his speech, that the banks are still concerned with the amount of uncertainty surrounding repurchasing risks, resulting in continued use of strict qualification standards.
Since the financial crisis, most banks have enacted standards that include "overlays," which are requirements above and beyond those required by the GSEs for conforming loans. Overlays may be higher credit score requirements or higher down payments, among other hurdles designed to weed out riskier borrowers. Those overlays are considered a big hindrance to the recovering housing market, dissuading mortgage newcomers from coming into the market or disqualifying borrowers that would historically be creditworthy.
Banking on change
The announced changes for the GSEs' buyback requirements came in a three-pronged approach to assuage some of the banks' biggest concerns about loosening credit qualification standards:
Eliminating repurchase liability for banks when loans have successfully passed the 36-month mark, even if there were two late payments during that time period
Enacting spot-checks for mortgages sold to the GSEs, with repurchase liabilities wiped out if the loan passes that inspection
Reducing the frequency of required repurchases by banks to cover losses for bad loans, if mortgage insurers refuse to pay a claim
The new approach will go into effect as of July 1, giving the banks a bit of time to evaluate their position on loosening credit standards for the crucial summer sales season. Nevertheless, though the FHFA and Watt may have given the nation's banks a good starting point for softening their credit standards, there's currently nothing that the agency can do to force the issue.
In response to a question about Watt's comments, Bank of America (NYSE: BAC ) CFO Bruce Thompson stated that the changes are positive from a policy perspective, but as a lender, the bank is interested in generating loans that will provide revenue and avoid the costs of delinquency. Thompson went on further, "[a]s we move forward, we're just not interested in putting on loans that are going to have heavier-than-average delinquent content."
Investor takeaway
Though the banks may continue to be leery of forced loan buybacks and cash settlements, despite the proposed changes outlined by Watt, it may be in the best interest of all parties to loosen some credit standards. It's not a secret that investors have been disappointed by the declining origination figures posted by the nation's top banks, so expanding the availability of credit to traditionally creditworthy borrowers may help boost the banks back to record profits.
For now, we'll have to wait until the changes noted by the FHFA's Watt are finalized and officially enacted to see how the banks move forward.
http://www.fool.com/investing/general/2014/06/12/1-reason-to-be-happy-about-fannie-mae-and-freddie.aspx
Fannie and Freddie Raking In ‘Tens Of Billions’ Of Dollars
By Jonah Bennett Published: June 11, 2014
http://dailycallernewsfoundation.org/2014/06/11/fannie-and-freddie-raking-in-tens-of-billions-of-dollars/?utm_source=rss&utm_medium=rss&utm_campaign=fannie-and-freddie-raking-in-tens-of-billions-of-dollars
Congress’ main attempt to reform Fannie Mae and Freddie Mac after the 2008 financial crisis won’t protect the public, argues a leading expert on government-sponsored enterprises.
Josh Rosner, New York Times best-selling author and managing director at Graham Fisher & Co, issued this warning about the Johnson-Crapo bill in Washington on Tuesday.
Johnson-Crapo would replace the current structure of Fannie Mae and Freddie Mac with a new government agency financed by the private sector. Government guarantee on mortgage bonds would be available, but only if the private sector sustained significant losses.
Section 305 of the bill, however, allows for risk-waiving in the event of a financial crisis, meaning that 90 percent of investor losses would be covered, and that number would jump to a full 100 percent in a national financial crisis.
Norbert J. Michel and John L
. Ligon at the Heritage Foundation are concerned that “these are the kinds of government guarantees that lead to more leverage in the economy, thus magnifying underlying economic risks.”
Democrats worry that reform would increase the cost of mortgages, excluding credit-worthy borrowers. However, in May, David H. Stevens, president
of the Mortgage Bankers Association (MBA), criticized attempts to avoid GSE reform, due to fears that changes will disproportionately harm minority hom
e-ownership.
Attempts at GSE reform reveal slow progress. The Senate Banking Committee advanced Johnson-Crapo, but the bill must still move through the Senate and the House within six months to remain viable, in light of the upcoming midterm elections.
Rosner stated that meaningful housing reform is possibl
e in 2014 and doesn’t require congressional action. “As a result of the Housing and Economic Recovery Act, the Federal Housing Finance Agency has the authority to set capital stronger standards for Fannie and Freddie,” Rosner added.
In a panel discussion following Rosner’s remarks, Ike Brannon, director of economic policy at the American Action Forum, agreed with the urgent need for reform, given Fannie and Freddie’s influence since 2008. “It’s hard to overstate the degree of regulatory capture that Freddie and Fannie had. [They] were in essence highly-leveraged hedge funds. We don’t need them to promote home ownership…The benefits of home ownership are overrated.”
Fannie and Freddie fully repaid the $188 billion dollars it received from taxpayers in 2008, but they are bringing in tens of billions of profits, said Rosner. Further, a recent internal Treasury memo revealed that the Obama administration continued to promote investment from outside investors, while having no intention to repay them.
One suggested reform in particular does not require congressional action, Rosner argued, and would continue through the conservatorship route, with Fannie and Freddie coming out on the other side as purely private and adequately capitalized firms.