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The FHFA PR stated that CSS was set up as a Deleware based LLC, not a corporation, that is equally owned by Freddie and Fannie. Without seeing the operating agreement it is impossible to know what the specifics are exactly, but generally an LLC would function as a pass through entity and make distributions to its members. It seems unlikely that there are additional members of the LLC at this point besides f and f, so it is probably safe to assume that they each have a 50% membership interest. LLCs cannot legally issue stock. Whatever CSS makes would be apportioned to the LLCs members as per the specific operating agreement. An LLC is not required to have a board or any other formal governance structure like a corporation, so essentially naming a CEO for CSS only confers the powers given to him by the specific operating agreement of this LLC. They could have arbitrarily called him president, manager, etc. Since FHFA is ultimately overseeing CSS, I would think that the "ceo's" discretion would be rather limited in this case. Until that structure changes, whatever CSS becomes is a pass through asset of f and f, and their senior junior and common shareholders.
The article also said that they would "eventually" "ramp up" to 200-250 employees. F and F currently have 12000+ employees and obviously their corporate campuses are vastly larger...I think Bill Gates's house is 60,000 square ft.....
Not gonna lie, if these debt ceiling proposals don't pan out by Wednesday night I secretly want Fannie to announce earnings early and for Tim Mayopoulos to show up at the door of the Treasury Thursday morning with several thousand briefcases full of billions and billions of dollars in cash....
We will see. They have about 12b left to pay. Its hard to gauge with bank settlements, additional dta's, etc.
Fanoogle.com and Framazon.com...
reformed housing finance system of "the future".
Nice find. Thank you for your work and insight.
This has been pointed out before. The headline is scary though, so I guess that is all that really matters....
Ted Olsen.
I think the whole situation is unprecedented and will undoubtedly become a case study, so there is no clear answer as to how it will ultimately play out. However, one the most prominent constitutional lawyers in the country, among others, is already preparing to argue the constitutionality of the sweep amendment as an overreach and beyond the scope of the conservatorship. If that is gaining traction in the courts?....
He did disclose before he testified at the senate banking hearing, so at least it is on record. 5trillion dollar industry, guess everyone is gonna make a play for it.
I think it will work out well for fnmas though. I was reading about Rodge Cohen who was in the room as attorney for fannie when they went into cship. He said that not doing more to protect preferds was a mistake, they can still correct it.
Great day here guys, nice close! I guess some HUGE news that some poster referred to hearing earlier on AM radio has gone by the wayside. Be sure to tune into you local Lubbock, TX station tonight to see if there is anything to spark another "sell blast" like we had today, or worse....a "sellsplosion"
So wait, commons up 4% on 28m volume is troubling, and FNMAS down 0.5% on 68,000 volume is a sell blast? Hyperbole.
Mark Zandi is on the Board of MGIC. They probably want to play on that new field, as long as they don't have to pay to build it.
Mortgage Guaranty Insurance Corp
I honestly feel for DeMarco. From a shareholder standpoint I am not sure whether or not he has been beneficial, but he has a truly impossible job. At his Senate testimony in April, he was clearly exasperated that nothing had been done to resolve the status of F an F. He is in charge of managing 2 of the largest companies in the world with a changing and sometimes contradictory set of objectives. He also took a beating publicly for not backing down with regards to writing down principal on underwater loans which would totally undermine the market for MBS, he actually gets heckled at the Senate meeting by people in the gallery. All things considered, he has helped to get F and F onto stable footing and is trying to navigate these complicated waters with no clear direction from lawmakers.
We do own it. It is an LLC equally owned by f and f. What happens down the road remains to be seen, but as of right now I agree that this certainly not bad news. It only clarifies the path we are on. Legally, we now know that the CSS is an asset of the 2 companies. The common securitization platform has been discussed and promoted in all of the recent senate hearings, so this is not a new idea. The only new information that we have now is that its legal structure is going to be an LLC that is a subsidiary of f and f.
