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Fannie Mae and Freddie Mac exist to provide liquidity for the Secondary Mortgage Market, it's kind of like, Socialism for Mortgage Banksters!
You know, WHO wanted to BUY MBS in 2008 (and MAR 20)? Hardly anyone would touch it!
That's the problem with Financial Panics, EVERYONE HEADS TO THE HILLS at the same time, NO BUYERS!
Liquidity means active buyers and sellers.
The GSES as I recall use to earn about 125 basis points on their $1.5T Mortgage Portfolios, that's approximately $15B-$20B PER YEAR!
The GSES ALSO had Guarantee Fee Income from issuing Fannie Mae and Freddie Mac MBS.
September 07, 2008 changed all that and pursuant to the SPSA the GSES were charged with GRADUALLY reducing their Mortgage Portfolios to like $250B, were it is today.
David Stevens pointed out that the FHFA and UST should amend the SPSA and bring back $191B in Mortgage Portfolio buying at the GSES to lower the bid/ask spreads and thereby lower the 300+ Basis point spread between 10yr Treasuries and 30 year Fixed Rate Mortgages.
Jerome and the Federal reserve may (or may not) have a different opinion.
Built then I believe. The DC Federal District Court Building likely had some type of Historical Preservation Designation and that's why 5-10 gal single flush is available.
But how do you get replacement parts?
The DC decision makers are going to have to decide whether or not they will release them.
A Court win could put release on the fast track. But is anyone CURRENTLY studying solutions for Exit from the Conservatorships? I have my doubts.
I think Bill Ackman commented not that long ago that he thought it was unusual that the Share price was so low.
Fannie Mae and Freddie Mac check all the boxes from his Set in Stone, Commandments of Investing, that apparently he keeps on his desk.
These are great American Corporations and should be set free not Nationalized.
If the GSE'S WERE ALLOWED to increase their Portfolio's by $120B, they would increase Earnings annually by $1B to $2B while exerting downward pressure on Mortgage Rates.
"America is a great nation that has risen to beat back the Great Depression, two world wars, a variety of other conflicts, the oil patch crisis, and more leading up to the Great Recession and the COVID-19 crisis. But for the American dream, now threatened by this supply/demand imbalance, actions by federal agencies that played a partial role in the current scenario are also the ones that can help to balance out this dysfunction. And the ones who would be most impacted to the better would be those that need the help from our nation the most as they have been literally priced out of the housing market altogether."
https://www.housingwire.com/articles/opinion-who-will-buy-the-mortgages/
Opinion: Who will buy the mortgages?
We are missing the two largest buyers of MBS on the planet
September 11, 2023, 7:50 am By David Stevens, CMB
The question many in capital markets have been asking since the GSEs were put into conservatorship is this: Without Fannie, Freddie, or the Fed, who will buy the agency MBS? Today we are seeing this play out with a shortage of MBS buyers to the tune of about $2 billion in demand per day.
Supply and demand — when demand is low, MBS prices will drop at sale and the corresponding yields will rise.
Late last year, Laurie Goodman, the famed MBS expert and a leader at the Urban Institute in Washington, penned an article in Barrons to explain why rates were so high. She gives a very thorough explanation as to why the 30/10 spread is so high, stating, “Before and during the Great Financial Crisis, the Fannie Mae and Freddie Mac portfolios essentially served as shock absorbers, buying mortgage-backed securities, or MBS, when spreads were wide, selling when they narrowed.
“In 2009-2010, the combined portfolios were over $1.5 trillion. In the wake of the Great Financial Crisis, Fannie and Freddie have been mandated to reduce their portfolio size. The two portfolios together are now under $200 billion. Meanwhile, the Federal Reserve was a fairly consistent buyer of MBS after the financial crisis, as part of its quantitative easing strategy. But as of June 2022, the Fed began to allow its portfolio to run off.”
image
Today, as Laurie points out, the GSEs are restricted in what they can buy. Per the 4th amendment to the PSPA (preferred stock purchase agreement), essentially the governing document for the two companies in conservatorship, it is stated clearly. Historically, the GSEs could make up for the short in demand if needed.
