Tuesday, January 29, 2019 7:22:06 PM
The Trump Appointee Delivering a Jackpot for Hedge Funds
DAVID DAYEN JANUARY 29, 2019
Joseph Otting, as an acting overseer of Fannie Mae and Freddie Mac, sets in motion a plan to overhaul the housing finance system, which would enrich wealthy investors.
Comptroller of the Currency Joseph M. Otting testifies during a Senate Banking Committee hearing.
When Mick Mulvaney became acting director of the Consumer Financial Protection Bureau in November 2017, there was outrage over Trump installing a crony with designs on destroying the agency that defends people from financial ripoffs. The reaction was far more muted when Joseph Otting, former CEO of OneWest Bank and current head of the Office of the Comptroller of the Currency, began moonlighting as acting director of the Federal Housing Finance Agency (FHFA) earlier this month. But the appointment is just as dangerous to the future of everyday Americans, if not more so. After all, it concerns the largest financial asset most of us will ever purchase—our homes.
The FHFA oversees Fannie Mae and Freddie Mac, the two giants that purchase mortgages and package them into bonds to keep the market for homeownership liquid. Fannie and Freddie came under government conservatorship after the 2008 crisis, with the government accepting $187 billion in liabilities. That has all been paid back and then some in the decade-plus of government control. Despite the initial thought that conservatorship was a temporary solution, it’s now become something like a de facto nationalization.
Today, Fannie and Freddie purchase the lion’s share of mortgages on the secondary market, and return all their profits to the U.S. Treasury. This standardization has enabled the government to wield a stronger hand in policing the market than the runaway irresponsibility of the housing bubble.
But some very rich and very powerful people don’t like this situation—stockholders in Fannie and Freddie, mostly a collection of vulture hedge funds. They have fought on Capitol Hill and in the courts to force a re-privatization of Fannie and Freddie, so their profits can accrue to investors. Most of these hedge funds bought Fannie and Freddie stock at a bargain, and would win a major payday if the government ever spun them out.
Enter Joseph Otting, the brave knight who is trying to deliver the Holy Grail to the hedge-fund community. And it’s already begun to pay off.
Otting, who led OneWest (with Steve Mnuchin as his chairman) as critics lambasted it as a foreclosure machine, took over for Mel Watt when his term expired on January 6. President Trump relied on the Federal Vacancies Reform Act, which gives presidents the ability to designate a formerly confirmed member of the executive branch as an acting officer of a federal agency. This was the subject of legal wrangling around Mulvaney’s appointment to CFPB, and Mulvaney eventually won out as the challengers to his appointment dropped their case.
But Otting’s appointment is different. The Housing and Economic Recovery Act of 2008 (HERA), which gave the executive branch the legal authority to take Fannie and Freddie into conservatorship, is explicit in its rules around vacancies: one of three specific deputies within the FHFA organizational chart must serve as acting director until a successor is appointed.
Of course, those deputies have been aides to Mel Watt, who Obama appointed to the position. Because HERA provides that a president can only fire an FHFA director “for cause,” Trump was stuck with Watt throughout his first term. When his term expired, he clearly didn’t want to wait around for his nominee for director—Mark Calabria, the chief economist to Vice President Mike Pence—to get Senate confirmation. So the Otting appointment was a rapid way to immediately change priorities at FHFA.
Critics have spoken out about the Otting appointment’s weak legal footing. “There are really serious questions about its legality,” says Brianne Gorod of the Constitutional Accountability Center. “The statute quite clearly appears to limit the president’s authority.”
Though Otting has only been at FHFA for a few weeks, he has already made waves. The hedge fund managers desiring the privatization of Fannie and Freddie have sued the government, claiming that the FHFA is unconstitutional, because the president cannot fire the director unless it’s for cause. Many bank regulatory agencies have this structure, including the CFPB and the Federal Deposit Insurance Corporation. But the hedge funders got a friendly three-judge panel on the Fifth Circuit Court of Appeals to agree with them, and rulethe FHFA’s for-cause provision unconstitutional.
The case has been appealed to the full Fifth Circuit for an en banc hearing. But Otting’s FHFA filed a brief with the court that it would no longer defend the constitutionality of that provision, a reversal of its previous stance. This leaves the FHFA with no defender in court against attempts to undermine its authority.
Otting subsequently told Politico that “a lot” could get done in his tenure at FHFA, and his top priority was ending the conservatorship. The White House proposed privatizing Fannie and Freddie last June, and Calabria also supports the idea. “Our goal is to be able to complete the release of [Fannie and Freddie] but at the same time make sure that it supports the U.S. housing market,” Otting said. Privately, Otting told FHFA employees that a plan to end the conservatorship would be announced in a matter of weeks.
