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Obit, thank you very much for the explanation. if I follow...
So NewCo would be run as a cooperative, while an overhauled Fannie and Freddie, stripped of their government charters, would still be owned by shareholders? However, NewCo would issue explicit government backing of loans for a set fee. This fee would be used to capitalize an emergency fund that could be used to protect taxpayers during the next inevitable housing downturn? NewCo would presumably have strong risk assessment and qualified lending standards to back only prime mortgages (let's say historical values of FICO > 650).
The reformed Fannie and Freddie could still make money by issuing/selling MBS and generate profit/dividend for their shareholders. They would essentially be on a level playing field with the rest of the financial institutions (no longer an implicit government guarantee), except they would specialize in the secondary mortgage market and probably have a large infrastructure/platform advantage.
That is a stellar article.
What's your take on this Obit?
http://www.housingwire.com/articles/29060-waters-wants-mortgage-industry-to-fund-fannie-freddie-guarantees
You very well could be right.
This is what I could find from a cursory look:
"The involvement of Fannie and Freddie, and the government guarantee that goes with them, has helped maintain the availability of a mainstay of American home buying: the 30-year fixed-rate mortgage. Fannie and Freddie buy mortgage loans and package them into bonds.
That is why, although it would close down the mortgage companies, the plan from Ms Waters would maintain government involvement through a guarantee, paid for by the mortgage industry, to capitalise an insurance fund. In place of Fannie and Freddie, it creates a new co-operative-owned mortgage securities issuer, according to her aides. The bill is still in draft stages."
-Financial Times, Oct 17, 2013
http://www.ft.com/intl/cms/s/0/a3544488-3733-11e3-b42e-00144feab7de.html#axzz2tzbAhFmK
Contrast that with the language in the housingwire article:
"Waters believes her government guarantee idea on Fannie Mae and Freddie Mac bonds will be key to accomplish this goal. Further she wants to see this happen without costing the taxpayer a dime. Instead, the mortgage industry will pay."
-Housingwire, Feb 21, 2014
One of these articles is incorrect. It is likely that the housingwire article has used language which is in inappropriate, unless Waters' viewpoint has flipped to maintaining FnF but requiring mortgage insurers to capitalize an emergency insurance fund. It may be viable: utilize the infrastructure of Fannie/Freddie, maintain liquidity in the secondary market provided by FnF, do not waste taxpayer money by re-inventing the wheel, and keep the mortgage insurers honest by putting them on the hook. Not sure if this even makes sense?
Comments welcome!
News! Hot off the presses: Waters wants mortgage industry to fund Fannie, Freddie guarantees
Key to preserving 30-year fixed?
By Jacob Gaffney | February 21, 2014
http://www.housingwire.com/articles/29060-waters-wants-mortgage-industry-to-fund-fannie-freddie-guarantees
Congresswoman Maxine Waters is pursuing a formalized proposal that she hopes will preserve the 30-year mortgage.
Waters believes her government guarantee idea on Fannie Mae and Freddie Mac bonds will be key to accomplish this goal. Further she wants to see this happen without costing the taxpayer a dime. Instead, the mortgage industry will pay.
"Next week, I will be discussing a proposal with Democratic members of the Financial Services Committee to reform the GSEs, which takes into consideration the changes in the marketplace since the crisis," Waters said in a statement. "This proposal will preserve the affordable 30-year, fixed rate mortgage and provide an explicit government guarantee that is paid for by industry."
Following today's announcement that Fannie Mae finally returned a profit to the United States treasury, Waters emphasized more work is needed.
Waters most recently said she wants to put the regulatory microscope on the transfer of mortgage servicing rights.
Fannie Mae will pay a dividend in March that will bring the total to $121.1 billion. Since 2008, Fannie received $116.1 billion in government bailouts.
"In 2008, as the economy was reeling out of control, Democrats worked with a Republican Administration to staunch the bleeding by putting Fannie Mae and Freddie Mac into conservatorship," Waters said.
"Doing so was controversial, but the action helped stabilize the housing market and provided Congress the opportunity to address the root causes of the subprime crisis," she added.
News: Fannie and Freddie are more complicated than that
By Ralph Nader | FEBRUARY 21, 2014
http://blogs.reuters.com/great-debate/2014/02/21/fannie-and-freddie-are-more-complicated-than-that/
This article was written in response to “How Ralph Nader learned to love Fannie and Freddie” (February 18) by Bethany McLean.
Bethany McLean’s article deserves a number of clarifying responses.
McLean injects an air of complexity and confusion with regard to my positions on a number of separate issues in what seems to be an attempt to imply a more interesting narrative for her article than exists in reality. Some clarifications are in order:
In the 1990s and early 2000s I opposed corruption in the government-sponsored enterprises (GSEs). I was clear about my admonition of the government subsidies they received in the form of an implicit government guarantee without meeting their obligations to advance affordable housing. I was clear that their drive for profits could tempt them deeper into murky legal waters. My opposition to their management compensation packages and questionable accounting practices were made plain.
Now I am advocating for the GSEs’ shareholders’ rights. This is an issue separate from the previous transgressions and corruption.
In its conservatorship of the GSEs, the federal government has used and abused GSE shareholders. It has unfairly treated the GSEs differently than other bailed-out corporations that were equally — or more — at fault for the financial crisis.
For example, AIG and Citigroup shareholders were given a chance to share in their companies’ recovery. In the Treasury Department’s unilateral amendment of the preferred stock purchase agreements in 2012, the federal government unlawfully changed the terms of its initial investment to its own benefit.
I have long been an advocate for shareholder rights. This is not an issue of supporting Fannie Mae and Freddie Mac in their previous incarnations, but an issue of the rule of law.
There exists a more nuanced position than one of the two extremes of proposing that we either completely eliminate the GSEs or that we maintain them without any reform, warts and all.
I don't get it. Why were Fannie and Freddie treated so significantly different than other TBTF institutions receiving bailout funds under TARP/Capital Purchase Program?
http://projects.propublica.org/bailout/programs/1-capital-purchase-program
Other financial institutions only had to pay 5% interest (periodic commitment fee) and they were eventually allowed to buy back preferred stock warrants held by the Treasury. Why such different rules for FnF? In essence, I suppose this is what some of lawsuits are trying to determine.
News: With Fannie and Freddie Debt Repaid to Taxpayers, Will Uncle Sam Turn Shareholders Into Zombie Investors?
By John Entine | February 21, 2014
Great article by Forbes.
http://www.forbes.com/sites/jonentine/2014/02/21/with-fannie-and-freddie-debt-repaid-to-taxpayers-will-uncle-sam-turn-shareholders-into-zombie-investors/2/
Five years after the government bailed out Fannie Mae and Freddie Mac by covering their combined $187.5 billion debt, taxpayers are poised to be made whole—and record profits are set to stream in as far as the eye can see. But in an odd twist, the government may be poised to commit what some critics say could result in the largest securities fraud in history.
Fannie Mae today reported an annual profit of $84 billion for $2013. Under the terms of the 2008 rescue, all of the profits will be sent to the Treasury. Fannie’s smaller rival, Freddie Mac is also set to confirm its astounding rebound next week It’s a surprising turn of events and a windfall for the government—but a looming potential disaster for shareholders who may lose billions for standing by the beleaguered organizations as the housing market seized during the Great Recession.FM-FM
The two government-sponsored entities (GSEs), which own or guarantee a massive proportion of all home loans in the United States, were on the verge of collapse when the housing market buckled at the height of the financial crisis, prompting the government to put them into conservatorship, an alternative to liquidation that was supposed to protect shareholders. Now, with the Treasury set to recoup its entire investment and then some, one would expect that the firms would be ready to exit government control and begin repaying their beleaguered investors—more than 21,000 of them. But in a bizarre turn in the Fannie and Freddie saga, the near record windfall is for now mostly symbolic. The government reengineered the original agreement to require the GSEs to send all their profits to the Treasury in perpetuity, meaning they can never exit government control.
Even stranger, an explosive government document has emerged that suggests that the Obama Administration appear determined to liquidate most or all of their investments, and Congress stands by with proposals that only codify the Administration’s derelict —committing what an ‘odd fellows’ coalition of über-liberals, shareholder activists and hedge fund managers say could be the largest securities fraud in the history of the United States.
What’s the story behind the government’s apparent securities fraud?
The burgeoning scandal swirls around what appear to be backroom policy decisions made in 2010, just as the housing market showed signs of recovery and the ink turned from black to red on Fannie and Freddie’s books.
While the government was publicly encouraging shareholders to hang on, officials at Treasury, backed by the Administration, quietly changed policy, hatching a plan to bankrupt them, including new investors who came on board after the crash at the Government’s wooing. According to an internal memo addressed to the Treasury secretary from Jeffrey A. Goldstein, then the under secretary for domestic finance, “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”
The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010 and was made public at a shareholder’s rights forum held earlier this month in Washington. It puts controversial meat on the bone of a more ambiguous statement in Fannie Mae’s annual report: “[W]e are no longer managed with a strategy to maximize shareholder returns” and “every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms.”
As New York Times’ business columnist Gretchen Morgensen summarized in a scathing piece last Sunday, two GSEs were not made aware of the new policy that essentially deprived them of future earnings. That appears to be in conflict with securities laws that require the disclosure of any “material” information that might affect an investor’s view of a company. In other words, federal officials were conspiring—that’s a word pregnant with implications but fair in this context—to treat shareholders more like characters in “Night of the Living Dead” than investors helping to keep a fragile agency afloat.
Did the government commit securities fraud? According to James Cummins, a leading securities lawyer who has litigated against Fannie and Freddie since 2004 on various issues, such a sharp switch in policy is “material information because it was going to tell people who might want to buy stock, ‘Hey, by the way, you’re not going to get any dividends and all of the earnings of the company are going to U.S. Treasury.’”
Who are these investors? They include hedge funds like Perry Capital and Pershing Square, but also thousands of other shareholders, including employees, pensioners, 401K funds, mutual funds and small banks, as well as individual shareholders. Among them are shareholder rights groups, including well-known consumer activist Ralph Nader.
Some of these shareholders are long term investors, who saw the stock plummet to pennies on the dollar, while others are funds that took recent but highly risky positions in hopes of benefiting from Fannie’s and Freddie’s recovery. Billions of dollars is at stake.