For example, if the current short was absorbed by GSE purchases, the spread between 30-year mortgages and and the 10-year treasury would likely collapse to it’s more normalized level, likely bringing mortgage rates down about 100bps +/-.
But the PSPA 4th amendment states the following: “Limit Future Increases to the Retained Mortgage Portfolio: The PSPA cap on the GSEs’ retained mortgage portfolios will be lowered from the current cap of $250 billion to $225 billion by the end of 2022, aligning with the FHFA conservatorship cap the GSEs are required to comply with today, while providing the GSEs with flexibility to manage through the current economic environment. As of November 2020, Fannie Mae’s mortgage portfolio was $163 billion, and Freddie Mac’s mortgage portfolio was $193 billion.”
So why haven’t we seen spreads wider more often since conservatorship in 2008 until now? It’s simple really, the Federal Reserve engaged in three rounds of quantitative easing post-2008 during the Great Recession and then another massive round in the spring of 2020 due to COVID-19 recession fears. They created the short in supply that pushes prices up and yields down.
The problem now is that we have the greatest quandary in the markets. We are missing the two largest buyers of MBS on this planet. And to top it off, the FDIC is auctioning off the MBS and Treasury portfolios of the failed SVB, Signature, and First Republic Bank, which only increases supply into the market.
In a recent article in International Banking, Viral V. Acharya, C.V. Starr professor of economics, department of finance, New York University Stern School of Business (NYU-Stern), and Satish Mansukhani, managing director, investment strategy at Rithm Capital, state, “The Fed is thus caught between a rock and a hard place, with the demand- and supply-side effects of its tightening working in opposite directions. Which way will the pendulum swing? It is hard to know, but this may precisely be why interest-rate volatility has remained high.”
image-1
This is not a small market. Agency MBS is the dominant feature of the mortgage market with an approximate $9 trillion in outstanding volume. The hole being created here is enormous.
So what are the options?
First is to just leave this alone and let the markets function without interference. This would likely be the goal of fiscal conservatives who have argued that this excessive involvement by the Fed and the GSEs over decades has resulted in the market dysfunction we see today. Industry vet James Johnson penned a great piece for Rob Chrisman’s daily report in which he describes the current supply/demand conundrum and calls the period we are in as the “great reset,” a very appropriate reflection on the scenario today.
But there are other options to consider, and the reason to consider other options is because this excessive mortgage spread is hurting the people that this current administration is the most concerned with protecting.
High rates make affordability a significant barrier to homeownership. And with no end in sight, we as a nation are likely to only widen the opportunity gap between wealthier Americans and those with less means. First-time homebuyers and people of color who often have less inherited wealth and lower wages are the ones impacted the most in a time like this.
More importantly, this scenario is the unfortunate outcome of putting too much stimulus into the economy during COVID-19 combined with supply chain shortages that resulted in hyper inflation, leading us to todays scenario.
So option No. 2 is this: let the GSEs use their roughly $119bb available in remaining capacity within the limits of the PSPA to begin some purchase activity. And if there was a modification to the PSPA to allow a slightly higher balance, the GSEs could do what they have done all during the Great Recession and the COVID-19 pandemic and act as a “shock absorber” as Laurie Goodman describes. They could become tools to help stabilize a scenario, much of which was the result of the same set of agencies that produced the environment we are in today.
The unfortunate reality is that the FHFA would likely come under fire for using the permissible balance sheet to at least help temporarily. And those attacks would be something the administration would like to avoid in a heated election period. But this is an option and one that could help — particularly those who need the help the most and are now victims of hyper inflation that they did not participate in creating.
America is a great nation that has risen to beat back the Great Depression, two world wars, a variety of other conflicts, the oil patch crisis, and more leading up to the Great Recession and the COVID-19 crisis. But for the American dream, now threatened by this supply/demand imbalance, actions by federal agencies that played a partial role in the current scenario are also the ones that can help to balance out this dysfunction. And the ones who would be most impacted to the better would be those that need the help from our nation the most as they have been literally priced out of the housing market altogether.
