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"We have two dates set for deposition – April 17 and April 29"
http://timhoward717.com/2015/03/30/mario-ugoletti-do-not-leave-the-country-and-seek-personal-legal-counsel-asap-perjury-charges/#comments
AIG Bailout Trial Revelation: Morgan Stanley Told Geithner it Would File for Bankruptcy the Weekend it Became a Bank
http://www.nakedcapitalism.com/2014/11/aig-bailout-trial-revelation-morgan-stanley-told-geithner-file-bankruptcy-weekend-became-bank.html
Posted on November 12, 2014 by Yves Smith
I’m still hugely behind on the AIG bailout trial, and hope to show a ton more progress in the next week. I’m posting the transcript for days three the trial; you can find the first two days here and other key documents here.
The first week was consumed with the testimony of the painfully uncooperative Scott Alvarez, the general counsel of the Board of Governors, who Matt Stoller argued needs to be fired, and the cagier-seeming general counsel of the New York Fed, Tom Baxter. Unlike Alvarez, Baxter at least in text seemed to be far more forthcoming than Alvarez and more strategic in where he dug in his heels. But the revelations about the Morgan Stanley rescue alone are juicy. The main actors have sold a carefully concocted story for years.
One of the hopes was that this trial would unearth new information about how the crisis was handled by the officialdom. Just as in wars, the history has been written by the victors. Here conventional wisdom was set in place by what amounted to an authorized narrative, Andrew Ross Sorkin’s Too Big to Fail.
And in that version, the firm that failed or were effectively nationalized were headed by incompetents or figures who got so little coverage as to be cyphers. Dick Fuld was a bully and a lousy negotiator who kept blowing deals that might have salvaged Lehman. Freddie Mac CEO Dick Syron and Fannie CEO Daniel Mudd have walk-on parts. AIG’s Bob Willumstad gets more coverage, but seems little more than a typical colorless corporate leader who isn’t up to managing the escalating crisis at AIG. When the giant insurer was working with JP Morgan and Goldman on a last-ditch fundraising, the bankers were openly derisive that Willumstad didn’t have a good handle on how big AIG’s liquidity black hole was.
Shorter: the prevailing accounts of the crisis are clear on who the good and bad guys are, and paints them accordingly (although the CEOs of walking wounded Citigroup and Bank of America generally received less flattering treatment than Jamie Dimon and Lloyd Blankfein did). But reality is seldom so clean and tidy.
As we wrote earlier, the trial has already revealed that Treasury Secretary Hank Paulson refused even to entertain investment offers from Chinese and Singapore sovereign wealth funds, along with rich Middle Eastern investors. His pretext was that they would have required “guarantees”. But it was a given that the Fed was going to provide liquidity, so the “guarantee” they’d refused to give to Lehman was already in place. There was nothing to lose in entertaining these offers…unless the real objective was not simply to salvage AIG at minimal cost to the public but to use it to launder rescue money to banks. More on that in future posts.
The Baxter testimony provides a key addition to the official history: This is Plaintiff’s Exhibit 175:
Screen shot 2014-11-12 at 4.57.23 AM
In case you have any doubts, TFG is Geithner.
I’ve checked my trusty copy of Too Big to Fail, have done some web searches (much less reliable than they were years ago) as well as called other crisis junkies for their recollection on this matter. If readers can show me any clearly contradictory evidence, I’d love to see it, but I am not aware of any published source previously saying that Morgan Stanley said it would not be able to open absent a bailout. And the e-mail also confirms something we’ve long said, and Lloyd Blankfein admitted to in a rare unguarded moment, that if Morgan Stanley failed, Goldman was next.
And don’t kid yourself. If Goldman and Morgan Stanley collapsed, you could forget about JP Morgan’s “fortress balance sheet”. JP Morgan and Bank of New York, the two linchpins of the tri-party repo system, would be engulfed by the cascading payment failures and bankruptcies that would ripple out of a Morgan Stanley/Goldman implosion.
How is the sanctioned history different, and why does this matter?
While everyone with an operating brain cell knows that all of the major capital markets firms, particularly what were then US investment banks, were in a world of hurt after the Lehman bankruptcy, there is a big difference between having the (correct) view that they were inevitably going to need to be put on the official drip-feed and knowing for a fact that they clearly were going to fail if they didn’t get a Fed rescue over the weekend of September 20-21. And remember, this weekend, when Goldman and Morgan Stanley were made bank holding companies, was the same weekend that the AIG demand note that bridged it into the weekend was replaced with an $85 billion credit facility on terms that were vastly more punitive, much to the surprise and consternation of its board.*
However, if you read Too Big to Fail, it depicts Geithner as having his hair on fire, desperately trying to browbeat Morgan Stanley’s John Mack into merging his bank for $1 into JP Morgan. And this is stated as if it is Geithner’s personal mania, rather than based on Morgan Stanley making an official report that it was a goner. From page 480 of the first edition:
Geithner, still holding court from his office downtown, had become convinced that Morgan Stanley would fail if it didn’t complete a deal by the time the markets opened on Monday. H e had threatened Mack earlier in the day that he would deny his request to become a bank holding company unless he found a sizeable investment or merged….
Not everyone at the Fed was in agreement with Geithner’s insta-merger strategy, however. So unpopular was Geithners’ single-mindedness about merging banks that afternoon that some CEOs began referring to him as “eHarmony, the online dating service. “If we sell more of these guys for a dollar,” [Fed governor] Kevin Warsh complained, “this whole freakin’ thing is going to come undone.”
In fact, Sorkin depicts Mack as a cool-headed, high-stakes poker player, evidently based on the assumption that the collapse of Morgan Stanley was not baked in. Remember, Mack was negotiating with Mitsubishi to make a capital injection, which they did in very general terms before the weekend was over.
What is kept hidden is that Mack knew he had the Fed and Treasury by the balls. After Lehman, they would not be able to let another major firm fail. It would clearly take the entire system down. So from his perspective, he had no reason to knuckle under. The Fed would blink and make Morgan Stanley a bank, as indeed it did. In other words, telling the Fed on Friday that the Morgan Stanley would not open Monday guaranteed that the opposite would happen, somehow. He could always do a deal with JP Morgan later if he really had no other option.
Mack himself apparently supported this misrepresentation, that it was the Fed/Treasury tag team that decided on its own that Morgan Stanley was about to go under, with since this account incorporates Mack’s point of view. The immediately following section from Too Big to Fail:
At about 3:30 PM, John Mack’s assistant, Stacey Cruck, announced that Secretary Paulson was on the line. Mack took the call on the phone next to his couch. The New York Giants versus the Cincinnati Bengals game was playing on the TV behind him.
“Hi, John, I’m on with Ben Bernanke and Tim Geithner, we want to talk to you,” Paulson said.
“Well,” Mack said, “since you are all on the line, can I put my general counsel on?”
Paulson agreed, and Mack hit the speakerphone after the television was muted.
“Markets can’t open Monday without a resolution of Morgan Stanley,” he said in the sternest way he knew. “You need to find a solution, we want you to do a deal.”
Mack just listened, dumbstruck….
“We’ve spent a lot of time working on this and we think you need to call Jamie,” Geithner insisted.
“Tim, I called Jamie,” Mack replied, clearly exasperated. “He doesn’t want the bank.:
“No, he’ll buy it, Geithner insisted.
“Yes, for a dollar!” Mack exclaimed. “That makes no sense.”
“We want you to do this,” Geithner persisted.
“Let me ask you a question: Do you think this is sound public policy?” Mack asked, clearly furious. “There are thirty-five thousand jobs that have been lost in this city between AIG, Lehman, Bear Stearns, and just layoffs. And you are telling me that the right thing to do is to take forty five to fifty thousand people, put them in play, and have twenty thousand jobs disappear? I don’t see how that’s good public policy.”
For the moment, there was silence on the phone.
“It’s about soundness,” Geithner said impassively.
“Well, look, I have the utmost respect for the three of you and what you’re doing….But I just won’t do it. I won’t do it to the forty-five thousand people who work here.”
And with that, he hung up the phone.
Now understand how this reads if you don’t know that it was Morgan Stanley that told the New York Fed that it would not be able to open on Monday. Mack is presumably relaxing, watching football and is ambushed by Geithner, Bernanke, and Paulson to do a deal and manfully wards them off. Remember, we’ve just seen Paulson successfully browbeat both Freddie Mac and Fannie Mae’s boards into accepting a resolution, when Fannie’s board and bank regulatory lawyers were convinced it wasn’t justified but found they had no way out.
We see a broadly similar story from Mack in a Wharton write-up of a talk he gave:
During the depths of the global financial meltdown in September 2008, John Mack faced the most critical moment of his tenure as CEO of Morgan Stanley. The investment bank was nearly out of cash, its stock price plunging into the single digits as investors lost all confidence in the financial sector. Mack was under enormous pressure from U.S. Treasury Secretary Timothy Geithner — who was then head of the New York Federal Reserve Bank — and from Geithner’s higher-ups, then-Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke. Their suggestion: Save the bank by merging with another player, most likely JPMorgan Chase & Co., for a price as low as a dollar…..
Mack stayed on the phone as Mitsubishi agreed to invest up to $8.4 billion in Morgan Stanley — the largest overseas investment by a Japanese financial firm ever — and then he worked out a deal with regulators to convert the investment bank into a bank holding company, a move that offered much greater flexibility for dealing with the fast-moving crisis.
What is the wee problem with this story? My archives show that the Fed approved that Morgan Stanley and Goldman become a bank holding company before the Mitsubishi deal was announced. From the Bloomberg story announcing the deal:
Mitsubishi UFJ Financial Group Inc. will invest up to 900 billion yen ($8.4 billion) for as much as a fifth of Morgan Stanley, the U.S. securities firm seeking capital following the collapse of Lehman Brothers Holdings Inc….
Morgan Stanley and Goldman Sachs Group Inc. won approval yesterday from the Federal Reserve to become banks, effectively ending the era of the Wall Street investment bank and capping a week that saw Lehman file for bankruptcy and Merrill Lynch & Co. rush to sell itself to Bank of America Corp.
Notice how all of the principals were apparently on the same page as far as the messaging was concerned: that it was the Fed and Treasury that were panicked about Morgan Stanley, that the Mitsubishi deal did not depend on Morgan Stanley having gotten the Fed lifeline of being made a bank holding company. The sequence of events strongly suggests that it did.
Here’s the political significance: the hiding of key details about the Morgan Stanley bailout obscures the degree to which officials bent the rules to salvage big, well connected financial firms, and remember, this is even with the public knowing the rules were already bent a plenty. The rushed approval of Morgan Stanley and Goldman as bank holding companies was utterly in violation of official procedures. It isn’t simply that normal waiting periods were waived. The Baxter testimony reminds us that the New York Fed and Board of Governors had to pretend black was white to approve Morgan Stanley as a bank holding company. Q here is David Boies, A is Tom Baxter:
Q. And in order to find that a company can be granted financial holding company status, you must find that they are in sound financial condition and well managed, correct?
A. Well capitalized and well managed, yes.
Q. And who has to make those findings?
A. The Board of Governors of the Federal Reserve System.
Q. And do you know whether the Board of Governors for the Federal Reserve System made a finding that Morgan Stanley was well capitalized and well managed the weekend of September 20th?
A. My belief is they did.
Q. Were you present when that happened?
A. I was not.
Q. Do you know what information was presented to the Board of Governors that would provide a basis for such a finding?
A. I do not know.
Boies’ questions to Baxter also expose that Morgan Stanley managed the difficult feat of borrowing more from the Fed via the Primary Dealer Credit Facility, which had been loosened on September 14 to allow broker-dealers to pledge non-investment grade securities, as in any dreck they could round up, than the larger AIG had taken in its bridge loans during the same time period.
So while Mack comes out of this sort of looking like a good guy, let us remember that this moral comparison is more like what the Japanese would call a height competition among peanuts.
Mack did manage to muscle his and his staff’s way into a lifeboat after the banking system hit the iceberg. But let us not forget that the lower classes in steerage of the Titanic, just like hapless Americans and foreigners who were exposed to the financial system collapse, such as business owners who had their credit lines cut and non Morgan Stanley bankers who lost their jobs, perished. And at least on the Titanic, the captain did go down with his ship. Here, instead, the captains got book deals and speaking gigs and used them to rewrite history.
____
* Note we are not saying AIG should have gotten a sweetheart deal. All of the rescued firms should have been treated harshly. At a minimum, their boards and top executives should have been replaced.
Freddie only has 4.895 billion left to pay back which includes the 10% interest. Freddie is a better buy at this price. i would swap FNMA for FMCC. 4.895 billion should be here in 2 quarters at most. If they release some CLR could be sooner
AIG case /
Another witness, Margaret McConnell, a former deputy chief of staff to then-New York Fed President Timothy Geithner, was shown a March 2009 e-mail she received from a colleague stating that Liddy “has no decision-making authority and is paralyzed at this point by the USG’s role.”
http://www.bloomberg.com/news/2014-10-17/aig-s-ex-ceo-says-he-chose-not-to-buck-bailout-minders.html
"According to Lambert, sweep should stop after 3rd quarter?"
do you have a link or can you point me in the right direction for this info?