The litigants, including Nader, point to the government’s guarantee that it would “preserve and conserve the assets and property” of each entity. But the internal government document suggests that federal officials were doing anything but. Over the past two years they’ve siphoned off the profits of the GSEs and sent the money to the general treasury instead of repaying Treasury and taxpayers
The litigants seek no damages nor do they want to short the government’s appropriate windfall for the unanticipated market rebound. “Shareholders are not arguing that taxpayers should not be repaid,” writes Nader in a letter sent earlier this week to Treasury Secretary Jacob Lew. “This is not at issue. Taxpayers should recoup their investment in the GSEs; but the Administration does not have to wipe out shareholders for this to happen.” Nader and other shareholders are asking the government to bide by the 2008 law, rather than what appears to be an internally hatched 2010 policy shift –another quiet form of regulatory overreach
Will potential homeowners become collateral damage in Fannie/Freddie wrangle?
These explosive disclosures come as the House and Senate, with White House encouragement, are poised to debate bills that could wind down the GSEs over the next five years. Neither measure would likely provide common shareholders with any return on their investments.
The federal government’s backroom maneuverings and proposed Congressional bills were prompted by the public’s apparent disdain for the botched housing policy leading up to the bubble burst. During his State of the Union address in January, President Obama called for “legislation that protects taxpayers from footing the bill for a housing crisis ever again”—a view that everyone seems to share. The Administration and many members of Congress say they support unwinding the GSEs in theory, but that’s easier said then done.
Liberals chafe at the thought of bailing out moneyed interests, including GSE shareholders. “The two government-chartered mortgage companies … swallowed billions in toxic mortgage instruments as they chase profits for their private investors,” writes Paul McMorrow, a Commonwealth Magazine editor, in the Boston Globe. “The conflict between taxpayer risk and private profit … can only be solved by putting the companies down for good.” McMorrow argues to put down the now wildly profitable agencies—a mercy killing for any liberals.
Many equally stubborn Republicans are wary of any bill that they say could establish a new, unvetted guarantor for potential homeowners, particularly low income ones who might ‘recklessly’ borrow, creating new government liabilities. That’s always been a myth of course. After all, the implosion came from a Devil’s pact between Democrats trying to please their base with Wall Street and the banks raking in billions by driving demand for “liar loans” and other abusive mortgages. No one has clean hands here.
While emotionally satisfying to the revenge crowd, allowing the government to take away all of the profits from a profitable company while giving nothing to shareholders seems unfair. It also could kill the housing dream of tens of millions of Americans, collateral damage to political wrangling.
President Obama also wants a new law that “keeps the dream of home ownership alive for future generations”—a goal that is highly unlikely unless a newly created super agency that rises Phoenix-like from the ashes of Fannie and Freddie provides the same kind of federal guarantees that critics contend contributed to the near collapse of Fannie and Freddie. Considering the way Congress operates, such legislation is both unlikely—and that may not be a bad thing.
After all, the private sector has down little in recent years to help debt-stretched low-to-middle income people with good credit become homeowners. As The New York Times recently wrote: “[L]ittle in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market… a significant amount of borrowers with less-than-perfect credit scores remain largely shut out of the market.”
No one disputes Fannie and Freddie’s historic role in helping to both creating a strong middle class and contributing to one of the greatest financial debacles in modern times. And no one questions the role of Wall Street in providing critical capital to fuel the American housing dream yet helping to kill the golden goose with its own avarice.
Is there a solution-focused middle ground or are Congress and Obama determined to just kill off the GSEs as a ritual sacrifice to the gods of greed?
In practical terms, and with the mid-term elections looming, reform legislation, while popular in theory, is unlikely to get much traction. Which leaves open the door to the possibility of leaving well enough alone—letting Fannie and Freddie provide guarantees to keep the still-bruised mortgage market liquid, only this time, regulate them properly and ensure they have sufficient capital reserves.
As Matt Levine argues in Bloomberg, “[T]he status quo is great for the government. Right now, Fannie and Freddie are completely controlled by the federal government, while keeping the technical trappings of private ownership (20.1 percent private shareholders, no explicit government guarantee) and thus staying off the Treasury’s balance sheet. They can be used as a tool of housing policy (particularly, they can keep guaranteeing cheap mortgages) without being explicitly federalized.
Perhaps it’s time for a little common sense here. “This need not be an issue of choosing taxpayers over shareholders,” Nader wrote in recent letter to Lew.
With lawsuits flying and more discovery mine bombs likely to blow in the months ahead, and court testimony from the likes of Ralph Nader, nothing good is likely to come of the government’s holding firm on its position that legitimate shareholders can have their rights taken away from them in backroom switcheroo.
Treasury Strikes Gold in Fannie Mae’s $84B Earnings.
A largely supportive video from Bloomberg:
http://www.bloomberg.com/video/treasury-strikes-gold-in-fannie-mae-s-84b-earnings-1NBmBKw2TvOCsNh~3T1aAA.html
Crazy amounts of positive press everywhere: "taxpayers made whole", "government going to make a profit on bailout", "treasury strikes gold", "taxpayers profit". Hopefully it means something in terms of public perception of Fannie/Freddie.
https://news.google.com/news/story?pz=1&cf=all&ned=us&hl=en&q=fannie+mae&ncl=dvszbtHn8wufe4MNBJQY01CxAjtuM&cf=all&scoring=n
News: People Really Didn't Like Fannie Mae and Freddie Mac
By Matt Levine | Feb 19, 2014
Interesting article...quite satirical and full of misinformation but raises some alternative viewpoints.
http://www.bloomberg.com/news/2014-02-19/people-really-didn-t-like-fannie-mae-and-freddie-mac.html
"Can the government commit securities fraud?"1 is one question that is raised by Gretchen Morgenson's column about Fannie Mae and Freddie Mac this weekend. Fannie and Freddie seem to be having a cultural moment, with their hedge fund defenders -- Perry Capital, Pershing Square and, I guess, Fairholme2 -- being joined by otherwise non-hedge-fundy types like Ralph Nader and Gretchen Morgenson to demand justice for Fannie and Freddie's shareholders, because I guess if anyone needs justice it's Fannie and Freddie shareholders.
The facts are long and convoluted but here is a mildly opinionated summary:
In September 2008, Fannie and Freddie were Bad, and the government agreed to lend them vast open-ended amounts of money in exchange for (1) a 10 percent annual interest on those checks and (2) an 80 percent equity stake in the companies.3
For much of the next few years, Fannie and Freddie struggled even to pay the annual interest, with the absurd result that Treasury kept lending them more money to pay the interest that was owed to Treasury.
By mid-2012, though, things had changed, Fannie and Freddie were profitable, and it looked like there was some chance that they might one day have enough money to pay back their loans4 and once again become freestanding companies run for the benefit of their shareholders.
But instead the terms of the bailout were amended so that, instead of getting a 10 percent return on its preferred stock, Treasury would just get to keep all of Fannie and Freddie's profits forever.
Shareholders were bummed and did a whole lot of suing.
That's the story. I've in the past been a little sneery about Fannie and Freddie's shareholders' efforts to sue their companies back from the government, but honestly that story is not unsympathetic, in a very path-dependent way. Like, if the story was:
in September 2008, Fannie and Freddie were Bad, so the government nationalized them and gave their shareholders nothing except a kick in the pants on the way out,
then those shareholders would still have sued their brains out and I'd have no sympathy for them.
Because Fannie and Freddie were Bad, and more than that they were relying on an unpriced implicit government guarantee of their liabilities that benefited shareholders for years. And if the price of that guarantee turned out, ex post, to be total expropriation of shareholders, well, rough justice.
But that's not the story. The story is the thing above, with its two stages: The initial bailout, with a negotiated 10 percent rate plus equity ownership, was not a complete nationalization of Fannie and Freddie. And it was not a nationalization for good reasons, and those reasons were mostly for Treasury's benefit.5 The second stage, which kind of was a complete nationalization, but without calling it that, might have seemed like rough justice in 2008, but in 2012 it just seems rough. Why should the government take away all of the profits from a profitable company, and give it nothing in return?
There might be some good answers to that question,6 but the leading answer really seems to be because the government hated Fannie's and Freddie's shareholders and wanted to punish them. That's the theory behind, for instance, this Perry Capital lawsuit, and it's the theory behind Morgenson's column.
That column takes us back to December 2010, after the initial bailouts but before the return to profitability. That month, a Treasury undersecretary wrote a memo (to Tim Geithner) laying out arguments for and against waiving some fees that went along with the the Fannie and Freddie bailout loans. His reasons to waive the fees are long and boring, at least 10 bullet points, depending how you count. His reasons to impose the fees take up only two bullet points:
Makes clear the Administration's commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.
Illustrates further commitment to recouping taxpayer support.
The government did not impose the fees. So ... I mean, I guess that means that Geithner rejected the arguments for imposing the fees? Including the first argument, the one about the Administration's commitment to ensure that shareholders never saw any money ever again?
I dunno, this sentence from a memo halfheartedly supporting a policy that the government rejected doesn't strike me as completely airtight evidence of the government's official position, but whatever. In the event, the government really did end up making sure that common equity holders never got any positive earnings, so I guess that was the position, whether or not it was adopted in December 2010. Anyway, Morgenson:
Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed. That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae. Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings.
So was the government committing securities fraud? Sure, why not.7 For giggles, here's Fannie's stock price from December 20, 2010 -- the date of that secret memo -- until September 1, 2012, two weeks after the government publicly announced that it was taking all of Fannie's profits for itself:
If you zoom out to like a 2006-2014 chart, this whole section of the chart looks like a flat line at zero. The 2007 high was $69.49 a share.
If you zoom out to like a 2006-2014 chart, this whole section of the chart looks like a flat line at zero. The 2007 high was $69.49 a share.
That profit grab hurt the stock a little, but not that much. That, and the fact that it now trades at $3.40 a share, four times the 2011 high, suggests that the government's officially stated position is not, you know, overwhelmingly material to shareholders.
The securities fraud question is ... I guess sort of an interesting one? Here, let me phrase it this way: When does the federal government become obligated to disclose facts that would be material to shareholders of public companies? My Google-based legal research has not been fruitful, but I'm going to go ahead and guess that the answer is "never," and that the government doesn't have to make policy pronouncements based on what shareholders want to know. But I could be wrong.8
All of the wrangling over Fannie and Freddie's past is, of course, mostly a symptom of the wrangling over their future. And the fact that so much wrangling is happening now suggests, at the margin, that their future is looking a bit brighter. My assumption has long been that the status quo is great for the government. Right now, Fannie and Freddie are completely controlled by the federal government, while keeping the technical trappings of private ownership (20.1 percent private shareholders, no explicit government guarantee) and thus staying off the Treasury's balance sheet. They can be used as a tool of housing policy (particularly, they can keep guaranteeing cheap mortgages) without being explicitly federalized.
