Fannie Mae-No Politics (FNMA)

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Has The Federal Reserve Destroyed Market Discipline for Housing and the Stock Market?

Despite Fed Chair Janet Yellen’s denial that The Federal Reserve is causing asset bubbles, it is no coincidence that the housing market and the stock market have both been juiced by the massive expansion of The Fed’s balance sheet and zero interest rate policies (ZIRP).

For example, American house prices have been rising rapidly since 2012 despite the lower level of real median household income and stalled average hourly earnings growth YoY. It has benefited only the wealthiest Americans. See Logan Mohtashami’s “Housing 2014 Mid-Year Update: The Rich Have Their Cake and Eat It Too.” Notice that the massive Fed balance sheet expansion hasn’t done anything for American wages and income.

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The same applies to the NYSE Composite Index. Cheap money, declining wage growth and diminished real income. And exploding stock prices.

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In terms of technical analysis, The Fed has essentially defanged any of the trading rules that might have worked.

Like the Ichimoku indicator (the pink dotted lines in each charter is The Fed’s Balance Sheet).

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Or the Hindenburg Omen.

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Or the Fibonacci Retracement.

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Or the McGinley Dynamic Indicator.

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Or …

So take your pick! The Fed has rendered the various charting models as useless. At least until The Fed pulls out of the market.

Market discipline has gone away with The Fed’s hyper-aggressive asset purchases and zero-rate policies.

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Misconceptions About Fannie Mae and Freddie Mac (What They Do and What They Don’t Do)

There continues to be misconceptions about the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. And these misconceptions are partly responsible for why GSE “reform” is stalled in the U.S. Senate.

MISCONCEPTION 1: Fannie Mae and Freddie Mac originate mortgage loans.

False.

Fannie Mae and Freddie Mac PURCHASE mortgage loans originated by mortgage lenders, such as Bank of America, Wells Fargo, Suntrust, etc. They are not permitted to lend directly to borrowers per their charters.

MISCONCEPTION 2: Fannie Mae and Freddie Mac purchased loans that were as risky or riskier that loans found in private label mortgage-backed securities.

False.

Private-label mortgage-backed securities (PLMBS) performed consistently worse for comparable LTV and FICO score buckets, according to FHFA data from Fannie Mae, Freddie Mac and CoreLogic.

As you can see, Fannie Mae and Freddie Mac’s market share started to slump in 2004 and 2005, but began to regain market share relative to private-label MBS in 2006. But note that low FICO Enterprise purchases increased in 2007.

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For most of the decade, PLMBS suffered higher serious delinquency rates than Enterprise purchased loans. One notable exception is low FICO, high LTV loans in 2007 where both PLMBS and Enterprise loans were crushed for adjustable-rate mortgages (ARMs).

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For fixed-rate mortgages, The Enterprise acquired mortgages consistently had lower serious delinquency rates than private label MBS for equivalent LTV/FICO buckets. Even is 2007.

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MISCONCEPTION 3: Fannie Mae and Freddie Mac have an implicit government guarantee.

TRUE.

This was not a misconception. They were, in fact, bailed out by the Federal government after experiencing losses leading up to being placed into conservatorship in 2008.

The misconception I am referring to is that the mortgage lenders themselves would like the explicit government guarantee for themselves. It’s all about economic rents and that why the US Senate GSE “reform” efforts stalled. Fannie Mae and Freddie Mac earned economic rents from their implicit government guarantee. Rather than trying to eliminate the government guarantee, Corker-Warner then Johnson-Crapo simply wanted to make the guarantee explicit and shift it to lenders.

In this sense, the government guarantee is similar to a taxi medallion. New York City cab companies can pay over $1 million for a taxi medallion giving a cab the right to cruise New York City and collect fares. Cabs earn positive economic rents since there is a relative lack of competition (particularly around 4-6pm!) Fannie Mae and Freddie Mac held (and continue to hold) a “mortgage medallion”. The price? Fannie Mae and Freddie Mac have affordable housing goals that they must meet.

Just to be clear, Fannie Mae and Freddie Mac do NOT originate mortgage loans. They purchase loan from lenders. And the performance of Enterprise purchased loans was far better than loans in private-label MBS. Except for ARMs in 2007. And mortgage lenders want the “mortgage medallion” (explicit mortgage guarantee) that Fannie Mae and Freddie Mac currently own. Rather than allow lenders to compete on a level playing field by granting lenders their own “mortgage medallion,” the GSE reform legislation proposed to phase-out Fannie Mae and Freddie Mac (their mortgage medallions) and give the mortgage medallions to lenders. The price? Once again, affordable housing quotas.

The Federal government holds the power to grant (sell) the mortgage medallions various parties (lenders, insurers, etc). As long as the Senate, for example, can grant the mortgage medallion, it is doubtful that the government guarantee will even go away. After all, someone will want to earn economic rents and the price is MORE affordable housing goals or quotas.

http://confoundedinterest.wordpress.com/