I was reading the Lambert decision when you wrote this looking for a statement like that.
thanks in advance,
https://timhoward717.files.wordpress.com/2014/09/93014-memorandum-opinion-perry-injunction-2.pdf
http://timhoward717.com/
$1,000,000.00 Reward for information concerning the governments seizure of Fannie and Freddie.
Bruce Berkowitz Talks Fannie, Freddie, AIG, BAC With Consuelo Mack [PREVIEW]
This Friday Consuelo Mack WealthTrack features an exclusive interview with The Fairholme Fund‘s President and Portfolio Manager Bruce Berkowitz, premiering nationwide beginning Friday, September 26 at 7:30 p.m. on public television (check local listings**) and on wealthtrack.com.
Consuelo Mack asks Bruce Berkowitz how he justifies the risks he takes:
Consuelo Mack reveals, “Bruce Berkowitz explains why he delved so deeply into financial stocks to begin with and why even after about $2 billion in estimated realized and unrealized profits in American International Group Inc (NYSE:AIG) he still believes it is cheap. He also defends his sizable position in Bank of America Corp (NYSE:BAC) and his investments and law suits regarding government controlled mortgage giants, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).”
Bruce Berkowitz describes his objectives for all four companies and how his holdings in them exemplify his style of investing. They are “within his circle of competence.” He buys companies that are “cheapest relative to their intrinsic value” and thinks sticking to his guns during stressful times has over the years proven to be correct and profitable. “If it was easy, everyone would do it,” explains Berkowitz.
Bruce Berkowitz: Background
Known for his deep-value approach and concentrated holdings, Bruce Berkowitz was Morningstar’s first “Fund Manager of the Decade” winner in 2010 and, since its 1999 inception, the fund ranks No. 1 in Morningstar’s Large Value category. As of late August, its 13% annualized returns beat its nearest competitor by 2.4% a year. Yet, assets in The Fairholme Fund dropped from over $20 billion at the peak of its popularity in 2011 to $7 billion in 2012, after a 33% decline in 2011 and billions of dollars in shareholder redemptions. Why? Berkowitz’ big bets in four financial stocks largely shunned by investors since the financial crisis, which now make up nearly 80% of The Fairholme Fund’s portfolio: AIG accounts for 47%, Bank of America nearly 15% and mortgage giants Fannie Mae and Freddie Mac account for over 15%.
The full interview will be available after the broadcast premiere at wealthtrack.com.
Fannie Mae, Freddie Mac: Olson’s Shot Across the Bow
http://www.valuewalk.com/2014/09/fannie-mae-freddie-mac-ted-olsons-shot-across-the-bow/
Fannie Mae, Freddie Mac: Ted Olson’s Shot Across the Bow by Todd Sullivan, ValuePlays
Perry Capital has asked to join Fairholme’s request for supplementation of the record. Ted Olson has done so in a way that all but makes the claim Treasury and FHFA are duplicitous in hiding/omitting documents in this case. Nothing pisses off a judge more that the specter of one side mocking their decision (by ignoring it) or playing games with the process. Nothing…..
As for the lawyers, it is a quick and easy way to be held in contempt or sanctioned for this type of activity so one might expect Lamberth, who until this point has abdicated his duty as a judge to Sweeney in the DC Court of Claims (in so far as making any rulings on this case) to come out rather harshly towards defendants lawyers or run the risk of being looked as though he has no control over his courtroom (many suggest this may already be the case).
There are additional ramifications to this also. So much of what is being decided here goes to credibility. When Fairholme/Perry/Ackman etc claim Treasury/FHFA are not being forthcoming with discovery and seek additional orders from the judge to require more and defendant’s lawyers claim they are, do actions like what is described below give them more or less credibility with the judge?
Fannie Mae, Freddie Mac: Olson says Treasury/FHFA claims were untruthful
One has to really step back here and read what Olson is saying. In no uncertain terms he is saying Treasury/FHFA were not being truthful when they claimed:
1- Tax attributes of >$100B were “never” discussed prior to the 3rd amendment (this is either an egregious lie or a signal of abject incompetence on a unfathomable scale)
2- Contrary to the “downward spiral” they claim the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s were in, the memo clearly depicts rapidly improving finances
3- There were in fact several other options available instead of the Net Worth Sweep (contrary to claims)
4- Both Treasury/FHFA claim FHFA did NOT act at behest of the Treasury yet FHFA was NOT present at the Blackstone meeting indicating Treasury in fact had a VERY active role in what was happening with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s (this was the sole role of FHFA)
Now, it is important to note that this meeting took place over year before the 3rd amendment was enacted so even if Treasury had financial projections for Fannie Mae and Freddie Mac’s that were far less optimistic than The Blackstone Group L.P. (NYSE:BX)’s at this meeting, there was a year for things to play out to determine if they or Blackstone’s were more accurate (Spoiler Alert: Blackstone’s were).
DTA coming to fruition at Fannie Mae, Freddie Mac
Let’s take it further. Defendants briefs and statements by officials in these cases all claim they never discussed or considered the DTA’s that were obviously coming to fruition at Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s. Now, this memo casts very real doubt on that claim and one has to wonder if people at FHFA/Treasury are getting nervous. The claims were made in court filings, you don’t get to go back and ask for a “do over” when documents come to light that counter your statement. Should more documents come out trashing that claim, someone has a real serious problem on their hands.
Finally, what Olson is really doing here is ingenious. He is trying this case publicly via his request. He lays out evidence and then links it to each of Treasury/FHFA’s claims and then illustrates how the evidence refutes each of them. Now, this isn’t for the general public (they aren’t reading this) but it sure as hell is for other plaintiffs, media members, members of Congress, the judge, and Treasury/FHFA officials.
Wanna see members of Congress scramble away from this faster than high school sophomores from a party the cops show up at? Just give them a hint something nefarious went on. They will switch sides on this in a heartbeat and support shareholders (think unions/pension funds).
Fannie Mae, Freddie Mac: Deposition list during discovery
Most importantly this is for those on the deposition list during discovery. He is telling them where plaintiffs stand and it letting them know they might not want to stick to the company line (as it pertains to the above issues) or perhaps they are committing perjury. All plaintiffs need is one person to spill it…just one and this whole thing explodes.
Applicable sections, emphasis mine (pdf of full filing).
C. Disclosure Of The Blackstone Presentation
On July 29, 2014, the website TheStreet, a financial news and services website, published a PowerPoint presentation that Blackstone, a global investment and advisory firm, and the law firm Skadden, Arps, Slate, Meagher & Flom LLP presented to Treasury on June 13, 2011. See Dan Freed, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Investor Blackstone Also Sought Advisory Role, TheStreet (July 29, 2014), http://www.thestreet.com/story/12823463/1/fannie-and-freddie-investor-blackstone- also-sought-advisory-role.html (follow link in second paragraph to “pitch documents provided to TheStreet”). Neither Record filed with this Court includes the Blackstone Presentation, even though on its face it constitutes a document that was before the administrative decisionmaker at the relevant time.
Among other things, the Presentation laid out potential ways that Treasury could create value and stability for the Companies, principally by restructuring Fannie’s and Freddie’s stock. See Blackstone Presentation 34-40. It also gave an overview of the Companies’ situation, including their overall financial health and the White House’s emphasis on winding down the Companies. See Blackstone Presentation 27-33.
Fannie Mae, Freddie Mac: The argument
Perry Capital now joins Fairholme’s requests to this Court for supplementation of the Record. See Fairholme Mot. to Supplement 14-27; Fairholme Reply 9-22. The APA requires courts to review the “whole record,” 5 U.S.C. § 706, meaning “neither more nor less than what was before the agency at the time it made its decision.” Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010) (citing IMS, P.C. v. Alvarez, 129 F.3d 618, 623 (D.C. Cir. 1997)). The Record filed here, however, has gaping holes. As Fairholme has explained, some of those gaps are known: key financial projections and associated records referenced by other documents, the missing Freddie Mac projections, materials from the Department of Justice, and privilege logs to justify any documents that Treasury and FHFA have withheld. See Fairholme Mot. to Supplement 17-20; Fairholme Reply 10-17. The government’s filings here suggest other gaps as well, further justifying supplementation of the filed Record. See Fairholme Mot. to Supplement 20-27; Fairholme Reply 17-22.
Now, the recent revelation of the Blackstone Presentation further bolsters Fairholme’s request for relief. It is clear that the document should have been included in Treasury’s Administrative Record all along. As a Treasury spokesman explained, the Blackstone Presentation was a “part of the policy making process.” Freed, supra (“‘As part of the policy making process, Treasury routinely engages with key stakeholders, market participants and consumer advocates. Treasury did not issue a Request for Proposals, and no contract was awarded,’ [a Treasury spokesman] said Tuesday in an e-mailed statement.”). And while Treasury included other financial analyses of the Companies in the Record it filed, those documents purport to support the government’s arguments by showing gloomier outlooks. See Treasury 3285 (Moody’s Presentation to Treasury: Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Capital Positions (Apr. 4, 2012)); see also, e.g., Treasury 1893 (Moody’s: Plan to Raise Fannie Mae and Freddie Mac Guarantee Fees Raises Question of Support (Sept. 26, 2011)); Treasury 3248 (Deutsche Bank: The Outlook in MBS and Securities Products (Mar. 14, 2012)).
Fannie Mae, Freddie Mac: Omission of the Blackstone Presentation troubling
The omission of the Blackstone Presentation is particularly troubling because it undermines at least four key arguments that Treasury and FHFA have made so far in this case. Cf. Walter O. Boswell Mem’l Hosp. v. Heckler, 749 F.2d 788, 793 (D.C. Cir. 1984) (remanding after agency’s initial record failed to disclose key documents, including those “quite critical” of the key agency study, and recognizing that when there is “no check upon the failure of the agency to disclose information adverse to it, the normal pressures towards inclusion of all relevant material in the record before the court are absent”).
First, FHFA and Treasury have maintained that they never considered—and need not have considered—the tens of billions of dollars in deferred tax assets held by the Companies, even though those assets were recognized immediately after the Sweep Amendment and resulted in a dividend to Treasury of more than $50 billion. See Treasury Reply 47; FHFA Reply 56; see also APA Opening Br. 17 & n.6, 72-73, 77-78; APA Reply 41-42. Indeed, FHFA’s litigating declaration asserts that the agency never “discuss[ed]” the deferred tax assets while considering the Sweep Amendment and that neither FHFA nor Treasury “envision[ed]” the quick recognition of those assets. FHFA 0009-0010. Yet the Blackstone Presentation suggests a way that “Fannie Mae and Freddie Mac’s could experience a build-up of capital”: “ncreased capitalization of tax attributes.” Blackstone Presentation 35 (emphasis in original). Therefore, Treasury at least knew the importance of the deferred tax assets more than a year before the Sweep Amendment.
Second, FHFA’s and Treasury’s defense of the Sweep Amendment rests largely on their “downward spiral” narrative. They claim that without the Sweep Amendment, the Companies would have continually borrowed to pay Treasury’s dividends and soon exhausted Treasury’s funding commitment. See, e.g., FHFA Opening Br. 22-26; Treasury Opening Br. 16-18, 27. They have disputed Plaintiffs’ charge that, since the Companies’ finances were improving, the narrative is fiction. See FHFA Reply 7-10; Treasury Reply 43-47; see also APA Opening Br. 67-68. Treasury did not disclose that, a year before it executed the Sweep Amendment, the Blackstone Presentation provided a road map for the Companies to pay the Treasury dividends without new borrowing from Treasury, while remaining solvent. Blackstone Presentation 34-40. The Presentation suggested that “Fannie Mae and Freddie Mac’s are showing improved financial performance and stabilized loss reserves” and that “Treasury funding for Fannie Mae and Freddie Mac’s continues to slow.” Id. at 28- 29. The Blackstone Presentation contradicts the arguments FHFA and Treasury have made so far regarding the need for the Sweep Amendment.
Third, and relatedly, FHFA and Treasury have disputed that there were reasonable alternative solutions to the Sweep Amendment, contending that no alternative would have solved the purported “downward spiral.” See Treasury Reply 48-52; FHFA Reply 1, 7-10, 55-56; see also APA Opening Br. 79-82. Yet the Blackstone Presentation proposed a variety of methods to restructure the Companies whereby the restructured Companies would not require additional Treasury Funding. See Blackstone Presentation 34-42. Although the proposed restructuring would have diluted the publicly held preferred stock, the Companies could have been profitable, while eliminating the circular payments to, and borrowings from, Treasury, thereby providing potential profit to holders of the publicly held preferred stock. Even though Blackstone proposed several methods to restructure the Companies, Treasury apparently failed to consider any of the suggestions as a substitute for the Sweep Amendment.