Equally owned joint venture.
Dear 100 DMA,
We don't really know how to say this... but we feel that it is time for us to let go. We want you to know that we really appreciate you and all that you have done for us. It has meant a lot that you have been there for support in the tough times, but now we feel that we are growing apart and frankly you are just holding us back. As hard as it is to say goodbye, it is just time for us to move on. Please, know that we will always look back on our time together fondly, and of all of the moving averages that we are trading above you will be the one we hold dearest in our hearts.
Sincerely,
FNMA
It is also fairly clear that Institutional and rates investors want a government backstop maintained to continue providing liquidity to the TBA market, as it is fairly clear that Regional banks and community banks want equal access to be able to sell loans to be securitized, as it is that hedge funds mutuals funds pension funds and individual investors want their constitutional rights upheld, as it is that eliminating f and f would destabilize the TBA market, as it is that the taxpayers also want affordable rates and access to fixed rate 30 year mortgage products, as it is that the taxpayers want a system with increased stability and oversight, as it is that no proposal in its current form has been able to adequately address the issues of all parties involved. It is a large and extremely complex problem that involves many interests from numerous parties some of which are conflicting on the individual level. From my perspective I see one solution that could adequately address all issues. It is important to look at these things from the perspective of all parties involved to determine what the most probable outcome might be, and not just from the perspective of a flipper of common shares.
It is not only middle class homeowners who need fannie and freddie. While current risk sharing transactions, and other developments by the gse's are positive in terms of scaling back their market dominance which is healthy for our economy, they do not represent a solution to replace the system needed to provide sufficient liquidity to our housing market. There still is no substitute...
TESTIMONY OF MS. JULIA GORDON
Director of Housing Finance and Policy
Center for American Progress
Hearing: Essential Elements of Housing Finance Reform and Executive Session
Thursday, September 12, 2013
The TBA market is also critically important to investors. It provides a safe investment for rate investors, who can enter and exit the market at will, and it provides a high degree of price transparency. These characteristics are critical for a variety of different types of investors, including foreign central banks, fixed- income investors, and regulated financial institutions who are subject to restrictions based in charter, statute or regulation. In addition, the TBA market enables the pricing and hedging of many non-TBA eligible mortgage products, including jumbo mortgages.
Unfortunately, the structured transaction solutions envisioned by S. 1217 and some other proposals would not be compatible with a deep and liquid TBA market. In a senior/subordinate deal, the subordinate piece would certainly not be eligible, and it is not clear that investors would consider senior tranches to be sufficiently homogeneous. What's more, even for a credit-linked-note transaction or other structured deal without a separate subordinate piece, any variations in the underlying documents from one deal to the next would lessen the level of homogeneity that's required for a market where new MBS are traded alongside more seasoned securities.
Senate Banking Committee
I completely agree that rates and underwriting standards will improve (more accurately have already improved), but I am still unsure that the system will function without Fannie and Freddie. I think that middle class people will still want homes:
Testimony of Mr. Martin S. Hughes
Chief Executive Officer and Director
Redwood Trust
Hearing: Housing Finance Reform: Fundamentals of a Functioning Private Label Mortgage Backed Securities Market
Tuesday, October 1, 2013
Excerpt:
Broadly speaking, I view the mortgage market as having
two distinct sectors. The first is the government supported
sector, which includes the FHA/VA,Fannie Mae,and Freddie Mac.
The other is the private sector, which consists of portfolio lenders, primarily banks,and private label MBS issuers, such as Redwood Trust. Each of these sectors has made vital contributions to the development of the mortgage market over time, for the benefit of millions of homeowners. However, in the wake of the financial crisis, Congress is now appropriately considering how to reform and improve each sector. My testimony will focus on the private label MBS sector of the mortgage market, although it is not possible to discuss reform of one sector in isolation of consideration of reforms in the other sector, as the two impact each other significantly
But Obama has expressly stated that he wants to maintain the 30 year mortgage, as have Senators. Which one is it?