And yes, there are other challenges, beginning with this terrible dearth in housing supply. But to use other variables as an excuse to not help here is a difficult argument to justify.
The bottom line is this, we have lost the biggest buyers of MBS in the world and this could keep rates artificially higher than would be the case in a more balanced supply versus demand environment. This is a project for the Biden administration to lead, which should include the NEC, Treasury, the Fed, HUD, and FHFA.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Dave Stevens at dave@davidhstevens.com
To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com
More: Fannie Mae Freddie Mac Urban Institute
Comments
Chance Mann
September 11, 2023 at 9:48 am
Well said, Mr. Stevens.
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That's one of the problems here. No one wants a repeat of 2008. How much Capital?
Regulator's knee jerk reaction is the more the better.
That's what's so bizarre about this saga, on August 17, 2012, the US Government wanted ZERO Capital and NOW they want too much.
As I recall, for the 40 years prior to 2008, the GSE'S did very well with less than 1% Capital on their books.
The lower the Capital Ratio, the easier it will be to pass through Mortgage Finance savings to Americans borrowing for a home.
No question in my mind, with their strong book of business, $113B in Capital, and risk management tools in place, they could be released today.
But this Administration has no plan and continues to punt to the US Congress to decide the future of American Housing Finance.
What does the federal government want out of this 'Partnership' with the GSES? (aka, What does Uncle Suggy Covet?)
Probably Primarily:
(1). A continuation of the Implicit Guarantee as that keeps the $7.5T in potential MBS Guarantees OFF the federal balance sheets.
(2). Lots of Capital to hedge against future rescues. But not so much as to make American Housing Finance Unaffordable.
(3). Safe and sound mortgage underwriting and well run GSES so the Federal Reserve can continue buying or selling GSE MBS in the future to contract or expand the US Economy and have some influence on the sometimes elusive long end of the yield curve.
(4). Some extraction from the GSES balance sheets to promote low and moderate income housing.
The problem that the prior administration had was that after the NWS depleted Capital to virtually ZERO, it would have been difficult (impossible?) to release the GSES quickly.
Does the federal government really want to run 2 of the largest financial institutions in the world in perpetuity?
I think after either a court win and/or organic capital rebuild and reduction in Capital Ratio (as Tim Howard points out, when he worked at Fannie Mae, the Capital Ratio was 45 basis points) release would become more likely.
That's the 1950's retro bathrooms down the hall from Lamberth's courtroom on the 6th Floor.
Check out the foot pedal flush! HeeeeHeeee!
Politicians aren't going to start experimenting with the plumbing of the backbone of the US $15.5 TRILLION DOLLAR residential MBS market.
If the party in power ends up doing irreparable damage to the financing mechanism of American Families biggest asset on their Family Balance Sheet, what do you think will happen at the polls?
Seems less risky to allow the GSES to build up Capital organically, win in 2024 and cash out in the 2nd term.
Besides, the $7.5T in GSE MBS is an integral part of the low capital required risk assets help on US banks, financial intermediaries and world markets.
Right now the US TBTF banks have about 1/2T in UNREALIZED LOSSES siting on their Balance Sheets.
https://www.fdic.gov/news/press-releases/2023/pr23072.html#:~:text=Total%20Deposits%20Declined%20for%20a%20Fifth%20Consecutive%20Quarter%3A%20Total%20deposits,lower%20levels%20of%20total%20deposits.
8 unanimous 2nd trial, 4 in the 1st trial. So, 12 random DC Jurors saw the injustice here pretty quickly!
Guess who owns this Company Town? The Defendants and all these 12 needed to do is buy the Government's Death Spiral narrative.
Those in power, rarely voluntarily give up their power, the FHFA and UST are going to need a motivation, but what?
“We want to buy the best businesses in the world,” he said.
“The short version of the principles are own the best, super-durable companies you can find with conservative balance sheets,” Ackman said. “Buy them at attractive prices, and use our influence to make sure they’re managed and governed correctly. That’s it, pretty simple.”