Fourth, FHFA has denied that it improperly acted at Treasury’s direction when it decided to execute the Sweep Amendment. See FHFA Reply 10-11; see also APA Opening Br. 51. Plaintiffs previously noted that “[e]ven more evidence supporting this conclusion [that FHFA acted at Treasury’s direction] is likely to be disclosed if the Court orders Defendants to supplement the inadequate administrative records they have submitted thus far.” APA Opening Br. 51 n.10. Now, the Blackstone Presentation does exactly that. It shows that Treasury was the sole recipient of the Blackstone Presentation setting forth strategies to restructure the Companies, with FHFA—the agency purportedly running the Companies—nowhere to be found. This evidence supports the conclusion that FHFA was merely acting at the behest of Treasury, instead of independently analyzing the Sweep Amendment, which it must do to meet its obligations as a conservator for the Companies.
Fannie Mae, Freddie Mac: Doubts on the completeness of the Record
Given the apparent gaps that Fairholme already identified in the Record, and the further doubts about the completeness of the Record raised by the Blackstone Presentation, Perry Capital requests that this Court order Treasury and FHFA to produce a full and complete Record immediately. The government is reviewing many of its documents anyway in response to the Fairholme discovery requests in the Federal Claims Case and is expected to produce 800,000 pages—nearly 200 times the size of the Record filed by Treasury and FHFA. This review and production will undoubtedly reveal documents that should have been included in the Record filed in this case. The government will suffer no added burden by producing the legally required, complete Record in this case. The Record should therefore be supplemented to enable the Court to review the full and proper Record when ruling on the parties’ dispositive motions.
Finally, if this Court agrees that the government must supplement the Record, this Court should not tie the deadline for production of the supplemented Record to the discovery deadlines in the Federal Claims Case. Unlike discovery in the Federal Claims Case, the Record here was due long ago. FHFA and Treasury should correct the clear deficiencies as soon as possible, and the Court should proceed with a hearing on the dispositive motions promptly.
CONCLUSION
For the foregoing reasons, Perry Capital respectfully requests that the Court enter an order requiring supplementation of the Record filed by Treasury and FHFA.
Fannie Mae, Freddie Mac
today is a similar trading day to 09/12/2013 for FNMA, check the chart.
John Carney (WSJ) Fails big in yet another attempt to bash shareholders of Fannie and Freddie.
http://timhoward717.com/
John carney from the Wall Street journal has once again made a misguided attempt to bash current shareholders of Fannie and Freddie, but this time he overplayed his hand. On Friday John gleefully announced that a decision by Judge Amy Jackson in a derivatives case involving Fannie Mae dealt a major blow to the legal cases of Fairholme and Ackman. This created quite a stir and prompted ValueWalk to publish an article about it. ( http://www.valuewalk.com/2014/09/fannie-mae-freddie-mac-first-court-loss-today/)
We immediately alerted our reader that this was laughable; it is a totally unrelated matter and has no bearing on the arguments being made in our cases. This was nothing new from John, both he and his employer have been engaged in an all out attack on the private shareholders of Fannie and Freddie for a while now.
I want to update our readers as to the debate that John and I have been planning. Malka Zeefe Senior Bankruptcy Correspondent at The Capitol Forum had graciously volunteered to be a moderator to help ensure that the debate would be conducted professionally, and ensure both parties received a chance to defend their positions. John then sent this email to us which we still are trying to decipher.
(Johns Email)
While I like the idea of a debate, a couple of caveats.
1) I have to get all public appearances approved by my higher-ups. Quite standard procedure but rules is rules. As I’m relatively new to the WSJ, I’m not sure how open they are to this sort of thing.
2) I’m not an advocate of a position the way you are. I don’t have a stake in the outcome. Instead, I have a view on the way the legal documents work, a view on the prospects of the companies and a view on desirable reforms for housing. I’m willing to defend these views but it should be clear that that is all they are: informed opinions.
3) We’ll have to agree on format, question for debate, and all that.
4) No debate will take place if there are any further attacks on my character, my employer, or similar fits of insulting behavior. I have no interest in debating fools or fanatics who cannot conduct themselves in a civilized way.
5) Although I cannot speak for my employers, your earlier attacks on them make it impossible for me to contemplate even asking them if I could debate you. You’ve already gone beyond the realm of civilized discourse.
6) So you’ll have to find a suitable person for me to debate on the subject.
He starts out stating fairly normal terms of debate and then like the government he defends takes a schizophrenic turn and proceeds to decline to debate based on our characterizations of him and the WSJ.
(Our reply)
John, I apologize if you have taken offense to our characterizations of you and the WSJ. It is simply our belief that you and the WSJ have been presenting a very one-sided view of the Fannie/Freddie story that has led us to draw these conclusions. The lack of honest reporting concerning the blatant theft of all of Fannie and Freddies profits is especially alarming to us.
I think the debate could help everyone involved get a much better grasp on the true picture. I also believe that a debate such as this could attract quite a bit of attention, and it would be nice if we could use it to raise money for charity.
I am open to a variety of terms and understand that you have obligations to consider as well. I would propose that we set up an online forum in which to have it.
We could have a moderator (Malka Zeefe has offered) who would review our proposed questions/topics and present them. We do not have to have strict time constraints; it can be fairly open-ended.
We could each invite other people to join our respective side to offer a broader array of opinions.
I hope we can put our past differences aside and go through with this debate. It could be a lot of fun, and maybe we could help some people out in the process.
I honestly believe that this issue is if critical importance and our dialogue could help shape the debate. Thanks
We have not heard back from John as of today.I was not surprised to see John back out, for the government has offered no legitimate defense for their actions, therefore, those like Carney and the WSJ, who choose to defend them have nothing to defend. Our government claims to have done nothing wrong yet when given the opportunity prove their innocence they have chose to stall, delay and hide all of the evidence that could prove their innocence, this forces those who choose to defend them no option but to do the same.
John claims he is just “analyzing the facts” yet closer examination shows that he is cherry picking certain facts that support the government while ignoring the truth that would expose their lawlessness. I am sorry John if you take offense to the truths that we find so evident, but you my friend are nothing more than a propaganda minister. You are not a “journalist.” As propaganda minister, your role is to create confusion while blindly rationalizing the governments brazen attempts to trample the rule of law.
It is critical for a democracy to have a free press that is Unafraid to expose our government when they attempt to trample the constitution. In the case of Fannie and Freddie many like John in the financial press have chosen rather to try and rationalize and justify these actions.They are committing the ultimate sin in a democracy. Unlike John, we are not beholden to anything but the truth. Here we will remain shining our light of truth on everyone involved in the Soviet-style profit grab.
Our offer remains open to having a moderated debate with not only John, but anyone who would like to defend our governments illegal seizure of private profits. As always Keep the Faith!!
Fourth, FHFA has denied that it improperly acted at Treasury’s direction when it decided
to execute the Sweep Amendment. See FHFA Reply 10-11; see also APA Opening Br. 51.
Plaintiffs previously noted that “[e]ven more evidence supporting this conclusion [that FHFA
acted at Treasury’s direction] is likely to be disclosed if the Court orders Defendants to
supplement the inadequate administrative records they have submitted thus far.” APA Opening
Br. 51 n.10. Now, the Blackstone Presentation does exactly that. It shows that Treasury was the
sole recipient of the Blackstone Presentation setting forth strategies to restructure the Companies,
with FHFA—the agency purportedly running the Companies—nowhere to be found. This
evidence supports the conclusion that FHFA was merely acting at the behest of Treasury, instead
of independently analyzing the Sweep Amendment, which it must do to meet its obligations as a
conservator for the Companies.
Given the apparent gaps that Fairholme already identified in the Record, and the further
doubts about the completeness of the Record raised by the Blackstone Presentation, Perry Capital
requests that this Court order Treasury and FHFA to produce a full and complete Record
immediately. The government is reviewing many of its documents anyway in response to the
Fairholme discovery requests in the Federal Claims Case and is expected to produce 800,000
pages—nearly 200 times the size of the Record filed by Treasury and FHFA. This review and
production will undoubtedly reveal documents that should have been included in the Record
12
Case 1:13-cv-01025-RCL Document 49 Filed 09/18/14 Page 18 of 18
filed in this case. The government will suffer no added burden by producing the legally required,
complete Record in this case. The Record should therefore be supplemented to enable the Court
to review the full and proper Record when ruling on the parties’ dispositive motions.
Finally, if this Court agrees that the government must supplement the Record, this Court
should not tie the deadline for production of the supplemented Record to the discovery deadlines
in the Federal Claims Case. Unlike discovery in the Federal Claims Case, the Record here was
due long ago. FHFA and Treasury should correct the clear deficiencies as soon as possible, and
the Court should proceed with a hearing on the dispositive motions promptly.
CONCLUSION
For the foregoing reasons, Perry Capital respectfully requests that the Court enter an
order requiring supplementation of the Record filed by Treasury and FHFA.
https://docs.google.com/viewer?a=v&pid=forums&srcid=MDUxNDQwNjExMTIwMzQzNjc3NDIBMDMwMzQ1OTg2NzExODAzMzI3MjgBZUl2blVZRllUeU1KATAuMQEBdjI
Fourth, FHFA has denied that it improperly acted at Treasury’s direction when it decided
to execute the Sweep Amendment. See FHFA Reply 10-11; see also APA Opening Br. 51.
Plaintiffs previously noted that “[e]ven more evidence supporting this conclusion [that FHFA
acted at Treasury’s direction] is likely to be disclosed if the Court orders Defendants to
supplement the inadequate administrative records they have submitted thus far.” APA Opening
Br. 51 n.10. Now, the Blackstone Presentation does exactly that. It shows that Treasury was the
sole recipient of the Blackstone Presentation setting forth strategies to restructure the Companies,
with FHFA—the agency purportedly running the Companies—nowhere to be found. This
evidence supports the conclusion that FHFA was merely acting at the behest of Treasury, instead
of independently analyzing the Sweep Amendment, which it must do to meet its obligations as a
conservator for the Companies.
First, FHFA and Treasury have maintained that they never considered—and need not
have considered—the tens of billions of dollars in deferred tax assets held by the Companies,
even though those assets were recognized immediately after the Sweep Amendment and resulted
in a dividend to Treasury of more than $50 billion. See Treasury Reply 47; FHFA Reply 56; see
also APA Opening Br. 17 & n.6, 72-73, 77-78; APA Reply 41-42. Indeed, FHFA’s litigating
declaration asserts that the agency never “discuss[ed]” the deferred tax assets while considering
the Sweep Amendment and that neither FHFA nor Treasury “envision[ed]” the quick recognition
10
Case 1:13-cv-01025-RCL Document 49 Filed 09/18/14 Page 16 of 18
of those assets. FHFA 0009-0010. Yet the Blackstone Presentation suggests a way that “[t]he
GSE’s could experience a build-up of capital”: “ncreased capitalization of tax attributes.”
Blackstone Presentation 35 (emphasis in original). Therefore, Treasury at least knew the
importance of the deferred tax assets more than a year before the Sweep Amendment.
Third, and relatedly, FHFA and Treasury have disputed that there were reasonable
alternative solutions to the Sweep Amendment, contending that no alternative would have solved
the purported “downward spiral.” See Treasury Reply 48-52; FHFA Reply 1, 7-10, 55-56; see
also APA Opening Br. 79-82. Yet the Blackstone Presentation proposed a variety of methods to
restructure the Companies whereby the restructured Companies would not require additional
Treasury Funding. See Blackstone Presentation 34-42. Although the proposed restructuring
11
Case 1:13-cv-01025-RCL Document 49 Filed 09/18/14 Page 17 of 18
would have diluted the publicly held preferred stock, the Companies could have been profitable,
while eliminating the circular payments to, and borrowings from, Treasury, thereby providing
potential profit to holders of the publicly held preferred stock. Even though Blackstone proposed
several methods to restructure the Companies, Treasury apparently failed to consider any of the
suggestions as a substitute for the Sweep Amendment.
Second, FHFA’s and Treasury’s defense of the Sweep Amendment rests largely on their
“downward spiral” narrative. They claim that without the Sweep Amendment, the Companies
would have continually borrowed to pay Treasury’s dividends and soon exhausted Treasury’s
funding commitment. See, e.g., FHFA Opening Br. 22-26; Treasury Opening Br. 16-18, 27.
They have disputed Plaintiffs’ charge that, since the Companies’ finances were improving, the
narrative is fiction. See FHFA Reply 7-10; Treasury Reply 43-47; see also APA Opening Br.
67-68. Treasury did not disclose that, a year before it executed the Sweep Amendment, the
Blackstone Presentation provided a road map for the Companies to pay the Treasury dividends
without new borrowing from Treasury, while remaining solvent. Blackstone Presentation 34-40.