Doing anything with Fannie and Freddie seems like an annoyance. Making mortgage insurance an explicit government program, or really privatizing Fannie and Freddie, or anything on the spectrum in between, would require a considerable expenditure of political capital, and might even require legislation.9 The only way that anything will happen with Fannie and Freddie is if the status quo -- the lawsuits, the awkward discovery in the lawsuits, the pressure from columnists and Ralph Naders -- becomes an even bigger annoyance than doing something would be. I don't think we're there yet, but we do seem to be getting closer.
-----------------
Footnotes:
1 Oh, I mean the federal government. Municipal governments can totally commit securities fraud. (Er, "can" meaning they can be charged with it. Not that they're allowed to do it. They're not.)
2 Not a hedge fund, fine.
3 Two corrections to that. One, that "loan" is technically preferred stock, and the "interest" is a dividend, though that has little practical importance for our purposes. Two, the 79.9 percent equity stake was to avoid taking the GSEs onto the government balance sheet: A key goal of all GSE-related maneuverings is to make sure that the GSEs' government guaranteed debt is not, for accounting purposes, treated as government guaranteed debt. Speaking of securities fraud!
4 Normally one can not really "pay off" preferred stock, but Fannie and Freddie's preferred stock actually had an "Optional Pay Down of Liquidity Preference" feature, so they could have paid it off.
5 That is: Treasury, for its own institutional reasons, doesn't want to consolidate Fannie and Freddie onto its balance sheet, as it would have to do with 80+ percent equity ownership. Consolidation would mean taking Fannie and Freddie's $5.2 trillion of liabilities onto Treasury's balance sheet, and, you know, Treasury only has so much room to take on liabilities.
6 The leading answer comes from Treasury's motion to dismiss one of the lawsuits in the case, particularly section II.D, starting on page 49, with the hilariously unambitious title "The Third Amendment Was the Result of Reasoned Decision Making." Treasury's argument is that, at the time, everyone thought that Fannie and Freddie's profits would never be enough to support paying a 10 percent dividend in the long run, so amending the agreement to make the dividend "whatever profits you have" rather than "10 percent of what we've loaned you" would make Fannie and Freddie more stable.
This argument ... consists of words? Here is a March 2013 report from the Inspector General of the FHFA pointing out that "over the long run, the new system could result in larger net payments to Treasury." Here is some simple arithmetic (based on ProPublica's bailout numbers):
Dollars in billions
Dollars in billions
So since the amendment, Fannie and Freddie have paid Treasury a total of $111 billion more under the new plan than they would have under the old one. But they couldn't have afforded the old one. Hmm!
7 Why would the government do this? Well here is sort of a loony-sounding theory:
Failing to disclose the administration’s hard line on the companies’ shareholders is disturbing for another reason. In bailing out Fannie and Freddie, the Treasury received warrants — optionlike securities that rise in value when the shares underlying them do. When investors, hoping for a housing recovery, flocked to the shares and pushed them higher, the value of the warrants increased. Fannie’s common stock now trades at $3.06 a share.
Given Treasury’s interest in a rising stock price, depriving common equity holders of future earnings was especially important for investors to know, Mr. Lowenfels said.
The theory seems to be that Treasury was withholding negative news in order to push up the market price of its warrants, so it could ... sell the warrants at inflated prices? Obviously it did not sell the warrants, and selling the warrants directly contradicts the whole never-reprivatize-Fannie-and-Freddie plan. I do not understand this fretting at all. Just because you own stock, or a stock-like thing, does not necessarily mean you have an "interest in a rising stock price." I mean, usually it does, but this is not a usual situation.
8 Also, it's not like the government was really encouraging Fannie and Freddie shareholders. Ralph Nader's view is that the worst thing the government did to shareholders -- "the cruelest and most unnecessary diktat of all," in his words -- was delisting Fannie and Freddie from the NYSE in June 2010, six months before this secret Treasury memo. As Nader points out, this "took the shares down to the range of 30 cents, chasing away many institutional holders." Which was the point: to make it clear that you should only own Fannie or Freddie stock if you're a gambler or a kook. The plan more or less worked, though ran into the problem that the gamblers include Perry Capital, and the kooks include Ralph Nader. But, anyway, in December 2010, Fannie and Freddie shareholders can't have been feeling much love from the government.
9 The big appeal of the Fairholme plan to re-privatize Fannie and Freddie is that it probably wouldn't require legislation day one, though it would require handing valuable assets to hedge funds on day one, and down the line it would probably require legislation.
News: Fannie Mae: Nader Ratchets Up The Rhetoric For Public Shareholders
by Saul Griffith | February 19, 2014
http://www.valuewalk.com/2014/02/fannie-mae-nader-ratchets-up-the-rhetoric-for-public-shareholders/
Noted consumer activist Ralph Nader, who has lately taken up the cudgels on behalf of non-government shareholders of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) (he is one himself), wrote yesterday to Secretary of Treasury Jacob Lew seeking clarification on a 2010 US Treasury memo.
A contradiction in terms
The offending memo, which can be read in full here, contains a phrase as follows:
“Makes clear the Administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”
Ralph Nader interprets the phrase as a clear indication that the Treasury had every intention of denying the GSE shareholders any benefits from the companies’ future profits. He asserts in his letter to Lew that this was in clear contradiction of the terms stipulated in the GSEs’ preferred stock purchase agreements that their assets be “preserved and conserved.”
“What legal authority does the Administration have …to completely wipe out shareholders?” asks Nader, considering that taxpayers’ bailout dues would soon be repaid in full by Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)
Gretchen Morgenson on “The Untouchable Profits of Fannie Mae and Freddie Mac”
Ralph Nader attached in his letter a copy of the above article published in the New York Times, and repeats the point raised in it that shareholders could be treated fairly even after repaying taxpayers. “The federal government has similarly recouped taxpayer money used to bailout other corporations (A.I.G., Citigroup, etc) involved in the financial collapse, but has allowed the shareholders of those companies to share in their recovery,” asserts Nader. “The same should be the case with the GSEs.”
Ralph Nader is silent, however, on another issue raised by Morgenson in her article – right or wrong, the decision by the authorities to deny shareholders rights in future profits was material information that was never communicated to the Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s shareholders, based on the opinion of securities law expert Lewis D Lowenfels.
Misrepresentation by officials
Though this non-disclosure of material information is probably bad enough, there was worse before the GSEs landed into conservatorship.
Ralph Nader has long been pointing out that various officials are guilty of painting a rosy picture of the GSEs’ affairs before the housing crisis, leading shareholders to believe that all was well. The reality, once the storm broke, was quite different.
“Shareholders who might otherwise have been apprehensive about keeping their Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) stock, even as the financial crisis was mushrooming, were led to believe these two prominent GSEs were financially sound,” says Nader in his letter dated May 23, 2013 to Jacob Lew, Secretary of the Treasury. “Even the most risk-adverse, prudent investor was comfortable relying on statements from knowledgeable high- ranking government officials who publicly claimed Fannie Mae and Freddie Mac were rock-solid companies.”
One example:
“Let me just say a word about GSE’s, because you raised that. The GSEs are adequately capitalized. They are in no danger of failing.” – Ben S Bernanke, Fed Chairman, to the House Financial Services Committee, July 16, 2008.
In effect, a GSE shareholder was misled before, and kept in the dark later.
Reconciling Ralph Nader
It is interesting that Ralph Nader has a previous history of crusading against Freddie and Fannie.
In her article “How Ralph Nader learned to love Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA),” Bethany McLean digs up his earlier testimony and statements against the GSEs and is surprised that “despite his prescient warnings and his dislike of the GSE business model, somewhere along the way Nader bought stock in Fannie and Freddie.”
She also points to another “irony,” – the alignment of Nader’s interests as a shareholder with “the interest of powerful financial firms – not Nader’s usual pals! – including hedge fund Perry Capital and mutual fund Fairholme Capital.”
“Is it just a story of pure hypocrisy, the way we can all change our minds when our own money is at stake?” asks McLean.
Come to think of it, there really is no hypocrisy here. When Nader demanded better governance and oversight of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) in his 2000 testimony, he was clearly carrying a bat for taxpayers, hoping to shield them from a recurrence of the savings and loan debacle.
It is to his credit that his warnings were so prescient, yet Nader’s priorities have not changed. Pay the taxpayers by all means, but play even-handed with shareholders too, is all he asks.
In all fairness, Ralph Nader has the right to criticize the Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s risky models and executive compensation, yet is fully entitled to demand equity for both taxpayers and shareholders in the same breath.
Where is the hypocrisy in that?
Thanks obit. Your response is much appreciated.
FNMA, 9.5M volume in 1.5 hours. Heaviest I've seen in a long time...
Breaking 3.26 will be huge. It's that downward resistance trendline that has been in play since 11/18.
Obit, a question for your critically-thinking mind.
Hypothetically speaking, what would happen to the lawsuits if the FHFA and Treasury agree to enact a 4th amendment to the PSPA that essentially invalidates the 3rd? Let's say they do this in "good faith" because the taxpayers have "been made whole" (at least in the eyes of public perception). Do the lawsuits seeking to repeal the 3rd amendment then have no grounds to proceed forward? Is the focus on the suits challenging the legality of the decisions made to enact the 3rd amendment or simply seeking to revoke it?
I am aware that Ted Olsen, Cooper & Kirk are representing on behalf of several hedge funds and doing so in the name of constitutionality and shareholder rights. However, I also realize that the hedge funds could mostly care less if they didn't have major skin in the game and would reap huge financial rewards in the repeal of the dividend sweep. So, if the sweep is cancelled on the FHFA/Treasury's own accord, would that give motive for Perry Capital, et al to drop the suit? I do also realize that there are other pending suits challenging 5th Amendment (i.e. illegal takings) violations. So perhaps this preemptive strategy by the govt would not ultimately help much.
Just thinking out loud here. I do not have a legal or financial background, so your insightful thoughts are very much welcome. Thanks in advance for the discussion!
As investors, we should be cognizant of all news...not just the pieces we want to hear. I don't consider posting a negative article a bad thing. Ultimately, this is a place to share and spread information--nothing more or less. One has to choose and follow one's own insight and investment strategy.