But why do you keep posting old articles from July?
Here is a link to the Senate Banking Committee Hearing from a few days ago. It explains in explicit detail why Freddie and Fannie and the TBA market are necessary. The more current hearing touches on the limitations of the private market to provide sufficient liquidity for housing finance, and all of the experts have expressed grave concerns regarding maintaining a robust and functioning TBA market. Why not reference that? it is much more current. At least then a discussion could be had regarding the prospects for the stocks one way or the other instead of rehashing the same old information again and again from cherry picked sources often of questionable origin. I would be very interested to hear your thoughts as opposed to dated articles. Then a discussion could be had regarding what is actually happening now as the situation is evolving.
So that all can make there own determinations as to what will happen:
Senate Banking Committee
This one is still old, but newer...
Fairholme Fund May Increase Bet on Fannie, Freddie
Perhaps, perhaps not. But that current information is still far more relevant as to the situation as it stands today than old news articles with expired links...
Yep. Freddie is about to drop his $28b dta.
Testimony of Mr. Richard Johns
Executive Director
The Structured Finance Industry Group
Hearing: Essential Elements of Housing Finance Reform and Executive Session
Thursday, September 12, 2013
Excerpt:
CONCLUSION
The issues confronting the Committee as it considers reforms to the housing finance system are critical not only to the health of the nation’s housing market, but to the growth of the
nation’s economy generally. While we recognize the need to correct the errors of the past, we urge the Committee not to lose sight of the ways in which the Agency Market has worked well,
and continues to work well (such as through the TBA Market), to facilitate the ability of Americans to enjoy the benefits of home ownership. To that end, we encourage the Committee to strive to retain the mechanisms, such as the government guarantee, that have succeeded in bringing vast amounts of private capital into the housing market, while it takes steps to more equitably and effectively distribute the risks related to residential mortgages.
We look forward to working with the Committee as it considers these vitally important issues. Thank you again for the opportunity to share SFIG’s views.
Senate Banking Committee
Testimony of Mr. Adam J. Levitin
Professor of Law
Georgetown University Law Center
Hearing: Housing Finance Reform: Fundamentals of a Functioning Private Label Mortgage Backed Securities Market
Tuesday, October 1, 2013
Excerpt:
One of the marvels of the US housing
finance market is the ability of homebuyers to lock
in rates as much as 90 days prior to closing. This is a feature that is unheard of elsewhere in
world. The ability to lock in rates in advance is a considerable benefit to both buyers and sellers.
It allows buyers to be pre-qualified for a mortgage and thus know in advance how much they are able to spend on a home purchase. This certainty allows sellers to maximize sale prices because
prices do not need to be discounted for the uncertainty of financing rates. The result is to enhance the liquidity of the US housing market and boost housing prices accordingly.
Homebuyers are able to lock in rates in advance because lenders are able to do so themselves by selling advance commitments in the form of forward contracts on the “To-Be-Announced” (“TBA”)
market. The TBA market is a market of forward contracts in MBS. The TBA market exists only for GSE MBS; jumbos and other private-label MBS do not trade in the TBA market.
Thus, to the extent that a borrower can lock in a jumbo rate in advance, the lender must assume the rate risk in this duration. Lenders are willing to do so in part because they can largely hedge the rate risk on the jumbo through offsetting sales in the TBA market. The TBA market is able to function because the GSEs’ MBS are exempt from the registration requirements of the federal securities laws. Because the TBA market involves the
sale of MBS before the MBS have been created, it is impossible for those MBS to be registered with the SEC.
Even with a registration exemption, however, a TBA market
is not possible for PLS because they lack the
high degree of fungibility that exists between GSE MBS, which is
necessary as an economic matter to create a liquid forward contract market. The re is variation among the GSE securities that trade in the TBA market, but they also all share three key features that help homogenize the GSE MBS:
(1)
all credit risk is held by the GSEs;
(2)
all are pass-through securities; and the
(3)
geographic composition of the pools cannot be determined
byinvestors
The variations among GSE MBS that trade TBA are relatively minor.