The Presentation suggested that “[t]he GSE’s are showing improved financial performance and
stabilized loss reserves” and that “Treasury funding for the GSE’s continues to slow.” Id. at 28-
29. The Blackstone Presentation contradicts the arguments FHFA and Treasury have made so
far regarding the need for the Sweep Amendment.
naked shorting
The Hundred Billion Dollar Loophole (05.07.02): There's a rule that the market makers use ... a rule that only has less than two hundred words in it ... and that rule allows them to naked short an OTCBB or Pink Sheet stock into oblivion. It allows them to literally create, out of thin air, as many shares as they need, to maintain an orderly market. "(B) Proprietary short sales No member shall effect a short sale for its own account in any security unless the member or person associated with a member makes an affirmative determination that the member can borrow the securities or otherwise provide for delivery of the securities by the settlement date. This requirement will not apply to transactions in corporate debt securities, to bona fide market making transactions by a member in securities in which it is registered as a Nasdaq market maker, to bona fide market maker transactions in non-Nasdaq securities in which the market maker publishes a two-sided quotation in an independent quotation medium, or to transactions which result in fully hedged or arbitraged positions." This rule allows a market maker to create a share in a company by simply taking the money from the buyer and making an electronic entry into their brokers' account, and the broker then electronically credits the buyer with one share of that company. But several things that no one is aware of take place in this transaction. 1. The buyer thinks that his share actually exists, but unless he or she has read his account agreement very carefully, he won't understand that all he did is give money to someone other than the company and never got any actual proof of ownership. His certificate, presumably, is sitting at the DTCC. 2. The market maker filling the order for one share has the buyer's money, and gave nothing except electronic acknowledgement of receipt of it ... the electronic entry in the buyer's account. One very important thing to understand here, is that at no point in this process, did the company in which the buyer 'invested' ever get one single dime of the money paid by the buyer for that share. There is a tremendous misconception out there that causes many to assume that when they buy a share of a company's stock, the company gets the money. This is only true if the buyer is buying an IPO, or a private placement of shares from the company. In any other sale or purchase of a stock by an investor, the company does not even see the money. This is particularly vexing when one begins to understand what happens in naked shorting situations. Situations where the provision that allows for naked shorting to maintain an orderly market is abused. Understand that whoever is doing the naked shorting is the one receiving the money. They keep it. For as long as it is convenient to do so. That is where the abuse of the rule comes in. That rule was created to allow for market makers, who by becoming market makers, agree to 'make a market' in certain stocks. That means that they will sell you a share, or buy a share from you, even if there isn't any available, or there are no other buyers for it. The Market makers' job is at least partly, to provide liquidity to the market. In thinly traded securities, or securities where there is a small public float, the market makers' ability to naked short is crucial to the liquidity of the market in that security. The abuse takes place when the market maker for whatever reason determines that the market for a particular security has become "disorderly". Too much buying pressure, for instance, can cause a price spike in that security that would have no relationship to the true book value of the security. The market maker then determines that he will naked short to fill orders, knowing that by doing so, the price will not explode on unusually high demand because he can literally issue new shares under this rule. The market maker then waits, with an open naked short position in that stock, until the buying pressure subsides, and he can buy enough shares back at lower prices to cover his naked short position. The rule does not have any time requirements and that allows for the market maker to keep a naked short position open for potentially years. In reality, until the buying pressure subsides enough for him to buy back at lower prices however many shares he needs to fill previously filled orders that make up his naked short position, it simply stays open, and the money sits in his account. Someone is going to ask the question, "So, how big are all those naked short positions, anyhow?" There is another provision that says that the market makers do not have to publish their open naked short positions. Never. At all. All OTCBB and Pink Sheet securities can be naked shorted - indefinitely - by market makers under this rule, and there is no way that an investor can discover if there is an open naked short position in a stock he may be interested in, or even how big that short position is. So far, the SEC does not see a strong need to correct this situation, either. Think about it. There are unlimited amounts of shares that were never authorized or issued by a company made available to the unsuspecting investor. They are authorized and issued by the market makers under this rule, and the company never gets any money from the sale of shares created under this rule. The temptation to abuse this rule is irresistible. Just do the math. A million naked shorted shares sold by a market maker at 0.01 (one cent) is $10,000 that the market maker keeps in his account, and that the company does not get. At 0.10 (ten cents) the market maker gets to keep $100,000. Now, that is for each million shares that the market maker creates. Under this rule, if a company and/or a group of shareholders begin to suspect a short position exists in their security, they can not discover this from any published source. The price of the stock remains constant, or goes down, even though there is unusually heavy buying ... buying that goes on for years in some cases. The company thinks that there is someone illegally shorting their stock in an attempt to ruin the company. The shareholders think that the company is illegally printing shares behind their backs and is scamming them. Eventually, this distrust between the company and it's shareholders becomes so great that investors start selling, or the company, already damaged by a suppressed share price, is forced to issue additional shares into the market because other collateral-backed loans can not be made with share prices so suppressed. This is what the market maker is waiting for ... sometimes for as long as years. In both cases, the market maker eventually gets his naked short position covered, and all it cost was the company's reputation, the shareholders' money, and the SEC's full cooperation by allowing this abuse of the rule. There is a third situation that the market makers naked short into ... a stock that is a likely prospect for failure. In that case, they just continue naked shorting no matter what, keeping the price suppressed, and eventually the company files for bankruptcy, and ... the company goes out of business, the shareholders lose their investment ... and the market maker keeps the proceeds of his continued naked shorting. A good question for the SEC would be, "Seeing as how the companies that failed never got the proceeds of the sale of stock over and above their issued and outstanding, but the market makers did, isn't the SEC allowing actual fraud to take place, and condoning it by the creation and continued existence of this rule?" Like it or not, the SEC has allowed securities fraud to run rampant in the OTCBB and Pink sheet stock markets by simply looking the other way and allowing the market makers to target the OTCBB and Pink sheet markets as a source of huge amounts of cash, literally stolen from investors by the third party creation of shares by an entity other than the the issuer - the company. This rule is nothing less than blanket permission by the SEC for market makers to become the issuers of company stock, no matter what the company's official authorized and issued amounts are. And that, my friends and fellow investors, is securities fraud on a scale almost beyond comprehension. Isn't capitalism great. One way to fight back on this is to email all the members on the House Committee of Financial Services (click link below). They oversee the SEC. We need 1000's of emails going to the Chairman of this Committee, all members for that matter, stating that this corruption must stop!! Come on people let's stand up for something and fight back on this. It will take a herculean effort to make our voices known. The next Chairman will probably be Barney Frank so maybe we can make a difference with a new Chairman.
http://ragingbull.com/forum/topic/684754
Info for joining lawsuit
Investors,
Thanks to all that joined us in Atlanta and online for our press conference requesting that Director Watt end the conservatorship. In case you missed it, check www.investorsunite.org for the replay!
A law firm has contacted Investors Unite with an opportunity for our membership to join a formal legal complaint against the government challenging the net worth sweep on behalf of Fannie and Freddie shareholders. The case will be led by well-respected attorneys at a leading law firm. The case will represent Fannie Mae and Freddie Mac common shareholders.
As a reminder, at Investors Unite it is our policy to never turn your personal information over without your consent. Because we protect the privacy of our members, we wanted to give you the opportunity to notify us if you are interested in learning more.
By sending us your contact information to pass along to the legal team, you are consenting to being contacted by the law firm about this complaint. If you choose, please reply to this email with first name, last name, phone number and email address to info@investorsunite.org. Please also let us know if you are a Fannie investor, a Freddie investor or both.
Another important note, if you choose to participate in this lawsuit, it will be completely independent of your membership to Investors Unite. We simply want to provide this opportunity that came to us for our members.
Thank you,
Tim Pagliara
tim@investorsunite.org
Murdoch’s Wall Street Journal stages Soviet styled propaganda attack. 12:26 AM
timhoward717.com/
The Wall Street journal has made another soviet styled propaganda attack on the private shareholders of Fannie and Freddie today. This time in an article by John Carney entitled “Time for Fannie and Freddie Investors To Surrender.”
The entire premise of his argument asks us to simply accept the 2012 third amendment sweep, where the government made a deal with the government, to sweep all of Fannie and Freddie’s profits to the government. John let me clue you in on something no one, but the government and those such as yourself who are serving as the official mouthpiece of the U.S. government are willing to accept the Soviet style profit sweep. When the sweep is deemed illegal than the entire basis for your article is no longer valid. But you know what John, I think you already know all of this, the purpose of your article was to wear down the will of those resisting these illegal government acts. You see John this is not the first time in history that this has been attempted, tactics like these were common by the state-owned press in the former Soviet Union.
Now we all know who was really behind this article none other than one ?????? ?????? (Rupert Murdoch). From now on we will refer to Rupert using the Russian spelling of his name. ?????? ?????? just because you have obviously surrendered any shred of principal long ago how dare you try and coerce the shareholders of Fannie and Freddie into doing the same. Just how warped you have become is evident in your quest to aid the U.S. government in this maniacal profit grab. You see unlike you ?????? ?????? money is not our God. We are fighting this fight to preserve our nation. If we lose this battle America will be forever changed.
I am now going to call for a boycott of all of ?????? ?????? publications.Anyone who continues to subscribe will be financing future propaganda attacks. Please tell them your reasons for canceling. I have pasted John Carney’s article below for reference.
I had hoped to post a deeper analysis of the opinion from last night, but this required immediate attention. I should get that up by tomorrow night. I want to commend our readers for some excellent comments today and the battles they waged on Twitter and the web, great work! NEVER SURRENDER and keep the Faith!
John Carney; 415-439-6400; John.Carney@wsj.com
Time for Fannie and Freddie Investors To Surrender
The fight over Fannie Mae FNMA -2.24% and Freddie Mac FMCC -2.74% profits should be over.
Freddie and Fannie have each reported profits for the second quarter that were much smaller than the record levels logged earlier, largely thanks to tax benefits and legal settlements tapering off. So there is far less at stake in the battle between the government and fund managers who own shares of the companies.
That spat has largely turned on the so-called sweep agreements the two companies entered into in 2012. Those require that after establishing a minimum net worth, all additional income must be handed over to the U.S. Treasury. In exchange, Uncle Sam agreed not to charge the companies a commitment fee on their government credit lines.
The fund managers argue that the government’s take should be limited to the 10% dividend owed on its preferred shares in the companies. The difference between the sweep and the 10% dividend was tens of billions of dollars last year—hence the attention.
Now it is far smaller. For Freddie, the difference is a rounding error. Under the sweep, it will pay $1.9 billion to the government. The 10% dividend on the preferred shares would be $1.8 billion. If Freddie owed a commitment fee for the credit line on top of that, it would likely be in deficit.
The difference is wider for Fannie. It is paying $3.7 billion to the government. A 10% dividend would be just $2.9 billion, an $800 million difference. But perhaps $250 million of that would likely go to any reasonable commitment fee on its $117.6 billion credit line.
Fannie’s chief said the second quarter gave a “good sense of a normalized environment,” suggesting these profit levels aren’t anomalous. And in this environment, sweep or no sweep, there is close to nothing left over for investors in Fannie or Freddie.
I was there to.
clearly, the guy holding the sign is the same guy in the article.
there is a picture of him on page 2 in front of the supreme court
http://seekingalpha.com/article/2160403-housing-prices-rise-new-home-sales-fall-earnings-loom
i'm talking about the picture in front of the Capitol. you may be talking about a different picture
the guy holding the sign "We are Fannie and Freddie Investors" is from Las Vegas.
he is this guy from a David Sims article
http://seekingalpha.com/article/2160403-housing-prices-rise-new-home-sales-fall-earnings-loom
that is not you
Icahn is dumping his shares in Herbalife which is giving Ackman a chance to cover his shorts. they are both dumping their loser and doubling down on their winner. These guys are friends when they aren't pulling shenanigan to make money.
All the banks are middle men when they sell their loans to Fannie Mae and Freddie Mac.
Wherever you go for a loan, ask for three options and the settlement statements for each option:
1. a no closing cost loan
2. a loan with fees in between the lowest rate and the no closing
cost loan
3. the lowest rate you can give me (highest fees)
Everyone's situation is different so with the three options you can pick the one that works best for what you are trying to do.
exp.
max cashout = no closing cost loan
lowest rate = good for person who wont refinance for a long time.
it may take five years of payments to pay for the
higher fees.
They will make money on you one way or another. they make money on the front of the loan (fees) or the back (rate) or a combination of both.
CashCall is good for getting a no closing cost loan. Everything is done over the phone and by fax or scan.
https://www.cashcall.com/landing.aspx
or call this number 702-796-3600 and they will send a complimentary limo to pick you up.
http://www.spearmintrhinolv.com/
"the court agrees with the case law of the United States Court
of Appeals for the Ninth Circuit, which states that the “FHFA cannot evade judicial review
. . . simply by invoking its authority as conservator.” County of Sonoma v. Fed. Hous. Fin.