News: Owners of Fannie Mae, Freddie Mac Stock Unable to Access Future Earnings
Arrangement could violate securities laws
BY: Daniel Wiser | February 18, 2014 5:55 pm
http://freebeacon.com/owners-of-frannie-mae-freddie-mac-stock-not-able-to-access-future-earnings/
A recently revealed memo from the Treasury Department indicates that owners of Fannie Mae and Freddie Mac common stock will not be able to access any future earnings from the mortgage giants, a previously undisclosed arrangement that experts say might violate securities laws and amount to a de facto nationalization of the companies.
Fannie Mae and Freddie Mac, known as government-sponsored enterprises (GSEs), were sharply criticized by many for their role in the 2008 financial crisis as packagers of mortgage-backed securities that went underwater. Treasury bailed out the mortgage companies with a total of $189.5 billion in taxpayer funds.
Some investors flocked to the companies’ troubled shares in hopes that a housing recovery would be imminent. That is exactly what happened—Fannie and Freddie began earning billions in mid-2012 and have repaid $185 billion to the Treasury.
However, a 2010 Treasury memo addressed to then-Secretary Timothy Geithner mentioned “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”
The memo, produced in a lawsuit filed by Fannie and Freddie shareholders, was first discussed earlier this month at a Washington, D.C., forum hosted by a shareholder advocacy group.
Thousands of investors in the companies were not made aware of the memo, which outlined a policy that deprived them of future earnings. Securities laws require the disclosure of any “material” information that might affect an investor’s view of a company.
James Cummins, a leading securities lawyer who has litigated against Fannie and Freddie since 2004 on various issues, said in an interview that the information in the memo would have been of great interest to potential investors at the time.
“It’s material information because it was going to tell people who might want to buy stock, ‘Hey, by the way, you’re not going to get any dividends and all of the earnings of the company are going to U.S. Treasury,’” he said.
A spokesman for the Treasury Department told the New York Times, which originally reported on the memo, that it referred to recouping taxpayers.
“The relevant language in the memo was about the importance of repaying taxpayers for the enormous investment that they made in the GSEs if the GSEs ever generated positive returns, which, at the time, was uncertain to ever occur,” the spokesman said.
Cummins said the memo was similar to a 2012 announcement by Treasury that it would capture all the profits posted by Fannie and Freddie in each quarter rather than collect annual dividend payments.
The companies were placed under the care of a conservator, the Federal Housing Finance Agency (FHFA), in 2008 that aimed to “preserve and conserve [their] assets and property.”
Cummins said that conservatorship has produced a unique situation in the mortgage market.
Critics accuse Fannie, Freddie, and the FHFA—which still guarantee nine out of every 10 U.S. mortgages—of crowding out competition from private mortgage insurers.
“It’s like a sick person going into a hospital, being cured of the illness, and then having the hospital refuse to release the patient,” Cummins said.
“It’s so different from what the entrepreneurial, capitalistic dream of the U.S. is supposed to be,” he added. “It’s just totally different from what anybody anticipated was going to happen.”
Cummins said Treasury’s control of the earnings, coupled with presidential appointments to the board of directors for Fannie and Freddie, more closely mirrors nationalized industries “in the Soviet Union or in Mexico.”
“If you combine U.S. Treasury taking all the earnings and the [Obama] administration taking a lot of the board seats, I don’t see how you can describe it as anything other than nationalization,” he said.
Republican lawmakers continue to blame Fannie and Freddie for causing the financial crisis and have proposed several bills to revive the private mortgage market.
They also say the mortgage agencies cannot legally buy back the billions in stock they sold Treasury—and repay taxpayers—until Congress changes their status.
News: Nader: Now GSEs are the good guys
By Bethany McLean | FEBRUARY 18, 2014
“It is time for [government-sponsored enterprises] to give up ties to the federal government that have made them poster children for corporate welfare. Most of all, Congress needs to look more to the protection of the taxpayers and less to the hyperbole of the GSE lobbyists. –Ralph Nader, testimony before the House Committee on Banking and Financial Services, June 15, 2000
“Fannie Mae and Freddie Mac should be relisted on the NYSE and their conservatorships should, over time, be terminated. –Ralph Nader, letter to Treasury Secretary Jacob Lew, May 23, 2013
People certainly do change.
Right now, one of Ralph Nader’s key projects, Shareholder Respect, is supporting a group called Restore Fannie Mae. They are fighting for “an end to the unconstitutional conservatorship of Fannie Mae and Freddie Mac by the U.S. government.” To that end, Nader has written an op-ed in the Wall Street Journal, “The Great Fannie and Freddie Rip-Off” and sent the above letter to Treasury Secretary Jack Lew, as well as one to the new Federal Housing Finance Authority director, Mel Watt. Nader also held a roundtable to drum up support for the cause, which largely seems to be about making sure shareholders get paid–but which seems an argument for a return to the status quo.
For most of their existence, Fannie and Freddie have been controversial. Critics argued that their gains during good years would go to shareholders and executives, while taxpayers would be saddled with any losses, thanks to an implicit government guarantee. That’s indeed what happened during the 2008 economic crisis.
Critics soon began to assert that the government-sponsored enterprises were largely responsible for the financial calamity. The more extreme critics, like Representative Jeb Hensarling (R-Tex.), now want the GSEs wiped out and the government completely out of the housing market. Even former Representative Barney Frank, once one of the GSEs’ strongest defenders, now says they should be abolished. In polite society, you do not dare say that the GSEs should be restored to their old selves.
The funny thing is, as his 2000 testimony shows, Nader was once among these GSE critics. You have to go back to the late 1990s, when what became an underground war against the GSEs had barely gotten started. Louisiana Representative Richard Baker was, at that point, one of the few people willing to get bruised trying to rein in the then very powerful housing giants. Baker tried to pass a bill that would tighten regulation of GSEs.
Nader’s congressional testimony was in support of Baker’s bill. He was vehement, warning that the GSEs would cause a taxpayer bailout similar to the late 1980s savings and loan crisis if the rules weren’t changed. (“Ralph Nader Predicted Wall Street Meltdown 8 Years Ago” read the headline on a Nader press release during his 2008 presidential campaign.)
“We are obviously not talking about GSEs interested only in providing the American dream of home ownership,” Nader said. “They have a big appetite that grows bigger as they saturate the mortgage market. They will reach out for more to maintain their high level of profits and shareholder dividends.”
It’s unclear how Nader got involved in the anti-GSE crusade. One longtime GSE watcher says that a guy named Jake Lewis, who worked as Nader’s spokesman around that time, previously had been a spokesman for the old House Banking Committee (now known as the House Committee on Financial Services). Armando Falcon, who became the head of Fannie and Freddie’s regulator and a huge opponent of the GSEs, was counsel to the House Banking Committee around that time. The longtime GSE watcher speculates that Falcon sparked Lewis’s interest, and maybe Lewis, in turn, sparked Nader’s.
Whatever the case, Tim Howard, Fannie Mae’s former chief financial officer, recalls in his new book, The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream, that Nader helped to organize a 1999 conference where anti-GSE types could complain. (Ironically enough, Restore Fannie Mae calls The Mortgage Wars a “fantastic read,” which it is.)
It wasn’t long after this that the war got started in earnest. The big lenders and mortgage insurers started an organization called FM Watch, with the goal of curtailing Fannie and Freddie’s power. Then, in the wake of Enron, the George W. Bush White House, terrified of another scandal on its watch, decided to take on the GSEs. Both Fannie and Freddie had to do multibillion-dollar accounting restatements, and the chief executive officers and other top execs at both firms resigned. (At one point, I was sure that Fannie and Freddie were the bad guys. I’m less sure today. There are certainly two sides to the story, and if you want to understand the other one, read Howard’s book.)
Even after the denouement, Nader stayed involved. In 2006, he wrote a letter to then Securities and Exchange Commission Chairman Christopher Cox. “As you continue to investigate the Fannie Mae accounting debacle,” Nader wrote, “we are writing to urge you to seek civil sanctions, including disgorgement, from senior executives who profited directly from the misconduct at Fannie Mae, and that you urge the Department of Justice to give careful consideration to criminal prosecution of these individuals.”
Perhaps the most surprising thing is that despite his prescient warnings and his dislike of the GSE business model, somewhere along the way Nader bought stock in Fannie and Freddie.
As it turned out, the mid-2000s victory over the GSEs was small in comparison to what came later. When Fannie and Freddie were put into conservatorship in September 2008, the Treasury took 79.9 percent of their common stock and $1 billion in preferred stock. Which meant the Treasury had to be paid in full before any other shareholders realized anything. The Treasury also charged the GSEs a 10 percent interest rate on funds advanced to cover their capital shortfalls, double the rate the big banks had to pay on the money they took. Then, in 2012, Treasury replaced the 10 percent dividend with a “net worth sweep,” which in essence meant that Treasury would take every dollar of profit the GSEs made. In other words, it was now impossible for Fannie and Freddie ever to pay back the government.
In Nader’s Wall Street Journal op-ed, he wrote that even after the conservatorship, “some faithful shareholders, including me, held on, believing that they might have a chance to recover something–as did their counterparts in Citigroup, AIG and the rest of the rescued.” He also writes that the “mistreatment of the Fannie Mae and Freddie Mac shareholders, including me, is uniquely reprehensible.” He wants shareholders (and taxpayers) to recoup some of the benefits of profitable GSEs.
Nader is right. At one point, you could have argued that the disparate treatment of the GSEs and the big banks was warranted because the GSEs required a lot more money. At the peak of the crisis they required $188 billion in total from the government, versus the $10 billion to $25 billion that the big banks each took as part of the 2008 Troubled Asset Relief Program.
Then again, there are lots of other ways in which the government financially supported the banks. At one point there was also an argument that the GSEs, unlike the banks, would always be a black hole, draining money from taxpayers. But that hasn’t turned out to be true either: The GSEs will soon have sent more to the Treasury than they took.
In addition to Nader’s past opposition to the GSEs, there’s another irony here. Restore Fannie Mae describes itself as a “group of concerned taxpayers, students, families, shareholders and citizens who are dedicated to establishing fairness in America’s housing market.” But it is also aligned with the interest of powerful financial firms–not Nader’s usual pals!–including hedge fund Perry Capital and mutual fund Fairholme Capital.
Both Perry and Fairholme have sued the government, arguing that the 2012 restructuring of the conservatorship was illegal. Theodore Olson, the former U.S. solicitor general turned Gibson & Dunn lawyer who is representing Perry Capital, spoke at Nader’s Feb. 5 roundtable, discussing the impact of conservatorship on the GSEs.