This has set off shares of Fannie and Freddie like a rocket ship. The stocks are up over 170 percent this year, and dividend-bearing preferred shares are up 37 percent. Even if this plan, which would likely require Congressional sign-off, never materializes, Otting’s loose lips have provided a serious boost to hedge fund fortunes.
A privatized Fannie and Freddie without oversight could exploit a government guarantee to take massive risks, grabbing profits while throwing any losses onto the taxpayers.
I’m not sure why markets believe that House Democrats would work with the Trump administration to overhaul the housing finance system and set up the same kind of private mortgage-backed securities market that failed so miserably in 2008. A privatized Fannie and Freddie without oversight could exploit a government guarantee to take massive risks, grabbing profits while throwing any losses onto the taxpayers. And homeowners could get caught in the crossfire, as they did in the crisis.
But one iteration of the privatization plan being floated would have the government sell warrants for common stock that could earn up to $125 billion. This would probably lose money over time, but the up-front injection of cash could prove attractive to those looking to reduce federal deficits. Of course, it would transfer enormous profits to hedge funds, who have used federal courts and lobbying muscle to try to pay off a big bet.
Of course, there’s no actual plan yet. The Democratic leaders of the House and Senate banking committees, Representative Maxine Waters and Senator Sherrod Brown, wrote to Otting last Friday, demanding to see any plan for Fannie and Freddie’s future by February 1. “Your comments call into question the independence of the FHFA under your leadership,” Waters and Brown wrote.
In response to this, the White House slightly walked back Otting’s remarks, saying that “the administration will work with Congress to formulate a plan that fully addresses the risks to taxpayers presented by the current housing finance system and that improves the ability of creditworthy Americans to buy a home.” While this removed the threat of working unilaterally toward privatization, it still keeps alive the notion of pushing a plan through Congress.
Even if you believe that Fannie and Freddie should be spun out of the government—for the record I don’t, I think effective nationalization has worked fairly well—there’s no reason that hedge fund shareholders should be made rich in the process. Otting appears to be putting the financial interests of hedge funds over sound policy. And everyone with a home mortgage or wanting to purchase one has a stake in that decision.
Fannie Overhaul to Focus on Legislative, Regulatory Changes, Sources Say
By Elizabeth Dexheimer - January 29, 2019, 1:57 PM PST
--- Trump administration is said to focus on legislative overhaul
--- White House intends to work with lawmakers, spokeswoman says
Prospective home buyers arrive to tour a house for sale in Dunlap, Illinois. Photographer: Daniel Acker/Bloomberg
The Trump administration’s push to free Fannie Mae and Freddie Mac from federal control will likely start with the White House calling on federal agencies to put forth ideas for a legislative and regulatory overhaul of the housing-finance giants, said people familiar with the matter.
The White House may outline a broad set of recommendations, such as increasing competition for the companies and protecting taxpayers from losses, and then request that the Treasury Department and the Department of Housing and Urban Development propose plans for implementing them, said the people who asked not to be named because plans are subject to change.
The move, which could come within the next few weeks, would be the culmination of months of meetings among administration officials on what to do about Fannie and Freddie.
Fannie Mae has rallied as investors await a U.S. government overhaul.
Some of the changes that the White House has discussed could be done by federal agencies, such as allowing Fannie and Freddie to hold more capital. Others would require congressional action, including providing an explicit government guarantee of mortgage securities backed by the companies. In meetings, officials have been resistant to any plan that would completely circumvent lawmakers, the people said.
Less Ambitious
Such an approach indicates the administration’s ambitions aren’t as sweeping or as far along as some investors hoped. And a White House spokeswoman confirmed Tuesday that they want to work with Congress, providing more evidence that changes might not be imminent. Controversial issues routinely move slowly on Capitol Hill, particularly during times of divided government.
Fannie and Freddie both fell more than 22 percent Tuesday, the biggest daily declines since February 2017. The shares had been rallying this month after acting Federal Housing Finance Agency Director Joseph Otting reportedly said a proposal for freeing the companies would be released in the next two to four weeks, and that the FHFA and Treasury were willing to bypass lawmakers.
“Housing finance reform is a priority for the administration,” White House spokeswoman Lindsay Walters said in a Tuesday statement. “The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly.”