"It should be noted, there is no current indication of an imminent FNMA exchange re-listing." from stocktwits
i was a day too early
testing 4.20 today
When I feel anxious about my investment in Fannie Mae, I draw strength from the "Harry Potter" series of books and films.
“In 'The Prisoner of Azkaban,' Dumbledore says: ‘Happiness can be found even in the darkest of times if one only remembers to turn on the light,’”.
http://news.yahoo.com/teen-survivor-texas-shootings-says-slain-family-members-012500643.html
I'm truly scared for this girls future. WTF
Fannie, Freddie and Charlie Brown
"A more sensible alternative is for the FHFA to reverse the third amendment, begin rebuilding GSEs’ capital, and put the enterprises on a sound footing to exit conservatorship, as AIG, GM, and other recipients of federal stopgap funding during the economic crisis already have."
http://thehill.com/special-reports/housing-july-9-2014/211868-fannie-freddie-and-charlie-brown
Like Charlie Brown — ever hopeful of kicking the football — players in the U.S. housing market have been hoping for congressional proposals for home finance reform that were not mere enticements to foolish investment or greater taxpayer burden.
Each crisis in the market has underscored problems with congressional reform proposals and has invited new efforts to make things right. But in every case, short-term interests or misunderstandings of what needs to be fixed have, like Lucy, pulled the ball away.
Since the 1930s, government-sponsored enterprises (GSEs) Fannie Mae, and later Freddie Mac, were supposed to assure liquidity in the housing market, with a sometimes implicit (sometimes explicit) government guarantee that would lower borrowing costs, protect investors and help promote homeownership.
Increased homeownership and a vibrant housing market seemed to signal their success. But in the aftermath of the financial crisis and changes in the incentives offered to mortgage issuers, the GSEs were left on the hook for much of the cost, and it was obvious that something needed fixing.
The 2008 Housing and Economic Recovery Act (HERA) placed the GSEs in conservatorship under the Federal Housing Finance Agency (FHFA) and provided substantial cash infusions in exchange for an annual 10 percent dividend on investment (i.e., on the government’s “senior preferred stock”) and rights to almost 80 percent of the GSEs’ common stock.
As the market improved, Fannie and Freddie’s finances improved, too. They now have paid “dividends” to the U.S. Treasury above the $188 billion received as bailouts. The GSEs seemed poised to return to profitability and a more stable operation. Then the U.S. government picked up and moved the ball again.
The FHFA unilaterally amended the HERA-based agreement, eliminating the rights of nongovernment shareholders and sweeping up 100 percent of the profits generated by the GSEs in perpetuity. This “third amendment” to the agreement also reduces capital holdings for the GSEs, making their operations more secure and decreasing need for taxpayer support.
These changes are being challenged in a lawsuit, Perry Capital v. Lew, but it should not take court action to see that there is a problem with the third amendment.
From a policy standpoint, this mini-nationalization seems totally backward. Aside from questions of its legality, the amendment diminishes incentives for private investment needed to boost liquidity for the housing market. It downgrades the security of Fannie and Freddie at a time when the still-undercapitalized GSEs could afford to increase capital assets simply by deferring new dividend payments.
While the FHFA policy provides more money now for the Treasury (which the government can spend on other priorities), the policy contradicts basic common sense. It’s as if, after a young adult moves back home, his parents seeing him saving very little and making potentially risky investments, direct him to save less and give them his paychecks—for them to spend!
A more sensible alternative is for the FHFA to reverse the third amendment, begin rebuilding GSEs’ capital, and put the enterprises on a sound footing to exit conservatorship, as AIG, GM, and other recipients of federal stopgap funding during the economic crisis already have.
A recent report from the Height Analytics group of financial analysts explains that this could make GSEs financially sound in 5–10 years, depending on how high the FHFA sets capital asset requirements. Moreover, this would give Congress better options regarding long-term GSE reform and less time pressure for acting.
With the $10 trillion to $20 trillion U.S. housing market representing much of the wealth of 70 million American homeowners, it is time for government officials to put the largest sources of mortgage-finance backing on sound footing. Financially secure GSEs are good for the housing sector and for home investment. Making a sensible move in this arena would bring a smile to Charlie Brown fans who’ve waited too long to see him kick the ball.
Cass is dean emeritus of Boston University School of Law, a U.S. representative on the panel of mediators for the World Bank’s International Centre for Settlement of Investment Disputes, and author of The Rule of Law in America.
Private Mortgage Insurer Eligibility Requirement
LINK
Submit Input
New Whitepaper
Another Link
http://www.fhfa.gov/Media/PublicAffairs/Pages/Draft-PMIERs-FAQs.aspx
Submit written responses to:
The Federal Housing Finance Agency
Constitution Center
400 7th Street SW
Washington DC 20014
Attn: Mortgage Insurance Eligibility Project
Or submit your response at www.fhfa.gov/open-for-comment-or-input.
Submitted responses will be posted without change, including personal information such as name,
street address, email address and telephone number on http://www.fhfa.gov.
The period for public input begins on July 10th, 2014 and ends on September 8th, 2014.
Page 1
Overview of Draft Revised
Private Mortgage Insurer Eligibility Requirements
I. Introduction
The Federal Housing Finance Agency (“FHFA”) is seeking public input for itself, the Federal National
Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie
Mac”) (together “the Enterprises”) on draft revised eligibility requirements the Enterprises would use to
approve private mortgage insurers that provide mortgage insurance on loans owned or guaranteed by
the Enterprises.
FHFA is the Conservator of each Enterprise. As Conservator, FHFA succeeded to all rights, titles, powers
and privileges of the Enterprises. FHFA is authorized to operate each company in conservatorship and
carry on the business of the Enterprises. This includes taking actions necessary to put them in a sound
and solvent condition and actions that FHFA determines to be in the best interest of the Enterprises.1
The Enterprises were chartered by Congress with specific purposes, which include providing liquidity
and stability in the secondary market for residential mortgages.2 Each Enterprise operates under a
charter act that requires mortgage loans with an outstanding principal balance exceeding 80 percent of
the value of the property to have an acceptable form of credit enhancement.3 Mortgage insurance is
the most commonly used form of credit enhancement. Primary mortgage insurance provides the
Enterprises with first loss protection on mortgage loans that exceed an 80 percent loan-to-value (“LTV”)
ratio and reduces the loss severity exposure of the Enterprises in the event of losses due to borrower
default. The Enterprises’ charter acts allow each Enterprise to determine whether a mortgage insurer
(“MI”) is qualified to insure loans purchased by that Enterprise.4
Each Enterprise currently has its own set of mortgage insurer requirements that an MI must satisfy to
become an approved counterparty (“Approved Insurer”). Fannie Mae and Freddie Mac have not
updated their MI eligibility requirements since 2003 and 2008, respectively. The existing Enterprise MI
eligibility requirements rely primarily upon an acceptable rating by a major rating agency as opposed to
specific counterparty risk and financial standards, as defined by the Enterprise. Additionally, the existing
requirements do not adequately consider liquidity of capital. Ensuring that regulated entities maintain
strong counterparty requirements, in addition to regulatory requirements, are part of sound risk
management by state and federal regulators.
A direct result of the financial crisis was a steep rise in defaults and foreclosures of single-family
mortgages, including those owned or guaranteed by the Enterprises. Mortgage insurers and the
Enterprises suffered significant losses as a result of these defaults and foreclosures. As the regulation of
insurance is conducted primarily at the state level, MIs are subject to state regulatory requirements.
1 The duties and authorities of FHFA as Conservator are found primarily at 12 U.S.C. § 4617.
2 See 12 U.S.C. 1451; 12 U.S.C. 1716.
3 See 12 U.S.C. 1454(a); 12 U.S.C. 1717(b).
4 See Id.
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To ensure that Approved Insurers possess the financial and operational capacity to withstand a severe
stress event, FHFA, as Conservator, directed the Enterprises to update, expand, and align their
counterparty risk management standards. The Enterprises, under the oversight of FHFA as Conservator,
have revised and aligned their Private Mortgage Insurer Eligibility Requirements (“PMIERs”). The draft
PMIERs are intended to mitigate future Enterprise losses, ensure that Approved Insurers maintain
sufficient financial strength to withstand a stress macroeconomic scenario and, to the extent possible,
create a common set of eligibility requirements for Approved Insurers. Once finalized, each Enterprise
will publish its own set of revised PMIERs.
FHFA, Fannie Mae and Freddie Mac consider the aligned, revised eligibility requirements important
conditions for doing business with the Enterprises, and FHFA seeks public input on the draft PMIERs.
This Overview and accompanying draft of the revised PMIERs are intended to inform the public of the
draft revisions and solicit input. FHFA requests responses to specific questions beginning on page 17
of this Overview.
The draft PMIERs should be relied upon for the purposes of public input. This Overview is intended to
facilitate the input process by providing additional background and context on five specific areas that
are addressed in the draft PMIERs:
1) Business Requirements and Policy Underwriting;
2) Quality Control;
3) Financial Requirements;
4) Failure to Meet Requirements; and
5) Newly Approved Insurer Requirements.
The draft materials should only be relied upon for purposes of public input.
II. Public Input
Submit written responses to:
The Federal Housing Finance Agency
Constitution Center
400 7th Street SW
Washington DC 20014
Attn: Mortgage Insurance Eligibility Project
Or submit your response at www.fhfa.gov/open-for-comment-or-input.
Submitted responses will be posted without change, including personal information such as name,
street address, email address and telephone number on http://www.fhfa.gov.
The period for public input begins on July 10th, 2014 and ends on September 8th, 2014.
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III. Timeframes
All components of the PMIERs would become effective 180 days after the publication date of the
finalized PMIERs. During the input period, and until the PMIERs are finalized, any Approved Insurer that
does not fully meet each Enterprise’s existing eligibility requirements would continue to operate in its
current status.
An Approved Insurer that fails to fully comply with the financial requirements would be given a
transition period of up to two years from the publication date to fully comply. After the PMIERs have
been finalized, an Approved Insurer will have adequate time to assess the revised PMIERs and, if
necessary, develop a transition plan to achieve compliance with the financial requirements by the end of
its transition period.
If an Approved Insurer requires a transition period, it would remain an Approved Insurer, as is the case
today, able to write insurance on loans eligible for delivery to the Enterprise during the development
and Enterprise review of a transition plan and, subject to plan approval, during the period in which the
plan is in effect. In no instance would a transition period extend beyond two years from the publication
date of the finalized PMIERs.
The timeline under consideration is as follows:
PMIERs Implementation Schedule
180 day period from Publication date to Effective
Date
• Each Approved Insurer would conduct a selfassessment
of whether it fully complies with
the PMIERs and certify to each Enterprise that
it satisfies all of the requirements or,
alternatively, identify specific requirements
not met.
• For an Approved Insurer unable to certify that
it fully complies with the financial
requirements, each Enterprise would require
the Approved Insurer to develop a transition
plan for Enterprise approval.
Effective Date • All Approved Insurers must be in full
compliance with the PMIERs on the effective
date.
• If an Approved Insurer fails to fully comply
with the financial requirements, it would be
given a transition period of up to two years
after the publication date to fully comply.
90 Days after the Effective Date • Due date for the transition plan.
• The transition plan would include proposed
interim milestones as well as detailed actions
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the Approved Insurer has initiated or would
initiate to achieve full compliance.
150 days after the Effective Date • Each Enterprise would review and either
approve or require the Approved Insurer to
revise the transition plan.
• Once a transition plan has been approved, each Enterprise would begin monitoring the Approved
Insurer’s progress against its transition plan milestones, including quarterly submission of a status
report detailing the Approved Insurer’s progress toward accomplishing its transition plan
milestones.
• A transition framework might include heightened surveillance, increased frequency of management
updates, or other actions listed in the section 706 and 901 below.