Maybe it’s fitting that the topic of housing makes for interesting bedfellows. This past weekend, New York Times columnist and long-time GSE critic Gretchen Morgenson also wrote a piece sympathetic to the shareholder point of view.
Apart from getting his money back, it isn’t clear what Nader’s goal is. What he doesn’t want is to see the housing market handed to the banks, which would be the result of most of the GSE reform bills now circulating around Congress. Restore Fannie Mae makes a point of saying that “responsible lending standards” should be enshrined in the GSEs’ charters. But if Nader wants a fundamental change in their structure from the pre-2008 days, I can’t find a clear overview of what that is.
Nader didn’t return messages to his organization or to Restore Fannie Mae asking for comment. So we have no answer as to why he seems to have changed his mind on the GSEs.
Is it just a story of pure hypocrisy, the way we can all change our minds when our own money is at stake? Or did the 2008 fiscal crisis, along with the right’s highly politicized efforts to blame it on the GSEs, make Nader realize that the alternative of the big banks might be worse?
Has Nader come to believe, in a twist on Winston Churchill’s famous saying about democracy, that the GSEs might be the worst possible way to finance housing–except for all the others?
Everyone should read the article in my previous post:
"Fannie Mae, Freddie Mac litigation heating up"
http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-litigation-heating/
It really outlines quite nicely what could very well take place now that the Geithner-Goldstein memo is out there. The author of this article makes the point that the administration cannot let discovery happen. People will then be under deposition, their word cast in the record of the courts, and held accountable for their fraudulent activities. It is best now if the govt negates the 3rd sweep "on their own will" and save political face, as well as to preemptively invalidate at least some of the lawsuits.
It's really quite a compelling look at the situation...IMO.
News: Fannie Mae, Freddie Mac Litigation Heating Up
by valueplays | February 18, 2014
http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-litigation-heating/
Plaintiffs in the Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) litigation are requesting discovery to prove some of the claims made by Treasury in their briefs asking for dismissal of the case are accurate (this was IMO a large tactical error by the gov’t). I have long opined that this case not only does not go to trial but will not pass the discovery stage. Why?
Take a look at the snippet below. This memo was obtained without discovery.
"This month, an internal United States Treasury memo that outlined this restriction came up at a forum in Washington.
The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the under secretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”
The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010. Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed.
That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae. Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings."
Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s filings do refer, albeit incompletely, to the administration’s stance, noting that the Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.” Note that this reference does not say all earnings.
There is serious discussion now on whether or not, since this was not disclosed to investors if in fact Treasury committed securities fraud. Legal folk can debate whether or not it constitutes it or not, but prior to this memo being obtained the question was not even being asked. Here is the proposed order in the case before Judge Lambert (Wilkins, the original Judge has been promoted to the Appeals Court):
"Upon consideration of Plaintiffs’ Motion for Supplementation of the Administrative Records, for Limited Discovery, and for Suspension of Briefing on Defendants’ Dispositive Motions, it is hereby ORDERED that Plaintiffs’ Motion is GRANTED, and it is further hereby ORDERED that:
1. Defendants shall promptly supplement their administrative record submissions so as to include all materials that were directly or indirectly considered by Defendants in connection with their decision to enter into the “Net Worth Sweep” implemented by the “Third Amendment” to the Preferred Stock Purchase Agreements, including, without limitation, (a) all financial projections and associated data and analyses; and (b) the Department of Justice materials to which the “decision memorandum” found at page 4332 of the Treasury Defendants’ record submission refers. In addition, to the extent Defendants have excluded from their compilation of record materials documents that they claim are protected by applicable privileges, they shall promptly produce to Plaintiffs a privilege log identifying those documents and the nature and basis for any such claim of privilege. To the extent any such privileged materials contain purely factual information, Defendants shall promptly produce redacted versions of such materials to Plaintiffs. The productions required under this paragraph shall be made as soon as is reasonably possible, and in no event later than February __, 2014.
2. Plaintiffs are authorized to take limited discovery into the completeness of the administrative records produced by Defendants.
3. Plaintiffs are authorized to take discovery, pursuant to Federal Rule of Civil Procedure 56(d), necessary to allow Plaintiffs to present facts essential to their opposition to the motion by Defendants Federal Housing Finance Agency (“FHFA”) and the FHFA Director to dismiss Plaintiffs’ claim for breach of fiduciary duty, which motion the Court shall treat, under Federal Rule of Civil Procedure 12(d), as a motion for summary judgment.
4. Briefing on Defendants’ pending dispositive motions is suspended until such supplementation of the records and limited discovery is completed. Plaintiffs’ response to Defendants’ dispositive motions, and any cross-motion Plaintiffs decide to file, shall be filed no later than 14 days following the completion of the discovery authorized under this Order."
Treasury/FHFA cannot allow discovery. Discovery will reach to ALL communications with everyone involved with the decision. Depositions will be done under oath as we have seen many times the willingness of lower level folks to throw decision makers under the bus rather than commit perjury. Their entire case rests on their claim that FHFA acted alone, as Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) ‘s regulator in enacting the Net Worth Sweep. Plaintiffs claim they acted as the gov’t in which case a host of laws were violated and the very sweep itself is more likely than not a 5th Amendment Violation. Thus is my thesis that should they lose this motion, we start to see events put in motion to end the net worth sweep. Remember, Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) was put into conservatorship under Bush/Paulson and Geither/DeMarco were heads of Treasury/FHFA in 2010 when The Net Worth Sweep was enacted.
Obama is now in the White House and Lew/Watt are now the heads of Treasury/FHFA. Rather than risk messy and potentially embarrassing discovery/trial to their agencies in this case, they can instead take a victory lap by setting aside the Net Worth Sweep amendment. How? Simple. At the end of Q1 Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Fresenius SE & Co KGaA (FRA:FRE) will have most likely completely paid off the US Gov’t’s investment in them. Obama/Lew/Watt can claim success in the bailout repayment, still hold 80% of the common giving the gov’t future profits from their involvement and end this case by setting aside the Net Worth Sweep and the dozens of additional lawsuits discovery will inevitably spawn. Once the NWS amendment is set aside, the basis for the suits against them now evaporates.
Obama/Lew/Watt can “return these entities to the pension funds (think teachers, police, fire, auto unions etc), small banks and individual investors who own their securities” and pat themselves on the back for another successful government action. The dramatic rise in the value of securities held by these pension funds will be nice positive PR boost for the President and Democrats before the fall elections. A public trial on the legality of their actions will stall any potential reorganization of them as plaintiffs will ask surely for a stay in any potential changes to the entities structure. Should they return to public market with Treasury holding 80% of the common (after exercising warrants) Treasury can then still push for changes to the entities as majority shareholders without the cloud of a trial hanging over them.
So, now the question is “when”. Impossible to tell but I think we get something this spring either from Judges Lambert or Sweeney. I’m think Sweeney issues a decision first as she seems to have been less willing to buy the Gov’t’s claims and demands for dismissal and is pressing on with the litigation in her Federal Claims Court.
Here is the discovery motion: Motion for Discovery
Below is the Gov’t response.
Gov’t Response to Discovery Motion
It is weak and I expect Sweeney to grant some discovery. It will probably be limited to specific issues but it will be granted. The gov’t, in all its motions continues to fall back on its position, “we are the gov’t and can do this”. Unfortunately for them, while the gov’t does have wide ranging powers, they still have to follow the law. The only way to decide that is for this case to go forward and based on the claims made by the gov’t in their initial brief, discovery in some form will be necessary to decide this.
Things should start getting interesting soon….
I sincerely hope the Johnson-Crapo legislation draws heavily on Corker-Warner, as it is apparent from the personal testimony of many high-ranking banking and financial officials that CW will ultimately move nowhere.
News: Paying Fannie and Freddie investors was never part of the plan
By Trey Garrison | February 18, 2014
http://www.housingwire.com/articles/29008-paying-fannie-and-freddie-investors-was-never-part-of-the-plan
Investors: This is government confiscation of private property
Holders of Freddie Mac and Fannie Mae stock were on the hook for losses after the housing crash, but since then, as the government-sponsored enterprises have shaken off the worst of it and turned in profits, those profits have not and are not going to be shared with stockholders.
A Dec. 20, 2010, Treasury Department memo to then-Secretary Timothy Geithner from domestic finance undersecretary Jeffrey Goldstein, said the Obama administration had a “commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s (sic) in the future.”
Fannie and Freddie had been bailed out by taxpayers just 28 months prior to the tune of nearly $190 billion.
The U.S. Securities and Exchange Commission requires that all material knowledge and information must be disclosed to shareholders and it’s hard to see how this information doesn’t qualify. As one party to the investor complaint against the Treasury Department put it, “This is essentially government confiscation of private property – something to be expected from Putin or Chavez, but not the U.S. government.” The Treasury declined to comment.
“People disagree about what should happen to the GSEs….But if the plan is to wind them down, Congress provided a means to do that in the 2008 law — it’s called receivership, and it provides a host of procedural protections to claimants,” said Matthew D. McGill, a lawyer at Gibson, Dunn & Crutcher in Washington who represents Perry Capital, a GSE investor suing for its alleged share of profits.
“What the Treasury cannot do is abuse its conservatorship powers to nationalize the companies and then, when it deems convenient, wind them down without the protections enacted by Congress," McGill added.
According to the New York Times, at the time of the memo, a large number of investors held the stocks in question. The paper says that 18,000 investors held 1.1 billion shares of Fannie Mae common stock, while just over 2,100 investors held 650 million Freddie Mac shares.
As of Sept. 30, 2013, the GSEs returned $185 billion to the Treasury and none to shareholders.
On Tuesday, activist Ralph Nader – no natural ally of investors – sent a letter to Treasury Secretary Jack Lew, a copy of which was obtained by HousingWire.
“What legal authority does the Administration have, as this section of the memo intimates, to completely wipe out shareholders – even after taxpayers have been repaid (as is likely to happen soon)?” Nader writes. “It seems to be setting a precedent for using and abusing the GSEs’ shareholders.”
News: Make Multifamily the Starting Point for Housing Reform
By: SHEKAR NARASIMHAN AND JAMES B. LOCKHART | FEB 18, 2014
http://www.americanbanker.com/bankthink/make-multifamily-the-starting-point-for-housing-reform-1065669-1.html
Reform of the secondary market for housing finance is a big topic now among think tanks, industry representatives and on Capitol Hill. Most of this discussion has centered on the single-family market, because that is the market that collapsed, helped to precipitate the Great Recession. This recession led to four million American families losing their homes, according to RealtyTrac data, and the conservatorship of Fannie Mae and Freddie Mac.