A PLS market cannot support a TBA market, so relying solely on PLS would make it extremely difficult for borrowers to lock in mortgage rates 60-90 days before closing. Credit risk on PLS is held by PLS investors and would vary in part based on the financial strength of the issuer that makes the representations and warranties about the quality of the securitized mortgages. As a result, these securities are very likely to be structured
to create credit enhancement , rather than pass-throughs. Structuring would destroy fungibility, as the credit
enhancements would vary between individual MBS. And because investors would bear credit risk, they would demand to know information such as geographic composition of pools
, as they already do for private-label MBS. Indeed, one of the factors the Kroll Bond Rating Agency explicitly lists as affecting their rating of PLS is the geographic composition of the mortgage pools.
Pre-closing rate-locks would not be standard in a PLS-financed system. The PLS Market Will Produce Geographic Price Discrimination and Systemic Risk. The GSEs do not currently disclose the geographic make up of their pools pre-sale, and
this prevents geographic price discrimination—there is no premium paid for living inparts of the country that are perceived of as riskier, either in terms of credit risk or in terms of prepayment
risk (such as states with greater population mobility).
Instead, in our current housing finance system, there is geographic cross-subsidization. In a PLS market, this cross-
subsidization would disappear, with the likely result that the
South and West would face higher mortgage rates, just
as they did before the entry of the federal government into the housing finance market. Rural communities would also likely face higher credit costs. Whatever one thinks of the distributional fairness of cross-subsidies, there is good reason to support its continuation, as it helps reduce systemic risk. Geographic price discrimination can result in self-fulfilling predictions of local housing bubbles and foster instability in the financial
system. For example, if there is a state budget crisis in Illinois (an all too real prospect, that could be expected to raise the costs of mortgage credit in Illinois, because state budget cuts could affect local housing values. Higher
costs of credit would depress Illinois housing prices, which
would in turn raise default rates and result in yet higher cost so mortgage credit in Illinois, creating a vicious cycle. Thus, it would be easy for local housing price collapses to be spurred
by largely unrelated events, and there is a risk of a cascade across local markets. What’s more, the flightiness of capital from PLS markets—as illustrated by the PLS market’s precipitous
collapse in 2008—means that the capital necessary to support housing prices will not be available precisely at the times it is most needed.
Senate Banking Comitee
FYI...I just clicked on the link that you posted here. It is actually so old that the link has expired to the article, I even searched the website and it didn't come up anymore. Just thought you should know...
Following that logic, then the government can't just illegally amend the terms of its 3rd PSPA agreement with F and F to sweep all profits. In 2 quarters, Fannie has paid 70b dollars to the US government. How many years of dividend payments is that?
The reality is that currently Fannie and Freddie are vital to our housing market and therefore our economy, and they cannot remain in conservatorship indefinitely. The situation is unprecedented and evolving...
So far so good. Need to smash through the 100.
Agreed.
The real question is what is the lip of the cup on right side of that chart going to look like...
I do, for a couple of reasons:
1. The political environment right now is completely overshadowed by the current shutdown and upcoming debt ceiling debate. Fannie and Freddie are within striking distance and could hit net 0 or net positive this quarter. From a PR standpoint, the fact that F and F could make tax payers whole during this period would make a powerful statement. On Friday, Inside Mortgage Finance published that there were "rumors" in Washington that Freddie was going to release its 28b deferred tax asset this quarter and was considering announcing early. If this is true, I can see no other reason to release early than to capitalize on the political timing. I personally would love to see 2 headlines in the WSJ on the same day that say "Gov. on the brink of default!" and " Fannie and Freddie Pay Back Taxpayers!" Really illustrates what is going on.