IV. Draft PMIERs
1. Business Requirements and Policy Underwriting
The draft PMIERs would implement the following revised business requirements to identify, measure,
and manage exposure to counterparty risk. Implementing these business requirements would provide
more timely feedback on operational performance of Approved Insurers.
a) Scope of Business (§300)
i. Operational Needs
The PMIERs should establish standards that are designed to ensure that an Approved Insurer has longterm
access to staff, services, and technology that meet its operational needs for administering its
insurance book of business. Please see Section V, Request for Input, Business Requirements, Question
A.1.a for questions related to how the PMIERs may address this risk.
ii. Claims-Paying Ability
The PMIERs should establish standards that are designed to ensure that an Approved Insurer’s potential
losses from insuring high-risk loan concentrations do not jeopardize its financial ability to pay claims on
its lower risk portfolio. Please see Section V, Request for Input, Business Requirements, Questions A.1.b
and A.1.c for questions related to how the PMIERs may address this risk.
iii. Other Services
Under the draft PMIERs, an Approved Insurer would not be permitted to:
• Provide contract underwriting or any other service not directly required for providing mortgage
guaranty insurance that creates a material, direct or contingent liability for the Approved
Insurer; or
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• Assume any obligations related to services, including contract underwriting, offered or
conducted by any subsidiary or affiliate. An example of such prohibited obligations is an
agreement to indemnify an affiliate, providing contract underwriting, from potential losses
incurred as a result of defective underwriting services.
b) Other Requirements
i. Enterprise Prior Approval (§307)
As drafted, the PMIERs would restrict Approved Insurers, without prior Enterprise approval, from
entering into any agreements for Enterprise loans that:
• Waive, suspend, or otherwise alter an Approved Insurer’s right to investigate loans, rescind or
deny coverage, or settle claims on one or more specified loans;
• Expand or alter the right to rescind, as in cases where rescission is triggered by an event
unrelated to loan eligibility, compliance with underwriting requirements, or breach of policy
representations and warranties (e.g., rescission triggered by failure of a seller/servicer to fund a
reinsurance entity); or
• Affect one or more loans owned or guaranteed by an Enterprise.
Note that, generally, an Approved Insurer would not need to obtain an Enterprise’s prior approval for
the settlement of a claim on a single loan in the ordinary course of business, provided that in connection
with such settlement, the Approved Insurer does not receive any financial consideration independent of
any claim adjustment that is otherwise supported by the terms of the Approved Insurer’s master policy.
ii. Diversification Policies (§308)
Under the draft PMIERs, an Approved Insurer would be required to:
• Have a documented risk diversification policy and employ risk management tools and
techniques to avoid concentrated risk exposures in the risk in force the Approved Insurer
insures. Segments of business for which concentrations should be monitored and managed
include, but are not limited to, loan products and programs, geography, customers, and source
of business (e.g., retail, wholesale, and correspondent).
• Monitor and report risk concentrations to its senior management and develop an action plan to
address breaches of established limits which must be provided to the Enterprise.
iii. Claims Processing and Loss Mitigation (§§309-310)
To ensure that all mortgage insurance claims are processed in a timely manner, an Approved Insurer
would be required to either pay or deny a claim or rescind coverage within 180 days of the claim
perfection date and rescind or deny any claim not perfected within 120 days from the claim filing date
except to the extent a master policy requires an earlier time line.
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In cases where an Approved Insurer does not provide full loss mitigation delegations to an Enterprise,
the PMIERs would:
• Allow for an assessment of a pricing adjustment when that Enterprise acquires loans insured by
the Approved Insurer to compensate for potentially higher loss management costs.
• Require the Approved Insurer to provide service-level agreements to the Enterprise that specify
acceptable loss mitigation decision timelines.
iv. Policies of Insurance (§ 312)
• An Approved Insurer would be required to maintain business insurance for Fidelity Bond and
Errors & Omissions at all times. The coverage amount for each policy must be no lower than $5
million dollars with a deductible amount not to exceed $150,000.
v. Use of Automated Underwriting Systems (AUS) (§404)
Under the draft PMIERs, Approved Insurers using a third-party Automated Underwriting System (AUS)
recommendation either, (a) for its own purposes, or (b) as part of a delegated underwriting process of
loans insured by the Approved Insurer, would be required to conduct a risk analysis to ensure that
recommendations of the AUS are aligned with the Approved Insurer’s independent credit risk
guidelines.
2. Quality Control
a) Quality Control Program Requirements (§500)
Under the draft PMIERs, each Approved Insurer would be required to maintain a robust quality control
(QC) program. Such a program is intended to facilitate the Approved Insurer’s monitoring of its
adherence to its underwriting and eligibility guidelines, ensure data accuracy, and prevent the insuring
of fraudulent mortgages or mortgages with other defects.
The draft PMIERs would require an Approved Insurer to submit to each Enterprise a copy of its QC
program annually, with changes noted from the prior year’s version.
Further, the draft PMIERs contains the following minimum requirements for an Approved Insurer’s QC
program:
1. Operate independently from the sales and underwriting functions.
2. Be effective in determining that the insured mortgages were properly underwritten and
consistent with the Approved Insurer’s underwriting guidelines.
3. Include standard reporting that identifies opportunities for improvement, training, or other
corrective actions that are communicated on a regular basis to the Approved Insurer’s senior
management and its lender customers.
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4. Employ a loan selection methodology and frequency of review requirement.
5. Monitor overall quality by source of business (e.g., retail, wholesale, broker).
6. Review declined applications for insurance to determine if there is adequate support for those
decisions.
7. Be in writing with documented operating procedures that incorporate the following:
a) A clearly defined scope and purpose of the review, noting differences between
underwriting versus claims reviews.
b) A red-flag checklist for potential fraud.
c) A well-defined process for establishing and managing corrective actions such as
notification to the Approved Insurer’s management, additional training for underwriting
staff, or the removal of a lender’s delegated underwriting authority.
d) Utilization of third-party resources that can be applicable to the QC process, such as
fraud detection tools.
e) A threshold QC defect rate that triggers the need for corrective actions.
f) A clear methodology to establish that a QC defect rises to the level requiring a
corrective action.
g) The prompt identification of loan defects and subsequent actions taken to address and
remediate patterns of loan production issues before loans qualify for rescission relief
under the Master Policy.
h) A documented governance criteria and process for making and approving revisions to
the Approved Insurer’s QC program.
b) Post-Closing Review (§502)
The draft PMIERs require an Approved Insurer to evaluate certain loan documentation as part of its QC
process including documentation related to:
• Income;
• Employment;
• Assets to meet reserve requirements;
• Appraisal report or property valuation data; and
• Credit reports.
c) Other QC Requirements (§§503-506)
Other QC requirements contained in the draft PMIERs include:
• The Approved Insurer must select loans on a random (i.e. non-discretionary sample) basis using
a sample size sufficient to produce results that have at least a 95% confidence interval with no
more than a 2% margin of error (when measured annually). Additionally, an Approved Insurer
must perform discretionary loan reviews for 100% of loans that become early payment defaults.
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• The Approved Insurer’s QC review of loans sampled through its random selection process must
be completed within 120 days following the latest insurance coverage effective date of the
selected loans.
• The Approved Insurer must establish a QC defect rate threshold for its random loan reviews.
The rate is subject to review and periodic reassessment by the Enterprise.
• The Approved Insurer must take prompt action to identify the causes of the breach if the QC
defect rate threshold is exceeded and, if necessary, develop an action plan to correct the
underlying causes driving the breach.
• The Approved Insurer must provide regular reporting of QC findings to its senior management
and quarterly summary reporting to the Enterprise.
• The Approved Insurer must report immediately to senior management any suspected pattern of
fraud or similar activity.
• The Approved Insurer must conduct an independent audit of the QC function to confirm
compliance with its internal program requirements.
d) Performance Monitoring and Scorecard (§802)
The draft PMIERs provide that each Enterprise would monitor the operational performance of Approved
Insurers through a quarterly Operational Performance Scorecard (“Scorecard”) that tracks the Approved
Insurer’s business performance using a set of indicators. These performance indicators are intended to
capture front-end quality metrics such as sample rates, QC defect rates, and back-end metrics to
monitor claims paying practices, such as rescission and denial rates, and claim processing timelines. If
an Approved Insurer were to report poor performance on one or more of the Scorecard metrics, the
Approved Insurer would be classified as high, medium, or low risk and would be potentially subject to
actions listed in the Remediation section described below or other corrective actions as determined by
each Enterprise.
Scorecard thresholds would be developed in the future based on the Enterprises’ counterparty risk
prudential standards for operational performance, with consideration to the input data provided by the
Approved Insurers during the initial build-out of the Scorecard data set. The draft Scorecard would
contain data metrics based on the combined Enterprise portfolios and individual Enterprise
portfolios. As such, metric targets for individual Enterprise portfolios may be different based upon each
Enterprise’s individual portfolio experience.
3. Financial Requirements
MIs are regulated by state insurance regulators that seek to ensure the MI companies have adequate
claims-paying ability and can meet their obligations by, among other things, establishing contingency
reserves, capital requirements, and permitted investment guidelines. MIs generally are required to
keep contingency reserves of 50% of premiums for ten years to help bolster the MIs’ financial standing
in cycles of high defaults, which typically coincide with a stressed economic environment. Current state
regulatory capital standards generally limit the amount of risk exposure an MI can write to a multiple of
its regulatory capital. In most states, this limit is twenty-five dollars of risk in force (RIF) for every dollar
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of regulatory capital. Ensuring that regulated entities maintain strong counterparty requirements, in
addition to regulatory requirements, are part of sound risk management by state and federal regulators.
a) General Requirements (§704)
The draft PMIERs seek to ensure that Approved Insurers have adequate liquidity and claims-paying
capacity during periods of economic stress. Under the draft PMIERs, the liquid assets of an Approved
Insurer (i.e., Available Assets) need to be greater than or equal to a minimum required asset level (i.e.,
Minimum Required Assets), defined as the greater of:
• The Total Risk-Based Required Asset Amount, which is a risk-based standard representing claims
from the Approved Insurer’s book of business forecast to be paid over the remaining life of
existing policies under a stress economic scenario, or
• A floor minimum requirement of $400 million as a condition of on-going approval
b) Risk Based-Required Assets Factors (Exhibit A)
The draft PMIERs define the Total Risk-Based Required Asset Amount as the projected claims for each
Approved Insurer using a grid of factors based on vintage (origination year), original loan-to-value ratio
(LTV) and credit score for performing loans, and the depth of delinquency for non-performing loans.
The grid approach, as currently configured, would take into account the following risk characteristics:
• The original LTV of the loan. For loans refinanced through the Home Affordable Refinance
Program (HARP), the original LTV as of the HARP refinance date;
• The original credit score of the borrower(s). For loans refinanced through the Home Affordable
Refinance Program (HARP), the original credit score is measured as of the HARP refinance date;
• The vintage classification (Pre-2005, 2005-2008, Post 2008), based upon the note date of the
insured loan;
• Whether the loan was originated pursuant to the HARP refinance program;
• The loan payment and/or policy claim status; and
• Certain risk features.
The factors in the grids would be updated, as needed, to reflect changes in the risk dynamics of loans
with mortgage insurance and in the macroeconomic environment. Exhibit A of the draft PMIERs
contains the grids and additional details on their application.
The grids generally would follow this format:
Original Credit Score Classification
Original LTV Classification <= 620 621- 680 681 - 740 741 - 780 781 - 850
LTV <= 85 x% x% x% x% x%
85 < LTV <= 90 x% x% x% x% x%
90 < LTV <= 95 x% x% x% x% x%
LTV > 95 x% x% x% x% x%
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Each factor in the grid would represent the aggregate remaining life of coverage claims as a percentage
of aggregate RIF adjusted for ceded risk, subject to a 1% floor. The aggregate projected claims for each
cell in the grid would be the sum of the projected loan-level claims for each loan matching the risk
characteristics for that cell. For performing loans, the loan-level claims for each cell would be projected
using the FHFA Mortgage Analytics Platform, 5 employing detailed loan-level data on Enterprise loans
with mortgage insurance (and excluding loans insured by previously Approved Insurers currently in runoff).
For delinquent loans, the grid factors would be a simple average of the Enterprises’ and FHFA’s
projections of loan-level claims on delinquent loans.
While the grids would be estimated using Enterprise loans with mortgage insurance, they would be
applied to both Enterprise and non-Enterprise loans. However, for certain non-Enterprise loans
originated after 2008 that have high-risk features, the draft PMIERs apply multipliers to the grid factors.
If a loan does not meet any of the following criteria at the time of origination, its factor from the grid
would be increased by applying each of the applicable multipliers in Table 1 below:
Criteria
• Eligible for sale to Fannie Mae, Freddie Mac, or any of the Federal Home Loan Banks;
• Meets the requirements of either Enterprise Selling Guide, except those related to loan amount;
• Originated under a state housing finance agency program; or
• Meets the requirements of a qualified mortgage under 12 C.F.R. § 1026.43(e) or (f)
High Risk Feature Multipliers
Risk Feature Multiplier
Not Underwritten with Full Documentation 3.00
Not Owner-occupied at Origination 3.00
Underwritten with a Monthly Debt-to-Income Ratio > 43% 2.00
Mortgage Payment is not Fully Amortizing 1.50
Recognizing that the application of these multipliers may result in a factor greater than 100%, the draft
PMIERs cap the factor at 100%.
5 The Federal Housing Finance Agency (FHFA) maintains a proprietary Mortgage Analytics Platform to support the
Agency’s strategic plan. The platform is one of the tools the FHFA uses in policy analysis. In the case of the
PMIERs, FHFA used the platform to project remaining life of coverage claims on Enterprise loans with mortgage
insurance. The projected claims were disaggregated into segments based on vintage, credit score, and LTV. The
risk based required asset factors in Exhibit A were calculated as the projected claims in each segment divided by
the risk-in-force for that segment. A description of the platform is available at FHFA Mortgage Analytics Platform.