It’s a tactic that appears to have worked: According to financial services publication Seeking Alpha, Pershing Square has outperformed the S&P 500 over the past 20 years, growing its investments at an annual rate of 16.1%.
https://finance.yahoo.com/news/hedge-fund-billionaire-bill-ackman-160430163.html
Watch, the new CFO of Freddie Mac will likely be someone with a strong social conscience and less experience in Mortgage Banking Finance than the current CFO.
Did you see the new Memo from Sandra to ALL Fannie and Freddie Employees?
From: Sandra "I can do whatever I want" L. Thompson
To: The Evil Mortgage Banksters under my absolute control at Fannie and Freddie
SUBJECT: DOING EXACTLY WHAT YOU ARE TOLD
Dear Subjects:
In addition to figuring out how to hand out more subsidies to my administration's targeted voting base, from here on out:
[u]ALL BATHROOM BREAKS WILL BE APPROVED BY MY OFFICE!
That is all for now!
Sincerely,
EMOPORESS THOMPSON
That'd be interesting if the SCOTUS agrees with J.Jones, in the 5th Circuit, God Bless her!
https://news.bloomberglaw.com/us-law-week/fifth-circuit-judges-offer-tips-for-litigating-in-their-court
More than 1 hearing, that's for sure. Plaintiffs ideally would need a small army of attorneys and support staff to go up against an adversary with virtually unlimited resources and time.
Did I mention the Defendant has a printing press that prints Legal Tender?
Alot has already been accomplished and much is in the public realm.
Without an adverse ruling here against Uncle Suggy for his outrageous acts, it could be Status Quo until we are all worm dirt!
https://www.science.org/content/article/thousands-unexpected-microbes-break-down-our-bodies-after-death
HeeeeHeeee! !
There's SO MUCH Juicy Government Overreach here! The problem is that most federal Judges and the American People and the financial press, really don't think about mortgage banking, unless they want a 15 or 30 year prepayable at anytime Fixed Rate Mortgage.
Getting them to understand what happened here is even more cumbersome.
I thought the Opening Statement in the latest Lamberth trial was GREAT when the Plaintiffs Attorney told the 8 Jurors, "These Conservatorships HAVE BEEN GOING ON LONGER THAN BRITTANY SPEARS!"
I can't tell you how many times in the 5 years I worked for Fannie Mae that people thought I worked at a Candy Company!
“I am deeply grateful for his service and wish him well in his future endeavors,” Federal Housing Finance Agency Director Sandra Thompson said in a statement. “I will work closely with the Board in identifying a successor and ensuring a smooth transition to the new leadership.”
Do we really have a choice Sandra? Nationalization, not just for Banana Republic's, is it, Sandra !
https://finance.yahoo.com/news/freddie-mac-ceo-michael-devito-142454388.html
There's lots of uncomfortable facts surrounding these 15 year plus Conservatorships for the US Government.
The 12 random Jurors had to make an inferential leap when they decided that the FHFA broke the Implicit Contract with the Shareholders, despite Uncle Suggy spewing the Death Spiral narrative.
It may work with the US Treasury as a listed Defendant.
Only one way to find out for sure !
"We have to make clear that (Conservatorship) is transitory otherwise it will be viewed as a Nationalization" President Bush to Treasury Secretary Paulson, Thursday, September 4, 2008, in the Oval office.
You forgot to read the last sentence: "While these memos were not admitted as evidence in the Berkley Insurance case because Treasury was not a defendant in it and the judge ruled them to be hearsay, the memos do exist, and they will be very difficult for Treasury to defend."
Solution: Sue Uncle Suggy's #1 Co Conspirator in the largest theft of Shareholder Property in US History - the US Treasury.
HeeeeHeeee! Under HERA , was it really up to 2 US federal government agencies to decide to Nationalize two private companies on the verge of World Record Profitability?
12 random Jurors saw it, it's not that hard to make that inferential leap, is it?
Uncle Suggy, tell me about the 'DEATH SPIRAL' again! !