Yet Fannie and Freddie have long played another critical role in our housing market: providing a secure secondary market for multifamily housing finance. One-third of all Americans rent their homes and over 16 million households live in multifamily developments, according to the U.S. Census Bureau.
There is finally some momentum towards reform as Fannie Mae and Freddie Mac enter their sixth year of conservatorship. There is a growing consensus it is time to downsize the government's massive involvement in the housing market. Bills have been introduced in both the House and the Senate to wind-down enterprises over a five-year period and reduce the direct government role in the conventional mortgage markets. Both bills mean to protect taxpayers from another bailout, buy they have very different end games. The Senate bill, introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would maintain a limited government guarantee for mortgage-backed securities, but only after private capital has taken significant first-loss risk. The House bill, introduced by Rep. Jeb Hensarling, R-Texas,would eliminate any role for the government other than as a market overseer.
While it is not debatable that the current situation is untenable long-term, disagreement over the end game could paralyze any attempt to come up with a solution. This, in turn, could leave room for those who would prefer the status quo. These advocates argue that the current GSEs, with a few changes, could simply continue to contribute their growing profits to reduce government deficits.
However, this would leave the financial system open to what happened before. It would also render the housing market unable to attract the private capital needed to protect the taxpayer from further risk. It would also lead to the permanent nationalization of the system, which is not a solution we support. Therefore, change is needed now, so where do we start? Multifamily finance reform, of course. Three key facts are important to understand:
The multifamily market remained healthy during the housing bust. These businesses have consistently been profitable activities for Fannie Mae and Freddie Mac because they were designed around good underwriting and risk-sharing.
The financing and management of multifamily housing varies greatly from the model used for single-family housing, and calls for different solutions.
During the crisis, the government-backed share of single family mortgage originations peaked above 90% and remains above 80%, according to a presentation by Beekman Advisors to the Cleveland Fed. The multifamily share is now only 40%, down from the peak of 80%, according to the Mortgage Bankers Association.
Because the multifamily financial markets have performed well for many years, it is our key goal that they not be disrupted during the restructuring period. Accordingly, our proposal would do the following:
Spin off the Fannie and Freddie multifamily operations in carefully planned phases, ending with privately owned entities.
Continue the existing successful risk-sharing multifamily programs as the successors to Fannie Mae's Delegated Underwriting and Servicing and Freddie Mac securitizations, where up to 15% of the first loss by pool is taken by private capital. The programs should focus on affordable housing as they have always have had.
Place adequate private capital at risk before a catastrophic guarantee provided by the government could be accessed.
Maintain a catastrophic government guarantee for qualified multifamily securities, but make it explicit and paid for with appropriate guarantee fees.
A government guarantee should promote counter-cyclicality by increasing fees or reducing commitments if prices get out of line with historical trends.
The successor entities would issue securitized pools of multifamily mortgages, but they would not be permitted to retain a large portfolio in pursuit of additional profits.
Allow additional securitizers, including a mutual model that could ensure that smaller lenders have access to credit, which could possibly expand the role of the Federal Home Loan Banks.
Ensure that the entities serving the multifamily secondary market cover its key aspects, including geographical coverage, affordability levels and size of developments.
Fund support for affordable housing with a portion of the fees paid for securitization and guarantee.
Assess a surcharge on high-end developments seeking a loan with the catastrophic government guarantee.
Give the Federal Housing Finance Agency the powers to be a strong regulator to oversee multifamily operations.
Multifamily is the foundation of America's housing system and for many, the first step into homeownership. The support for multifamily housing finance remains central to the GSEs' public purpose. Reforming the multifamily housing market first will help lead the way to the housing finance system of the future where private capital takes first-loss risk and uses its ingenuity to serve all markets at all times with responsible lending products. This will make us face up to our obligations to support affordable housing for all Americans while preserving and enhancing the role of private capital.
We understand several members from both parties of the Senate Banking Committee are working on a bill that accomplishes many of these goals, and we look forward to seeing this bill introduced. It is important to reform our housing finance system and better to do it sooner rather than later.
Shekar Narasimhan, currently managing partner at Beekman Advisors, has over 35 years' experience in real estate finance. He previously ran one of the first publicly-traded companies in the multifamily finance business. James B. Lockhart is vice chairman of WL Ross & Co. LLC. He has previously served as director of the FHFA, regulator of Fannie Mae, Freddie Mac and the twelve Federal Home Loan Banks, and its predecessor agency the Office of Federal Housing Enterprise Oversight.
News: Protecting borrowers as Senate mulls housing finance reform
By Jeffrey Sanchez | FEBRUARY 18, 2014
http://www.bostonglobe.com/opinion/2014/02/18/podium-housing/HV187OQIKYx6dXGHU6PGhN/story.html
Throughout my district, working-class families struggle. Burdened with underemployment, a tight job market, and few opportunities to get ahead, parents are trying to provide for their children, while worrying about the future.
In the not so distant past, families in Mission Hill, Jamaica Plain, and Roslindale could depend on the equity in their homes for financial security. It helped fund college educations, small businesses, and retirements. But the financial landscape changed starkly with the housing collapse in 2007, and now the nation is at a crossroads on housing policy.
The buzz word today among policymakers is “income inequality.” It’s how we express that the rich are getting richer and the poor are getting poorer. Those in the middle, which describes many of the families I know, are just stuck making ends meet.
While Washington talks about addressing income inequality, new laws are proposed that would expand the wealth gap instead of closing it. That is especially true with housing finance reform and legislation known as the Corker-Warner bill.
Under this legislation, which was proposed in the Senate by Republican Senator . Bob Corker of Tennessee and Democratic Senator Mark Warner of West Virginia, Fannie Mae and Freddie Mac would be dissolved. Their critical role of providing a secondary market for mortgage loans would fall to a new government entity, the Federal Mortgage Insurance Corporation. But the FMIC would usher in a housing policy that would be friendlier to the Big Banks and Wall Street, while creating barriers for moderate and low income homebuyers.
For instance, the affordable housing goals that Fannie and Freddie used to encourage lenders to originate loans to low and moderate income families will end. Economists estimate that the legislation would increase the cost of mortgages by a minimum of $1,400 a year, an amount that could keep some families out of the housing market. Furthermore, the lenders will have far greater discretion in setting the rates for loans, which housing activists fear will create a two-tier system where buyers in higher income, suburban communities get lower rates than those seeking homes in urban and rural communities. Simply put, the new system reduces risks for lenders, while creating barriers for working families.
It’s understandable that policymakers are seeking to strengthen the housing finance system and implement reforms to prevent another devastating crash of the housing market, but at the same time the federal government shouldn’t be rewarding the perpetrators of the financial crisis and making working people the victims —– yet again.
Perhaps Congress should seriously consider other policy alternatives such as reorganizing Fannie and Freddie rather than liquidating them.
It’s astonishing that these entities, formally known as Government Sponsored Enterprises, could play such a dramatic role in expanding homeownership since the 1940s, yet receive so much scorn for a crisis that was created by poor judgment at multiple levels of the government and private sector. To be sure, Fannie Mae and Freddie Mac were chasing profits for shareholders and securitized bad loans that should have undergone tougher scrutiny and underwriting. But the mortgage giants did so when their market share was severely threatened by Wall Street investors, who received the green light from Congress and bank regulators to enter the market with little regulatory oversight. It began a race to the bottom, with each side originating many mortgages that weren’t properly scrutinized.
I’m not recommending a return to the past. But there may be ways to secure and safeguard the system without victimizing working-class homebuyers.
For instance, there are proposals to create a cooperative structure for Fannie Mae and Freddie Mac that can preserve its basic mission of assuring the existence of a liquid secondary mortgage market in all economic environments. The government could end their current conservatorships and reorganize the institutions into a cooperative owned by members. This is the model followed by the the Federal Home Loan Bank, which not only survived the housing crisis largely unscathed but provided capital that helped keep financial institutions afloat until the Federal Reserve stepped up their activities.
A cooperative system would relieve the pressure from stockholders for Fannie and Freddie to chase profits, yet keep in place many of the safe, consumer-friendly practices that fueled the expansion of homeownership and wealth in communities across the country.
If the nation is serious about addressing income inequality, it has to start with providing a path towards homeownership because that is one of the few proven ways to generate wealth for working families. It can do it again — if the right housing policies are enacted.
]Jeffrey Sanchez is a state representative from Jamaica Plain.
News: United States: Investments And The Rule Of Law
By Joseph A. Woodruff
http://www.mondaq.com/unitedstates/x/293786/Financial+Services/Investments+and+the+Rule+of+Law
"If you can look into the seeds of time and say which grain will grow and which will not, speak then to me..." (William Shakespeare, Macbeth, Act I, Scene 3)
Investors of all stripes no doubt relate to that sentiment. Knowing what the future holds in store for a particular stock would certainly make the investor's decision much easier to make. Such knowledge, however, is not to be had . . . at least not lawfully . . . and the last few days have provided examples of both lawful and unlawful varieties of market intelligence.
On Thursday of last week, a federal jury in Manhattan convicted Mathew Martoma of conspiracy and criminal securities fraud in the latest insider-trading conviction of former employees of SAC Capital. Martoma was found guilty of trading in shares of Elan (ELN) and Wyeth (WYE) based upon non-public information regarding disappointing results from clinical trials of an experimental drug treatment for Alzheimer's Disease. In a written statement released after the verdict, US Attorney Preet Bharara of the Southern District of New York, said: "In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty." Martoma's conviction is the 79th insider trading conviction in the Southern District over the last four years.
Contrast this illegal activity, with a report in the February 11 edition of the Wall Street Journal on investor confidence in the eventual triumph of holders of preferred shares of Fannie Mae and Freddie Mac. The value of certain classes of preferred shares in the two mortgage entities have doubled over the previous six months as investors appear to be encouraged by the prospects of success in the more than 20 lawsuits brought on behalf of shareholders against the federal government's confiscation of the GSE's earnings.
Also encouraging is the fact that the taxpayer is also poised to fully recoup the government's investment in Fannie and Freddie. The fact that the mortgage entities have been a cash-cow for the government is one of the primary reasons that Marsha Courchane, an economist with Charles River Associates, cited in predicting that legislative efforts to abolish the GSE's would go nowhere for the foreseeable future. Speaking on February 7 to bankers and bank attorneys attending the annual banking law seminar sponsored by the University of Alabama School of Law, Dr. Courchane mentioned the Corker-Warner proposal, floated in the Senate by Senators Mark Warner (D-VA) and Bob Corker (R-TN), as a GSE "reform" scheme unlikely to be enacted.