2. In terms of placing F and F into receivership, there is only one argument I have heard that makes any logical sense, although it is a stretch. That is if they are released as is, they are too big as they now dominate the market. However this problem is a catch 22, because their size and the concentration of the guaranteed MBS market allows for a simple homogenous platform for the multi trillion dollar TBA market. If this market is fractured, then securities will become less attractive to investors which could seriously impact housing market liquidity. Most experts that have testified in front of the Senate agree that doing anything to disrupt the day to day functions of F and F or disrupting the TBA market, which their existence facilitates, would have disastrous consequences for the economy and mortgage markets. On Sept 12 at the Senate Banking Committee hearing Mark Zandi testified that as a way to address this they could be placed into R-ship and then released and rechartered as private entities that would license their own assets back from the government and could continue functioning on a day to day basis, while other private companies could compete for the same assets to level the new playing field. Interesting to note that Mark Zandi is on the board of the Mortgage Guaranty Insurance Corp., so this idea would directly benefit his company. He argued that instead of 2 gov. backed mortgage guarantors there should be 5, presumably his MGIC would be one. Assuming that lawmakers were to take this approach, which would still have a measure of uncertainty as to the impact on the TBA market, there are several other issues that this plan would create. Specifically, the gov. would have to cancel its existing stock warrants and amend the PSPA. Also, F and F liabilities would not be licensed back by the companies. Trillions of dollars of debt would have to go on the governments books. For this reason, I see it as being highly unlikely that this approach will be adopted. I do not think that unnecessarily adding 5 trillion dollars (an approx. 30% increase) in debt on top of whatever debt ceiling increase is debated will be politically viable. I think that they are going to decide to release and capitalize on their stock warrant...
Hensarling is absurd, who cares? No one who has the first clue about the realities of the situation thinks the Path Act is viable anyway. The US House or Representatives, from the people who brought you the government shutdown and possible US default...
That is a sexy looking chart...
And another blurb from IMF...
The Federal Housing Finance Agency has yet to show its hand on 2014 conforming loan limits for Fannie Mae and Freddie Mac, but that isn’t stopping elected officials from sticking their noses in the issue.
In particular, a recent letter sent by 13 senators – 11 Democrats and two Republicans – addressed to FHFA Acting Director Edward DeMarco puts pressure on the agency to show what legal authority it has to declare new loan limits and requests a “quantitative analysis” on what impact it will have on “the economy and national and regional housing markets.”
The 13 senators want a “detailed analysis of the distributional impact on households in high-cost areas.”
The lawmakers are concerned that the housing recovery is not strong enough to withstand a shift of government-sponsored enterprise business to the non-agency market. “It would also be wrong to assume that families now served by the conforming loan market could be equally served by the jumbo market,” they write. For more on the story....
From Inside Mortgage Finance just now:
...Now that the third quarter has ended, the megabanks will begin reporting earnings next week, including the nation’s largest residential lender and servicer, Wells Fargo. Fannie Mae and Freddie Mac likely will report in early November, though there’s some talk in Washington that Freddie might report early, unveiling a $28.6 billion capture of deferred tax assets which will flow through to the bottom line. That money, in turn, will be handed over to the U.S. Treasury in the form of earnings. But keep in mind that such a transfer is not immediate and can take several months...
The treasuries market is the largest in the world. The TBA market for mortgage backed securities that f and f facilitate is the 3rd largest. Guess some of our "leaders" don't think either is that important, as long as 50% of Americans agree I guess it is a good idea to destabilize them...idiots.
I agree. I think net 0+ is going to drop right on the heels of a government shutdown and debt ceiling fight. Lots of settlements, +earnings, + the potential for more dtas. Also experts testifying that the mortgage market can't exist in the absence of f and f and the tba market they facilitate.
Gov needs to get out of the way of a system that is working now and clean up their own mess...
Reallocated and bought a little more yesterday....
$780,000,000=1 payment that is $32,550,000 shy of FMCCs current market cap of $812,550,000.... F and F got royally screwed...
FMCC Market Cap
I'll take it on a day like today. Everything else is pretty red...