Ohh Uncle Suggy, you can run, but you can't hide, but you could save face by resolving the mess you made here! ..."Treasury knows it has not been telling the truth about the sweep, even if the media and the public do not, and sooner or later someone there (or at a senior economic policy level outside of Treasury) will realize that the surest way to avoid getting caught in their false story is to end the sweep. And as they then begin to investigate alternative ways to do this, it will become apparent to them that there is an easy way out of both the net worth sweep and the conservatorships that demonstrably produces the best result for all stakeholders—the administration, Treasury, the mortgage finance system, homebuyers, and investors."
Great point: "But the August 14 jury verdict in the D.C. District Court will be harder for Treasury to ignore, and it also opens the door for more “truth telling” about its and FHFA’s treatment of Fannie and Freddie, most notably the internal memos among senior Treasury officials admitting that they did know Fannie and Freddie were about to enter a period of “golden years of earnings” because of the reversal of their non-cash expenses, and that Treasury intended the net worth sweep to keep them from retaining those earnings to recapitalize. While these memos were not admitted as evidence in the Berkley Insurance case because Treasury was not a defendant in it and the judge ruled them to be hearsay, the memos do exist, and they will be very difficult for Treasury to defend."
"The only reason they remain in conservatorship is that neither Congress nor any administration has made it a priority to confront and resolve two policy decisions made over a decade ago—agreeing with what I call the Financial Establishment that Fannie and Freddie must hold 4 percent-plus “bank-like” capital irrespective of the risks of the mortgages they guarantee, and the August 17, 2012 agreement between Treasury and the Federal Housing Finance Agency (FHFA) to change the dividend on the companies’ Treasury senior preferred stock from 10 percent per year to “an amount equal to the incremental increase in [their] net worth during the immediately prior fiscal quarter,” known as the net worth sweep."
Argentinan Stock Exchange's Slogan: "Home of Nationalized Corporations Stock Exchange!"
Good to know the US Government is following our Banana Republic Countries in South America!
Amerika, my kinda place!
Another Nationalized Corporation from 2012; Investors 1 Banana Republic 0, todays WSJ:
Argentina Owes $16 Billion in Expropriation Suit, U.S. Court Rules; Decision comes as country faces economic crisis and presidential election
"A federal judge in New York on Friday ordered cash-strapped Argentina to pay about $16 billion over the government's decision to seize majority control of the energy company YPF in 2012.
Following a trial, U.S. District Judge Loretta Preska ruled in March that two YPF shareholders were owed compensation for the unlawful expropriation. On Friday, the court set the parameters for calculating the damages and interest Argentina owed to the litigation financier Burford Capital, which had taken on a lawsuit on behalf of the investors. Shares of Burford jumped 15% and 23% on the New York and London stock exchanges, respectively.
Argentina's government said in a statement that the ruling was flawed and would appeal.
The South American country is struggling with inflation topping 113% and a shortage of dollars while preparing for next month's presidential vote. Javier Milei, a libertarian outsider who rails against recent governments' economic policies, won last month's presidential primary .
YPF was expropriated in 2012 under President Cristina Kirchner, who currently serves as vice president, in an initiative spearheaded by her economic adviser, Axel Kicillof."
WSJ today: "Add to the mix government-sponsored enterprises Fannie Mae and Freddie Mac, which have fueled the housing boom by making it easier for borrowers who can't afford to repay their student loans to take out bigger mortgages.
Here's out it works: Mortgage lenders have typically preferred that buyers have a total debt-to-income ratio less than 36%—meaning that monthly debt payments shouldn't exceed 36% of one's income. As housing prices climbed, however, Fannie and Freddie allowed home buyers with higher debt-to-income ratios to qualify for government guarantees.
In the second quarter of this year, 26% of new mortgages backed by Freddie had debt-to-income ratios above 45%. Fannie now guarantees mortgages for buyers with debt-to-income ratios up to 50% . But here's the kicker: Fannie and Freddie exclude much student debt for borrowers in Obama income-based repayment plans. This has enabled many people who can't afford to pay their student loans to take out mortgages that are $100,000 to $200,000 larger.