These examples illustrate that the rule of law is an indispensable requirement for any rational, efficient and transparent financial market. Enforcing the rule of law is therefore one of the most important functions that the government can perform. But what happens when the government itself departs from adherence to the rule of law? The plaintiffs in the GSE lawsuits are claiming that they have been damaged by exactly that sort of departure from the rule of law by the Treasury and FHFA, Fannie and Freddie's principal regulator.
What do you think the future holds for Fannie and Freddie? Will the GSE's be reformed, recapitalized and relieved of government conservatorship? Will investors lose out while the government grabs the cash? Let us know what you think, The Banking Law Connection will keep a close eye on this evolving story.
UPDATE:
On February 4, 2014, the Ralph Nader project, Shareholder Respect, held a roundtable discussion on the impacts of the conservatorship of government sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac and the future of Fannie Mae and Freddie Mac. Read a portion of the transcript here.
News: No more Fannie, Freddie sequels, please
By Paul McMorrow, FEBRUARY 18, 2014
Yet another article filled with inaccuracies...
http://www.bostonglobe.com/opinion/2014/02/18/more-fannie-freddie-sequels-please/ZTBVQgUSZdkYFD3377ki8K/story.html
Fannie Mae and Freddie Mac collapsed into the costliest bailout of the financial crisis because they nurtured impossible internal conflicts. The two government-chartered mortgage companies grew reckless and greedy during the run-up to the housing bust. They swallowed billions in toxic mortgage instruments as they chased profits for their private investors. The chase destroyed them.
Several years and $187 billion in taxpayer-funded bailouts later, America’s housing market is reemerging, and so are Fannie and Freddie. The two government-owned firms are profitable again, and Wall Street is trying to sink its hooks back into the mortgage companies. The opening is there, because Congress has punted away any plans for putting Fannie and Freddie out of business. And if the current Wall Street gambit succeeds, it could reestablish the same dynamic that helped ruin the companies in the first place.
The current conflict centers on investor lawsuits seeking to crack open the September 2008 bailouts of Fannie and Freddie. The two companies owned or backed half of the country’s mortgages at the time of the housing market collapse, and the Treasury Department nationalized them to head off the total implosion of the housing and banking industries.
Treasury’s takeover wiped out Fannie and Freddie’s stock, which wasn’t worth anything as long as the companies themselves were worthless. The lawsuits Fannie and Freddie are fighting off now come from investors who bought the companies’ stock on the cheap at the depths of the housing bust, and are now asking the federal courts to make that stock worth something again.
Perry Capital, a New York-based hedge fund, is leading a pack of investors in seeking to overturn a key 2012 change to Fannie and Freddie’s bailout. Before the change, the companies paid interest on their bailout funds to the Treasury. But because they were broke, Fannie and Freddie would borrow from the Treasury to make interest payments to the Treasury.
The 2012 change eliminated the interest payments, and instead swept most of the firms’ profits to the government. And lately, the windfall has been significant. Fannie and Freddie, which combined to lose more than $250 billion from 2008 to 2011, have posted $130 billion in profits over the past year. The investors who bought Fannie and Freddie stock when it was worthless now want a piece of that action; they’re claiming the deal to hand all Fannie and Freddie profits to the Treasury was illegal self-dealing.
The government has argued that any profits that Fannie and Freddie produce belong to the taxpayers who effectively own the companies. Still, the lawsuits put the government in an uncomfortable situation.
More than five years after rescuing Fannie and Freddie, Washington still doesn’t know what to do with the two companies. By claiming all of their profits, the Treasury bought policymakers some time. Fannie and Freddie still underwrite a huge portion of the housing market, but if they don’t keep their profits, they can’t become a vehicle for private speculation. Perry is trying to roll back the clock, to a time when Fannie and Freddie’s government backing made money for wealthy investors.
The issue is much bigger than whether some hedge funds are able to make a bet on Fannie and Freddie’s junk stock pay off. If Fannie and Freddie stop depositing their profits in the Treasury, they’re viable private businesses again — private businesses backstopped by the federal government.
This is exactly the conflict of interest that ruined the two mortgage companies in the fall of 2008. Fannie and Freddie took huge risks in the name of making profits for private investors, and when those risks soured, taxpayers ate all the losses. Fannie and Freddie lost enormous amounts of money, not just because they covered half the country’s mortgages, but because they’d gorged themselves on subprime Wall Street bonds — bonds full of toxic mortgages that Fannie and Freddie couldn’t legally write themselves. Their subprime bond binge had nothing to do with helping Americans buy homes, and everything to do with chasing profits for private shareholders.
The conflict between taxpayer risk and private profit is on ice, so long as Fannie and Freddie have no profits to speak of. But it can only be solved by putting the companies down for good. Congress dithered and ducked the issue for years. And now, as a reward for Washington’s inaction, they’ve tempted a federal court to take the decision away from them.
Paul McMorrow is an associate editor at Commonwealth Magazine. His column appears regularly in the Globe.
Hmm. If you look on the FNMA chart on May 29 and 30th, 2013...those were the two days in which Fannie hit 5.44 and finally closed at 1.73. It's speculative at best, but Fairholme may have been part of that pump and dump. Perhaps they sold when they felt that had a good return of investment. Perhaps short term investments in common shares were to hedge against any long term bets on the preferred, which they clearly hold much more of.
It's all speculative but something to consider.
If you're an investor looking to increase or start a new position in the GSEs, that ~7 cent differential between Fannie and Freddie can add up--especially in a large position. IMO...
Fantastic article. I hope the discovery in the ongoing lawsuits will be damning for the Treasury and FHFA. Clearly this initial memo between Geithner and Goldstein has had an impact...I can only see the remaining evidence being equally convincing.
Actually, 3.5% going back to 2009. In fact, it did not happen at all in 2013. That being said, I'm still not convinced the volume differential means anything in terms of significant pps movement.
Thanks navycmdr!
Thanks for the info eship. Could you please post the link to the fairholme discovery. Thanks!
News: Banks Loosening Mortgage Lending Standards
By Philip van Doorn
Can you believe this article? Isn't this what got us in the housing bubble mess to begin with? Too big to fail financial institutions relaxing lending standards to enhance their bottom line and appease stockholders....unreal.
--------
http://www.thestreet.com/story/12338720/1/banks-loosening-mortgage-lending-standards.html
"NEW YORK (TheStreet) -- The decline in mortgage activity in the United States continued in January and big banks, including Wells Fargo (WFC) and JPMorgan Chase (JPM) are responding by lowering their underwriting standards.
The Mortgage Bankers Association projects that originations of one-to-four family mortgage loans in the U.S. will decline to $1.116 trillion in 2014 from an estimated $1.755 trillion during 2013, with the wave of refinancing slowing as long-term interest rates have risen.
According to a preliminary estimate from Inside Mortgage Finance, the issuance of single-family mortgage-backed securities by Fannie Mae (FNMA), Freddie Mac (FMCC) and Ginnie Mae totaled $67.8 billion during January. That's down 10% from December and is also the lowest figure since January 2009.
Major lenders are making adjustments. Wells Fargo has lowered the minimum FICO score for borrowers applying for loans insured by the Federal Housing Administration to 600 from 640. JPMorgan Chase "plans to lower LTV standards in certain markets for both jumbos and conforming mortgages to portfolio on balance sheet," Deutcshe Bank analyst Dave Rochester wrote in a note to clients on Tuesday.
LTV stands for loan-to-value ratio. "Conforming" means a one-to-four family mortgage loan that adheres to the underwriting standards of Fannie Mae and or Freddie Mac, and can therefore be quickly sold to one of those government-sponsored enterprises. It is very important for lenders to have the option of selling the majority of their newly originated fixed-rate mortgage loans, in order to get the interest-rate risk off the books and free-up liquidity to make more loans.
The limit for a conforming loan being sold to Fannie or Freddie is $417,000, and the Federal Housing Finance Agency, which regulates Fannie and Freddie, can adjust the conforming limit from time to time.
A jumbo mortgage loan is one that exceeds the conforming limit, and therefore can't be sold to Fannie or Freddie. These loans tend to be underwritten with tight credit standards, since they are more difficult to sell.
The actions being taken by Wells Fargo and JPMorgan Chase could signal a major change in the U.S. mortgage market at all levels, following years of very tight credit standards.
"We have long argued that in the absence of robust refinancing volumes, banks are likely to go down the credit spectrum with respect to borrowers in order to support purchase origination activity," FBR analyst Paul Miller wrote in a client note on Tuesday.
"With the largest player [Wells Fargo] in the mortgage market now originating FHA product to non-super prime borrowers, we believe the wall has begun to come down, and more large originators are likely to open their credit boxes. If lenders are successful in breaking back into the low-FICO FHA market, it will support increased origination volumes going forward," added Miller.
Miller also wrote that his estimate for $1.3 trillion in mortgage originations for 2014, which exceeds the MBA's estimate by 16%, "could even prove conservative."
If Miller's expectations are borne out, many banks could see positive earnings surprises this year, which could push earnings estimates higher, supporting higher stock prices.
O'Connor expects loan growth for large-cap banks "to accelerate to 4-5% in 2014 and 6% in 2015 vs. 3% in 2013," reflecting a strengthening economy and lower credit standards. However, a decline in credit spreads over bench marks, such as the federal funds rate, "could likely offset some if not all of the benefit of stronger loan growth," according to O'Connor, meaning the banks may not see much of an earnings boost from higher origination numbers.
Either way, the lowering of underwriting standards could make for quite a boost for the residential real estate market this year."
Actually, I went through the volume data for the past 5 years. In that time, FMCC has had more volume than FNMA 48 times (3.8% of trading days). The last time this happened was 12/13/2012. This trend did not seem to correlate with any significant increases/decreases of pps for either entity.
One might think that this newest Motley Fool article titled "Will this bill wipe out Fannie and Freddie Shareholders?" was deliberately published to play on the fear of the recent comments made by Shaun Donovan that a housing reform bill is likely to be released soon.
However, the comments raised by Donovan/Obama administration pertain to the work being done by Johnson-Crapo and do not directly relate to Corker-Warner. The timing to publish seems a little too coincidental for a very bearish advocate (Motley Fool) against Fannie/Freddie....IMO.
Obit, perhaps you can answer a question. In light of the recent comments from Shaun Donovan indicating that the Obama administration predicts movement towards housing reform in the coming weeks via the Johnson-Crapo bill in the Senate.