Page 11
c) Macroeconomic Scenarios
A macroeconomic scenario is a critical model input for projecting mortgage insurance policy claims that
are used to generate the Risk Based-Required Assets Factors. The scenario includes projected house
prices, interest rates, unemployment rates, and other factors. In developing the draft PMIERs,
consideration was given to macroeconomic forecast scenarios available from commercial vendors,
FHFA’s Countercyclical Capital Regime6, and the Federal Reserve Board’s Comprehensive Capital Analysis
and Review (CCAR) exercise.7
The draft PMIERs apply the CCAR Severely Adverse stress scenario (excluding the Global Market Shocks)
for loans insured after 2008 to maintain rough consistency with the stress tests of the federal financial
regulators. For most policies written before 2009, the draft PMIERs use the CCAR Baseline scenario
because the associated loans have already been subjected to significant economic stress. The draft
PMIERs use only the house price, interest rate and unemployment rate projections from the CCAR
scenarios needed to model mortgage insurance claims. The draft PMIERs do not apply the full CCAR
exercise. The CCAR exercise is used by the Federal Reserve Board to evaluate the earnings and capital of
banks, both from a quantitative and qualitative perspective.
There are two technical limitations to using the Federal Reserve Board’s CCAR scenarios in projecting
claims:
1. The CCAR scenarios contain only national house price projections, which do not capture regional
variations.
2. The CCAR scenarios contain projections for only thirteen quarters. To project claims on
mortgage insurance policies, CCAR scenarios need to be extended.
To address these limitations, the national CCAR house price paths would be disaggregated to the state
level and extended to 30 years.
The national CCAR house price path would be disaggregated, or apportioned, to each of the 50 states
plus the District of Columbia based upon the ratio of each state’s House Price Index (HPI) to the national
HPI under FHFA’s countercyclical scenario described in FHFA working paper 12-2, Countercyclical Capital
Regime: A Proposed Design and Empirical Evaluation.8 CCAR’s national unemployment scenario would
be disaggregated, or apportioned, in a similar manner.
To extend the HPI, interest rates, and unemployment stress paths to 30 years, the CCAR scenarios would
be transitioned to long-run equilibriums (as specified in FHFA working paper 12-2) beginning in year
three of the projection. By year ten, these scenarios represent long-run trend HPI, average interest
6 http://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/2012-04_WorkingPaper_12-
2_508.pdf.
7 http://www.federalreserve.gov/bankinforeg/ccar.htm.
8 http://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/2012-04_WorkingPaper_12-
2_508.pdf
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rates between 1994 and 2000, and the latest estimate of the natural rate of unemployment from the
Federal Reserve Bank of St. Louis.
d) Prudential Floor (Exhibit A)
For performing loans, the draft PMIERs add a prudential floor requirement of 5.6% of primary mortgage
insurance RIF (adjusted for ceded risk) to address a concern that a pure risk-based approach may
establish an inappropriately low Risk-Based Required Asset amount for a book of business, that is
heavily weighted with higher quality loans, in the event that the model-based forecast turns out to be
overly optimistic. The Risk-Based Required Asset Amount for primary mortgage insurance covering
performing loans would be the greater of:
• The requirement for performing loans calculated using the grids, or
• 5.6% of performing primary mortgage insurance RIF adjusted for ceded risk.
Risk of default for loans with two or more missed monthly payments would not be subject to a
prudential floor for the Risk-Based Required Assets requirement because their grid factors already
reflect a high likelihood of claim.
e) Pool Policies (Exhibit A)
Under the draft PMIERs, pool policies would be treated similarly to primary mortgage insurance policies.
Each loan covered by a pool policy would be assigned a Risk-Based Required Asset Amount using the
grids. The Risk-Based Required Asset Amount for a pool policy would be the lesser of:
• The aggregate Risk-Based Required Asset Amount for both the performing and non-performing
loans covered by the policy; or
• The net remaining stop loss for the policy, defined as the initial stop loss amount, net of any
pool policy deductible and any benefits paid to date.
f) Available Assets (§704)
The draft PMIERs require an Approved Insurer to hold Available Assets at a level that meets or exceeds
Minimum Required Assets. Available assets would be composed of liquid capital investments readily
available to pay claims, including the most liquid investments of an Approved Insurer and liquid capital
investments of subsidiaries.
Available assets for an Approved Insurer would be calculated as the sum of its:
• Cash (such as those currently listed on an Approved Insurer’s Statutory Statement of Assets,
[line 5] in its convention statement).
• Bonds (such as those currently listed on an Approved Insurer’s Statutory Statement of Assets,
[line 1] in its convention statement).
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• Common and preferred shares (included at their market capitalization value discounted by 25%)
only if:
o The stock is publicly traded, and
o The Approved Insurer has complete control and authority to sell the shares.
• Receivables from investments (such as those currently listed on an Approved Insurer’s Statutory
Statement of Assets, [line 14] in its convention statement).
• Dividends of subsidiaries to be paid (with Enterprise prior written approval) to the Approved
Insurer over a time period that is no greater than:
o Two years, if unconditionally guaranteed by a strongly capitalized company, as
determined by the Enterprises with at least an A- rating from either S&P or Fitch, or A2
from Moody’s; or
o One year, if unconditionally guaranteed to the satisfaction of the Enterprise by a
strongly capitalized company as determined by the Enterprises with at least an BBBrating
from either S&P or Fitch, or Baa2 from Moody’s; or
o Another period as approved by the Enterprise.
• The following liquid assets owned by an exclusive affiliated reinsurer, if the exclusive affiliated
reinsurer is both (a) a U.S. domiciled corporation that is regulated as an insurance company; and
(b) writes only mortgage guaranty insurance or mortgage guaranty reinsurance:
o Cash, and
o Bonds.
• The trust balance for any lender captive reinsurer, related to loans insured by the Approved
Insurer.
• 210% of the Approved Insurer’s mortgage guaranty insurance premium net of any amount
ceded to a non-affiliated reinsurer or non-exclusive affiliated reinsurer earned in the prior 12
months on policies written before 2009 (including those subsequently refinanced through the
Home Affordable Refinance Program). (See Discussion on Including Future Premium Income
below.)
Less,
• The Approved Insurer’s unearned premium reserves (such as currently listed on an approved
insurer’s Statutory Statement of Liabilities, Surplus and Other Funds [line 9] in its convention
statement).
g) Including Future Premium Income (§704)
For operational simplicity, the draft PMIERs would estimate three years of future premium revenue on
pre-2009 policies by using the premium income on pre-2009 policies earned in the past twelve months,
multiplied by three and applying a reduction, or “haircut,” of thirty percent to estimate run-off (i.e.,
Page 14
210%). Premiums ceded under reinsurance arrangements would not be included in this calculation.
Premiums from policies on loans refinanced through the HARP program would be treated as pre-2009
premiums for purposes of this calculation, if not already reported in that manner. This limited inclusion of
premium income phases out as the pre-2009 policies run-off.
Post 2008 future premiums would not be included in Available Assets to avoid a mismatch of premiums
and losses and to ensure that Approved Insurers are able to honor obligations as they come due. During
the recent financial crisis, three MIs were placed in run-off by their state regulators due to actual or
imminent statutory insolvencies – which by definition do not include future premium income – and the
Enterprises’ claims were paid on a partial basis under Deferred Payment Obligations (DPO). If the draft
PMIERs were to include future premiums in Available Assets while state regulators did not include future
premiums in statutory capital, the Enterprises would remain exposed to the risk of statutory insolvencies
and DPOs.
To avoid a recurrence of a statutory insolvency, the draft PMIERS require Approved Insurers to hold
sufficient liquid assets to pay claims throughout the life of an insured loan. Additionally, including future
premiums in Available Assets would be undesirable as it could create a potential incentive for an
Approved Insurer to write new business on uneconomic terms in order to increase premium income in the
short term to pay legacy claims.
h) Limitations for Approved Insurers with an Available Assets Shortfall (§706)
After the effective date of the financial requirements, Approved Insurers would be required to maintain
Available Assets that equal or exceed their Minimum Required Assets. An Approved Insurer with a
shortfall of Available Assets relative to Minimum Required Assets would be required to obtain the
Enterprise’s approval before:
• Entering into any new capital support agreement or modifying an existing capital support
agreement;
• Entering into an assumption of liabilities agreement or guaranty agreement (except for
contractual agreements in the normal course of business);
• Making any new arrangements under tax-sharing, and intercompany expense-sharing
agreements;
• Making any investment in affiliates, subsidiaries, or non-affiliated entities; or
• Entering into any new risk novation or commutation transaction or any new reinsurance
arrangement or structure.
4. Failure to Meet Requirements
a) Remediation Options (§901)
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If an Enterprise deems that an Approved Insurer is not in full compliance with any part of the PMIERs,
the draft PMIERs establish that the Enterprise may require the Approved Insurer to provide an action
plan acceptable to the Enterprise that contains specific completion timeframes.
In addition, under the draft PMIERs upon the effective date of the PMIERs, if an Approved Insurer is not
in full compliance with all components of the PMIERs, including the financial requirements, or an
Enterprise has concerns regarding the Approved Insurer’s: i) ability to honor obligations to the
Enterprise, ii) ability to continue to write new business, or iii) ability to maintain adequate operational
performance, the Enterprise may take action(s), including, but not limited to, the following:
1. Engage in more frequent dialogue or visits.
2. Require the Approved Insurer to provide additional information and data.
3. Impose new business volume or risk limits for loans insured by the Approved Insurer and
delivered to the Enterprise.
4. Limit the risk characteristics of loans to be acquired by the Enterprise and insured by the
Approved Insurer.
5. Increase frequency of QC reviews.
6. Restrict delegated underwriting.
7. Increase the Minimum Required Assets.
8. Further limit the types of assets that may be considered Available Assets.
9. Require the Approved Insurer to raise or infuse additional capital.
10. Obtain parental or other capital support.
11. Commute or restructure existing risk-in-force.
12. Limit variances to the Approved Insurer’s underwriting guidelines.
13. Limit or deny acceptability of an affiliate’s product or services in connection with the
Enterprise’s business.
14. Restrict or deny participation in new products, initiatives or programs offered by the Enterprise.
15. Notify Approved Insurer’s regulator and rating agencies of remedial actions.
16. Differentially price insured loans acquired by the Enterprise, based upon the Approved Insurer.
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17. Decline insurance renewal or exercise other policy cancellation provisions of loans owned or
guaranteed by the Enterprise, or so instruct servicers of Enterprise loans, and then transfer
insured business to another Approved Insurer.
18. Implement restrictions on business practices or charge financial penalties for failing to satisfy
requirements or agreed upon remediation actions.
19. Issue a demand for any other specific corrective action.
20. Suspend approval status.
21. Terminate approval status.
b) Suspension or Termination (§902)
Under the draft PMIERs the Enterprise may arrange for transfer of the existing mortgage guaranty
insurance RIF to another Approved Insurer or, if such coverage is not available, make alternative
arrangements consistent with the terms of the Enterprise's charter.
c) Appeals Process9
To support resolution of issues prior to certain remediation actions by the Enterprise, an appeals
process will be established. This process will be designed in a manner that supports a neutral factfinding
process to resolve factual disputes.
5. Newly Approved Insurer Requirements
The draft PMIERs establish specific criteria for MIs requesting to become an Approved Insurer. The key
consideration of the draft PMIERs is that an Approved Insurer would need sufficient resources to
support the Enterprise book of business within a reasonable period of time after Enterprise approval,
such that the costs of administering its mortgage insurance business would be competitive and not
exhaust claims paying resources.
a) Financial and Rating Requirements for New Approved Insurers (§203)
The draft PMIERs requires that newly Approved Insurers:
• Demonstrate initial capital funding in an amount not less than $500 million, which may include
contributions already made and/or provisions for start-up and formation costs such as those
associated with either the acquisition or development of an operating/technology platform;
• Obtain a rating agency rating as soon as practicable but no later than 3 years after Enterprise
approval; and
9 An appeals process currently is not reflected in the draft PMIERs. This process is presently under development.
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• For the first 3 years after Enterprise approval, a newly Approved Insurer would be:
o Prohibited from paying dividends to its affiliates or its holding company, or making any
investment, contribution or loan to any subsidiary, parent or affiliate; and
o Required to obtain approval from each Enterprise before engaging in other enumerated
activities as specified within the PMIERs.
b) Scope of Application (§203)
Generally, the requirements for newly Approved Insurers would apply to the following:
• A newly Approved Insurer; and
• An Approved Insurer that experiences a material change in ownership, control or organization,
or a formerly Approved Insurer requesting reinstatement following suspension or termination,
may, at the discretion of the Enterprise, be treated as a newly Approved Insurer for some or all
of the newly Approved Insurer criteria.