Take a couple with two kids that earns $75,000 a year and has $100,000 of student-loan debt. Under a standard repayment plan, they would have to pay about $1,150 per month. Under the Obama plans they would have to pay only about $250. If they apply for a mortgage, only $250 would be counted toward their debt-to-income ratio.
This would enable them to qualify for mortgages with monthly payments $900 larger than they otherwise could if they were paying down their student loans in full. At today's interest rates, they would qualify for a roughly $120,000 larger mortgage.
It gets better: If borrowers don't earn enough to make their monthly student-loan payments, no sweat. Mortgage lenders can count their student-loan payment as zero—meaning they can take out even larger mortgages. What could go wrong? For taxpayers, who stand behind the mortgages and student debt, a lot.
At the same time, Fannie and Freddie have reduced the required down payments for lower-income borrowers to 3% from 20% for conventional mortgages. A freelance website designer "ready to buy a home of his own" but still in need of his parents as co-borrowers needn't worry, Freddie's website says. He can still qualify for a 3% down payment.
As the housing market has slowed, the nation's biggest mortgage lenders in recent months began to chip in 2% toward the 3% down payment. Home buyers thus have to scrounge up only a few thousand dollars to buy a new home. Such accommodative policies helped fuel the run-up in prices and are now helping prop them up.
Nonetheless, the median home price nationwide has fallen 13% from its peak last autumn. That means some recent home buyers with low-down-payment mortgages could already be underwater.
Conventional wisdom holds that home owners are in better shape than they were before the 2007-2008 housing meltdown. That may be true, but the combined effects of higher interest rates and inflation could soon start to bite homeowners harder.
Home-insurance premiums are soaring , 20% on average over the last year. If homeowners have to buy a new car because their old one breaks down, their auto-loan payments will spike. Auto-loan and credit-card delinquencies are now at their highest levels in more than a decade. Struggling homeowners may pay their mortgages first to avoid foreclosure, but something may eventually give, and it may not be in housing.
One thing that's certain is that taxpayers are now standing behind trillions of dollars in risky mortgages and student debt. The former may be saved from default only because borrowers aren't repaying the latter."
A DC Bureaucrat has never been fired for following the Status Quo. What's she pulling in $220k/yr plus benefits?
If I was her, I'd be ordering a Jacuzzi and expensive Art for my Office Suite on the top floor !
Then I'd ask everyone on the ihub board if they were looking for a job making six figures, work optional !
Has SLT and/or Janet Yellen, EVER uttered the words "administrative release"?
Sadly no, "It's up to the US Congress to decide the future of the US Housing Finance Market."
FDR had an unprecedented 4 consecutive POTUS terms to put his ideological footprint on American Government and we are still debating that ideology today. Next month's CFPB case is but one example. Fannie Mae another.
If you watched the 60 minute H.W. Brands speech I linked for you, the US went through significant change on the eve of the Great Depression and WWI & WW11 - BEFORE Americans expected little help or assistance from the federal government AFTER Americans expected more and more help from the federal government and the proliferation of government agencies emerged, including Fannie Mae.
Where the right balance between a Progressive and Conservative federal government lands will ultimately be up to the US Citizens and the limitations of the US Constitution.
We'll see what happens.
"Joseph Story, explained that if not for the
Appropriations Clause, “the executive would possess
an unbounded power over the public purse of the
nation; and might apply all its monied resources at his
pleasure.” 3 Joseph Story, Commentaries on the
Constitution of the United States § 1342 (1833). The
Clause ensures “regularity, punctuality, and fidelity,
in the disbursements of the public money,” defined as
“all the taxes raised from the people, as well as the
revenues arising [from] other sources.” Id.
In his Commentaries, St. George Tucker criticized
those systems without a check like the Appropriations
Clause, where an executive “levies whatever sums he
thinks proper; disposes of them as he thinks proper;
and would deem it sedition against him and his
government, if any account were required of him, in
what manner he had disposed of any part of them.” St.
George Tucker, 1 Blackstone’s Commentaries, App. at
362 (1803). As Tucker explained, accountability via
the Appropriations Clause is “the difference between
governments, where there is responsibility, and where
there is none.” Id.