I've found this article published in Oct 2013 highlighting the basic goals of each piece of housing reform legislation introduced to date.
http://www.standardandpoors.com/spf/upload/Events_US/US_FI_Event_Webcast111313_Article4.pdf
From what I gather, the Johnson-Crapo bill (FHA Solvency Act?) seeks to reform FHA so that they will serve a greater, more efficient role in the housing market by: increased underwriting standards, proper oversight, increase return of private capital, and retaining a capital reserve to protect against loss. Is the FHA Solvency Act the same bill that Johnson-Crapo are currently working on to reform the housing finance system?
If so, this bill mentions nothing of GSE oversight or the fate of the GSEs under said legislation? Do we know or have any hint of what Johnson-Crapo intend to do with Fannie and Freddie under this plan? Does this plan suggest Fannie/Freddie's current dominant role in the marketplace would be transitioned over to the FHFA, with the GSEs acting as insurers/reinsurers on an even playing field with other financial institutions?
The easy answer might be that nobody knows at this point. Just wondering if you (or anyone else) could shed some light on the subject.
News: Shaun Donovan optimistic about housing reform
By: Jon Prior
http://www.politico.com/story/2014/02/morning-money-shaun-donovan-housing-reform-103430.html?hp=f3
Housing and Urban Development Department Secretary Shaun Donovan on Wednesday said he is encouraged by the work being done in Congress to reach an agreement on what to do with government-owned mortgage giants Fannie Mae and Freddie Mac.
“I am optimistic that there is a strong bipartisan effort on the Hill,” Donovan said at POLITICO’s Morning Money Breakfast Briefing. Donovan predicted that a bill would emerge in the Senate Banking Committee “in the next few weeks.”
The administration is currently working with Senate Banking Committee Chairman Tim Johnson (D-S.D.) and the panel’s top Republican, Mike Crapo of Idaho, on legislation that is expected to replace Fannie and Freddie with a new agency. It would leave more of a government role in a new housing finance market than a bill authored by House Financial Services Committee Chairman Jeb Hensarling (R-Texas), which was approved by his panel last year.
Donovan’s comments were more optimistic than those of outside observers following the debate.
Anxiety has grown in Washington among advocates of overhauling the mortgage finance system that the window to do much this year is closing as Fannie and Freddie are churning out record profits and the mid-term elections approach.
“I think that is a misreading of the opportunity,” Donovan said.
Even if the Senate Banking Committee produces a bill it is unlikely to come to the floor this year. Hensarling’s bill also appears unlikely to receive a floor vote in the coming months. That means the issue will be left for the next Congress.
Donovan said HUD has been consulting closely with members of the Senate Banking Committee, discussing both broad policy and technical aspects of housing finance legislation.
The secretary acknowledged that crafting a bill that can draw enough support from both sides of the political aisle is the “trickiest” part of getting a deal.
“This is an area where I think we will see some tension,” he said.
He added that there could be some disagreement over what role the government would play in supporting affordable housing for the poor and how much private capital should be exhausted before a new agency would begin to cover losses.
Donovan said lawmakers should not restrict what types of private companies could enter the system. A bill introduced by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) last year would allow for both private mortgage insurers and companies that back entire mortgage bonds to stand in front of the government.
Several hedge funds have invested in Fannie and Freddie betting that Congress will be unable to reach a deal in the coming years, leading the government to ultimately decide to withdraw from the two companies and allow them to once again operate as private entities.
Former Treasury Secretary Hank Paulson said in a recent interview that the hedge funds are not playing a productive role in the housing finance debate because they betting “against progress.”
Donovan declined to discuss the role of hedge funds, some of which suing the government, other than to say the issues surrounding their involvement in Fannie and Freddie is all the more reason to enact legislation soon determining the fate of the mortgage giants.
Donovan said it would be “very disappointing” if Congress and the administration are not able to come together on housing reform before he left office.
News: Obama administration says housing finance reform to advance in Senate soon
By Margaret Chadbourn
http://finance.yahoo.com/news/obama-administration-says-housing-finance-142716651.html
WASHINGTON, Feb 12 (Reuters) - The U.S. Senate Banking Committee is expected to move forward within "the next few weeks" with bipartisan plans for overhauling the U.S. mortgage finance system, Housing and Urban Development Secretary Shaun Donovan said on Wednesday.
"We'll have a bipartisan product relatively soon," Donovan said at a forum sponsored by Politico in Washington. "There is a way to find a compromise."
President Barack Obama as well as Democrats and Republicans in Congress want to wind down Fannie Mae and Freddie Mac. Leaders of the Senate banking panel wanted to roll out a housing reform bill by the end of 2013, but missed the target and have yet to introduce legislation.
"We have a relatively short window to get something done," Donovan said. "There is a great deal of bipartisan groundwork."
Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo, the panel's top Republican, are aiming to produce a bipartisan bill that builds on legislation that 10 senators had already co-sponsored to wind down Fannie Mae and Freddie Mac and allows for a federal backstop for lending in a crisis.
While momentum is building, it remains unlikely Congress will enact a law this year.
The challenge for the Senate Banking Committee is whether Johnson will be able to coax the panel's Democrats that have started to splinter over concerns about how much the bill reduces the government's support for the housing market, and fails to promote affordable housing programs.
Republicans may support the overhaul but it's unclear whether they would back down if more emphasis is placed on low-incoming housing initiatives in the negotiation process.
"We're making real progress, but there is more that we can do," Donovan said. "Both sides could walk away with something."
Any bill offered in the Senate must be reconciled with a Republican-backed measure in the House of Representatives that greatly limits the government's housing-finance role. Midterm elections also complicate the congressional calendar and detract from efforts to get something done.
The U.S. government seized Fannie Mae and Freddie Mac in 2008 after they were pushed to the brink of insolvency by investments in bad loans. The duo took $187.5 billion in taxpayer aid but have since paid about $185.2 billion in dividends to the government, thanks to the U.S. housing market rebound.
News: Pressure Mounts To Return Fannie Mae, Freddie Mac To Owners
by VW Staff, Richard X. Bove
http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-pressure-mounts/
The fate of Fannie Mae is up to the courts
“The Wall Street Journal reports today that the fate of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) is up to the courts. Moreover, the Journal is suggesting that shareholders will win and the government will lose.
The plaintiffs in this action are accusing the government of unlawfully seizing private property without the due course of law. The basis of this claim is that the U.S. Treasury Department effectively nationalized the company through its so-called third amendment.
Treasury claims that all profits of Fannie Mae belong to the treasury
Under this amendment the Treasury claims that all profits of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) belong to the Treasury even though the initial move by the Congress to put Fannie Mae into conservatorship made no such claim. In fact, it suggested the opposite – i.e., that the government would return the company to its shareholders at a future date.
The plaintiffs are also upset that the third amendment requires the elimination of Fannie Mae’s capital by 2017 and the reduction of its mortgage holdings to $250 billion by that date.
While it is possible that the plaintiffs will win their case, it is not clear what the U.S. government will do if it loses. In the Winstar cases related to the savings and loan industry, one might argue that the U.S. government ignored the ruling of the Supreme Court.
I continue to believe that the only realistic solution for the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) dilemma is for Congress to explicitly state that the company would be returned to its former status. The rationale for this would be that if Fannie Mae and its brother GSE were eliminated so would the 20 and 30 year fixed rate mortgages. No one would buy them. This would create a crisis in the housing markets.
In sum, the pressures are building to return this company to its owners. This would be a bonanza for its stockholders.”
News: Fannie Mae, Freddie Mac Could Soon Put ‘Paid’ To Their $187B Bailout
by Saul GriffithFebruary
http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-soon-paid-bailout/
The change of fortunes in the housing market have led to solid profits at mortgage finance companies Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).
But all of these profits flow into the coffers of the US Treasury under a federal diktat that requires the two companies to fork over profits as dividends on the government’s 80% ownership in the two companies.
Fannie Mae and Freddie Mac: Bailout a blip in the rear view mirror
In fact, with its dividend payment of $30.4B last December, Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) returned all of the $71.3B it received as a bailout from the government and paid over an additional $9B. Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) paid $8.6B, bringing its cumulative tally of the amount returned to taxpayers to about $113.9B, and within handshaking distance of the total bailout of $116.1B it received.
Fannie Mae will most likely repay the piffling balance amount of $2B plus change this quarter.
A lucrative dividend stream for the government
With the bailout repaid, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will continue to make dividend payments to the Treasury, provided they are profitable, becoming veritable cash cows for the government.
Last month, the country reported a record December budget surplus of $53.2B, aided by the payments from the GSEs and higher payroll taxes.
Other contenders
But now that taxpayers have been made whole, attention needs to be paid to the holders of the common and preferred shares in Freddie Mac / Federal Home Loan Mortgage Corp and Fannie Mae / Federal National Mortgage Association, who are clamoring for equitable treatment by the government in its reform involving the two housing mortgage companies. More particularly, they would like to participate in the companies’ profits once taxpayers are paid in full.
Consumer activist and shareholder Ralph Nader held a round table discussion in Washington to draw attention to the need to help shareholders retrieve their investments in the GSEs. Current political thinking is weighing the winding up of the companies, though currently, there appears to be a political logjam on the issue.
“Housing reform will have an impact not just on shareholders, but on industry stakeholders and the broader economy,” Nader said at the discussion, which was organized as a part of his campaign with Shareholder Respect, a group created to empower Fannie and Freddie shareholders.
Hedge funds on the warpath
Hedge funds such as Bruce Berkowitz’ Fairholme Fund and Perry Capital are embroiled in litigation against the government and contend that its appropriation of all of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) profits is unjustified.
Theodore Olson of Gibson, Dunn & Crutcher LLP, which represents Perry Capital LLC, said at a conference last week that the Treasury “has effectively nationalized the companies and ensured that they will never return to private ownership” using steps that are “plainly unlawful.”
Non-profits want theirs, too
Low-income housing groups led by the Right To The City alliance have claimed in a lawsuit that the government should honor its commitment in the original bailout to set aside a small portion of the profits to be made by Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) for funding a trust that will provide affordable housing to low-income and homeless persons.
In all honesty, what was she supposed to say? It's not within the Feds authority to make executive or legislative decisions about housing reform, those fall to the FHFA and Congress, respectively. She gave her personal opinion that a new housing system needs to be put in place to avoid systemic risk and explicitly define the government's continued role...but her personal views should have little impact on the ultimate decision.