V. Request for Input
FHFA, in its capacity as Conservator of the Enterprises, requests input for itself and the Enterprises on
the draft PMIERs. FHFA seeks comments on all aspects of the draft PMIERs and, in particular, is
interested in responses to the following questions:
A. Business Requirements
1. Scope of Business:
a. How can the PMIERs ensure that Approved Insurers have long-term access to staff,
services and technology that meet their operational needs for administering their
insurance book of business?
b. How can the PMIERs ensure that potential losses from insuring high-risk loan
concentrations do not jeopardize an Approved Insurer’s financial ability to pay claims on
its lower risk portfolio?
c. Should Approved Insurers have separately funded affiliates for insuring higher-risk
products?
2. Should the adequacy of each Approved Insurer’s risk-adjusted rates of return be measured? If
so, what would be the appropriate calculation method for this measure?
3. If the Enterprises, in the interest of establishing strong counterparty financial requirements,
expect an Approved Insurer to maintain “adequate” risk-adjusted rates of return for New
Insurance Written (NIW), what might be benchmarks for the Enterprises to establish a
reasonable range of such expected returns? Should the benchmark also be inclusive of the
Approved Insurer’s entire portfolio of Insurance in Force (IIF), or only a defined portion?
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4. What counterparty risks might be raised by an Approved Insurer maintaining inadequate riskadjusted
rates of return on capital across its expected business profile?
5. Should an Approved Insurer be required to validate a third-party AUS prior to using the
recommendations from these systems? If so, what type of analysis would be appropriate to
sufficiently validate that the credit decisions from the AUS are in line with the Approved
Insurer’s credit underwriting requirements?
6. Are there other Approved Insurer Operational Performance Scorecard metrics that should be
considered?
7. How should Operational Performance Scorecard thresholds be determined?
8. How should Approved Insurers be rated under the Operational Performance Scorecard?
9. How would Operational Performance Scorecard thresholds be applied?
B. Newly Approved Insurer Requirements
10. What would be the impact of the $500 MM requirement for newly Approved Insurers? Should
the requirement reflect the start-up costs to scale a competitive mortgage insurance business?
Are there other appropriate requirements or controls that should be established to ensure that
start-ups are held to more stringent requirements?
C. Settlements and Changes to Enterprise Rights
11. Section 307 contains requirements relating to the ability of Approved Insurers to enter into
agreements with servicers or originators. Should the PMIERs contain provisions relating to
agreements entered into between Approved Insurers and originators or servicers? If so, what
provisions should be in place?
D. Claims Processing and Loss Mitigation
12. Should the Enterprises impose pricing adjustments for acquired loans where an Approved
Insurer does not provide a full delegation of loss mitigation? Does a lack of full delegation
unnecessarily expose the Enterprises to foreseeable costs? Should there be exceptions to what
constitutes full delegation of loss mitigation?
E. Policies of Insurance
13. Should self-insurance be an appropriate method for Approved Insurers to meet the
requirements for Fidelity Bond and E&O insurance?
F. Quality Control
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14. What are the relative costs and benefits for Approved Insurers to implement the draft quality
control requirements in the PMIERs?
15. Do the draft quality control standards present any unintended consequences?
G. Financial Requirements
Grids
16. What comments or suggestions are there related to the grid framework for performing loans in
calculating the Financial Requirements?
17. What comments or suggestions are there related to including LTV and credit score as the
primary factors in the grid framework for performing loans?
18. What comments or suggestions are there related to the treatment of HARP loans in calculating
the Financial Requirements?
19. What comments or suggestions are there related to the treatment for non-performing loans in
calculating the Financial Requirements?
20. Is the segregation of books of business by vintages appropriate?
21. How often should the grids be updated?
22. What comments or suggestions are there related to employing a remaining life of coverage loss
horizon in calculating the grids?
23. What comments or suggestions are there related to the use of multipliers for certain loans with
certain high risk features?
24. It is common underwriting practice to consider additional factors that help reduce or offset risks
associated with higher DTIs (often described as compensating factors). Should the Enterprises
take compensating factors into consideration when determining risk multipliers as described in
Exhibit A, table 3a? How should compensating factors be incorporated into table 3a?
25. An alternative would be to have several DTI risk multipliers, for example, 43%, 45%, 47% and
greater than 50%. What are the merits or drawbacks of this approach?
Macroeconomic Scenarios
26. What comments or suggestions are there related to using the house price, interest rate and
unemployment rate projections from the CCAR Baseline scenario for calculating the grids for
Pre-2009 and delinquent policies?
27. What comments or suggestions are there related to using the house price, interest rate and
unemployment rate projections from the CCAR Severely Adverse scenario for calculating the
grids for non-HARP Post-2008 policies?
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28. What comments or suggestions are there related to using the house price, interest rate and
unemployment rate projections from the CCAR Baseline scenario for calculating the grid values
for loans refinanced through HARP?
Available Assets
29. What is the appropriate frequency for an Approved Insurer’s senior management team to certify
compliance with the available and minimum required asset provisions of Section 704?
30. What suggested changes are there to the categories either included or excluded from the
definition of Available Assets?
31. What comments or suggestions are there related to the proposed treatment of premium
income in Available Assets?
32. Should the proposed treatment of premium income in Available Assets be aligned with the
exclusion of premiums that currently occurs as part of state regulatory calculations?
33. Should premium income for the Post-2009 vintages be included in the calculation of Available
Assets, and if so, should the inclusion of this premium income be limited to the transition
period, or should it extend beyond the transition period? What would be an appropriate phaseout
and/or haircut for premium income credit given during the transition period?
34. Should unearned premium reserves (UPR) be included in the calculation of Available Assets?
Should there be different treatment of refundable versus non-refundable premium?
Alternative Approaches
35. Should an alternative approach to determining Minimum Required Assets be considered in the
future? If so, please describe the approach.
Limitations Triggered by a Minimum Required Assets Shortfall
36. What comments or suggestions are there related to the limitations triggered by an Available
Assets shortfall to the Minimum Required Assets Amount described in Section 706 if they were
expanded to include:
a. Paying dividends, making any payments, or pledging or transfer asset(s) to any affiliate or
investor; and
b. Assuming any obligations or liabilities other than those arising from mortgage guaranty
insurance policies.
Risk Sharing and Reinsurance
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37. Should risk sharing or reinsurance transactions that do not receive full credit for the risk
transferred under GAAP or SAP be permitted, and, if so, what limitations should there be
on such transactions?
38. What would be the impact of the draft Financial Requirements, if any, on Approved Insurers
who are considering writing pool level insurance on pools with LTVs below 85 percent?
Third-Party Opinion and Risk Analytics
39. Should the requirements of a third party opinion or analysis in Section 703 be restricted to a
particular purpose, triggering event, and/or frequency?
Overall Impact
40. What may be the impact, if any, on high LTV borrowers of the draft PMIERs?
41. What may be the impact, if any, on low credit score borrowers of the draft PMIERs?
42. What may be the impact, if any, on Seller/Servicers of the draft PMIERs?
43. What may be the impact, if any, of the draft PMIERs on Approved Insurers who are considering
writing forms of insurance that are different from the traditional loan-level, borrower-paid
mortgage insurance (BPMI) ?
H. Failure to Meet Requirements (Post-Transition Process)
44. Are the remediation measures sufficiently comprehensive? Should the number of measures be
reduced, expanded or refined and, if so, how?
45. Do the remediation measures present any unintended consequences or operational
constraints?
46. Are there remediation frameworks that would serve as an alternative to the proposed
approach?
47. Should the PMIERs include an appeals process to provide an Approved Insurer with a means to
dispute remediation actions taken by the Enterprises? If so, what should that process consist of
and should it apply to all remediation actions or to a subset?
I. Newly Approved Insurers
48. What financial and business requirements should be placed upon new entrants? How would
such requirements affect the market for mortgage insurance?
J. Transition Process
49. What would be the appropriate length of time for Approved Insurers to fully comply with the
Financial Requirements of the revised PMIERs?
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50. Should the duration of a transition period for full compliance with the Financial Requirements of
the revised PMIERs be consistent for all Approved Insurers or varied depending on each
company’s unique circumstances?
i think i may have left my notebook in courtroom 4. i would like to take a look at my notes. maybe they can just mail it to me.
unfortunately, it is for real and it cost me 10 cents. the most recent document before this one was the order on 6/24/14.
Fairholme Order Huge News just came out today!
In the United States Court of Federal Claims
No. 13-465 C
(Filed: July 10, 2014)
*************************************
FAIRHOLME FUNDS, INC. et al., *
*
Plaintiffs, *
*
v. *
*
THE UNITED STATES, *
*
Defendant. *
*************************************
ORDER
It has come to the court’s attention that a member of the court’s Office of Information and Technology staff discovered a notebook in Courtroom 4, which appears to have been left behind after the last hearing in the above-captioned case. If a party in this or in one of the related cases believes that they inadvertently left the notebook behind, they should contact the Senior Staff Attorney of the Court in the Clerk’s Office to ascertain if it belongs to them.
IT IS SO ORDERED.
s/ Margaret M. Sweeney
MARGARET M. SWEENEY
Judge
Case 1:13-cv-00465-MMS Document 68 Filed 07/10/14 Page 1 of 1
LOL
"the Perry Capital LLC suit is scheduled for argument later this month"
"The FHFA could suspend dividends and retain earnings in order to build an adequate capital cushion."
"FHFA could legally override the requirement that Fannie and Freddie sweep all profits to the government and instead require the two private companies to build their capital to better absorb future economic shocks."
http://www.rollcall.com/news/Salvaging-Housing-Finance-Reform-Commentary-234459-1.html
Salvaging Housing Finance Reform | Commentary
Housing finance legislation has stalled in the Senate but reform is not dead yet. Secretary Jack Lew recently announced a new initiative to incentivize private capital in the housing market, yet to date, the administration has implemented housing policy that does the complete opposite.
As director of the Federal Housing Finance Agency, Melvin Watt can push forward without Congress, while complementing the administration’s new goal of making sure private capital sustains the housing market.
“The housing market accounts for nearly 20 percent of the American economy, so it is critical that we have a strong and stable housing finance system that is built to last,” declares the Senate Banking Committee Leaders’ Bipartisan Housing Finance Reform Draft. But so far, Congress has been unable to reach a broad enough consensus to make headway towards this laudable goal.
During the financial crisis of 2008, the U.S. mortgage giants Fannie Mae and Freddie Mac (highly successful in the past) joined a long list of distressed financial institutions. Even though these two companies never became insolvent, Congress passed the Housing and Economic Recovery Act of 2008 to take control over Fannie and Freddie, placing them under the FHFA.
Fannie and Freddie recovered and returned to profitability in 2012 and are currently generating cash — enough cash, in fact, to more than repay the $187.5 billion in emergency funding received from the government during the downturn. But instead of fulfilling its fiduciary obligation as conservator to marshal these assets for the benefit of shareholders, the FHFA worked with the Treasury (without the approval of either Congress or of Fannie and Freddie shareholders) to enact new regulations requiring the companies to turn over 100 percent of profits they earn to the Treasury.
As one analyst recently observed, “in this case the debt that was once $187.5B is now considered infinite. That is to say that with the way things currently are, it is impossible to ever pay back what they have borrowed because the Treasury said so.” By sweeping 100 percent of Fannie and Freddie’s income, the government has left the two private companies undercapitalized despite the large amount of cash they have been generating.
Just as the FHFA worked previously without Congress, it can do so again — but this time, it can help correct its path. Under HERA, Mr. Watt has the statutory authority to develop and set capital standards for Fannie and Freddie. Mr. Watt may use this authority to require the companies to begin rebuilding capital.
How might this look? The FHFA could suspend dividends and retain earnings in order to build an adequate capital cushion. FHFA could legally override the requirement that Fannie and Freddie sweep all profits to the government and instead require the two private companies to build their capital to better absorb future economic shocks. With $5.2 trillion in combined liabilities, Fannie and Freddie would have a long way to go to build up an adequate cushion without other efficiency measures, but reversing the sweep would be a move in the right direction.
By ceasing the government’s constant removal of all of Fannie and Freddie’s cash, the FHFA would also remedy its prior dereliction of its fiduciary duties and shift to an appropriate role as conservator. In this way, the FHFA could work to build stronger companies that are better able to provide liquidity to the housing market and can be transitioned from government control.
Investors have filed more than a dozen lawsuits to challenge the government’s income sweep, and the Perry Capital LLC suit is scheduled for argument later this month. With Congress unable to move forward, it is time for Mr. Watt to take at least the initial steps towards reforming Fannie and Freddie into more efficient enterprises that operate at lower risk to taxpayers.
Jonathan R. Macey is the Sam Harris Professor of corporate law, corporate finance, and securities law at Yale Law School. Logan Beirne is an Olin Scholar at Yale Law School and author of Blood of Tyrants.