Walters said no decisions have been made on any reform plan. The administration intends to work with Congress to formulate a proposal that fully addresses the risks to taxpayers and that improves the ability of creditworthy Americans to buy a home, she added.
Slow Process
Figuring out what to do with Fannie and Freddie, which the government took over during the 2008 financial crisis, has confounded policy makers for more than a decade.
Hedge funds have been hopeful that President Donald Trump would help end the decade-long stalemate for Freddie and Freddie in a way that allows shareholders to get their hands on the companies’ profits, which now go to the Treasury. But two years into his term, little progress has been made.
Fannie and Freddie underpin the housing market by buying mortgages from lenders, packaging them into securities and offering bond investors guarantees in case borrowers default. The companies backstop nearly $5 trillion in mortgage bonds, which keeps borrowing costs low and helps make loans readily available.
In a potential directive to Treasury and HUD, the Trump administration is almost certain to demand that their plans ensure that taxpayers will be compensated for federal backing of the mortgage market, the people said. The administration also wants Congress to create an explicit guarantee of mortgage securities, ending decades of ambiguity over whether the government will step in during a crisis.
Boosting Capital
The White House has also discussed recommending that lawmakers empower other companies to compete with Fannie and Freddie, the people said. That could be accomplished by passing legislation that allows FHFA to grant charters to additional firms, permitting them to also guarantee mortgage securities.
Lawmakers say housing finance is also a priority for them. Senate Banking Committee Chairman Mike Crapo, an Idaho Republican, said Tuesday that trying to tackle it is one of his goals for the current Congress. House Financial Services Committee Chairwoman Maxine Waters, a California Democrat, has said she would consider working with the Senate on developing a plan.
There are some aspects of what the White House is considering that would be good news for hedge funds. For example, officials have discussed allowing Fannie and Freddie to hold more capital, the people said. But the White House hasn’t endorsed an approach that would let Treasury and the FHFA permit the companies to build up bigger capital buffers and then free them from federal control, the people said.
The White House has also outlined its desire to see Fannie and Freddie’s portfolios shrink, the people said. The administration would like to mitigate some of the companies’ risks, which could lead to changes in loan limits and credit underwriting requirements.
Otting’s Comments
Otting’s remarks, made privately this month to FHFA staff, have fueled shareholder optimism that a windfall is coming soon. But even he indicated that any changes might be months or even years away. Otting, who also serves as the comptroller of the currency, said the Trump administration intended to make progress on a Fannie and Freddie overhaul within six to 18 months, Politico reported Jan. 24, citing a recording of his comments it obtained.
John Paulson, a hedge fund billionaire who invests in Fannie and Freddie, has a history with Otting and Treasury Secretary Steven Mnuchin. In 2008, Mnuchin joined forces with Paulson to buy troubled mortgage lender OneWest. Mnuchin recruited Otting to run OneWest two years later.
Otting’s recent comments have raised eyebrows on Capitol Hill. Representative Waters and Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, have demanded that he provide a copy of any Fannie and Freddie proposal that’s in the works and more details about his own plans for the FHFA.
— With assistance by Joe Light
DAVID DAYEN JANUARY 29, 2019
Joseph Otting, as an acting overseer of Fannie Mae and Freddie Mac, sets in motion a plan to overhaul the housing finance system, which would enrich wealthy investors.
Comptroller of the Currency Joseph M. Otting testifies during a Senate Banking Committee hearing.
When Mick Mulvaney became acting director of the Consumer Financial Protection Bureau in November 2017, there was outrage over Trump installing a crony with designs on destroying the agency that defends people from financial ripoffs. The reaction was far more muted when Joseph Otting, former CEO of OneWest Bank and current head of the Office of the Comptroller of the Currency, began moonlighting as acting director of the Federal Housing Finance Agency (FHFA) earlier this month. But the appointment is just as dangerous to the future of everyday Americans, if not more so. After all, it concerns the largest financial asset most of us will ever purchase—our homes.
The FHFA oversees Fannie Mae and Freddie Mac, the two giants that purchase mortgages and package them into bonds to keep the market for homeownership liquid. Fannie and Freddie came under government conservatorship after the 2008 crisis, with the government accepting $187 billion in liabilities. That has all been paid back and then some in the decade-plus of government control. Despite the initial thought that conservatorship was a temporary solution, it’s now become something like a de facto nationalization.
Today, Fannie and Freddie purchase the lion’s share of mortgages on the secondary market, and return all their profits to the U.S. Treasury. This standardization has enabled the government to wield a stronger hand in policing the market than the runaway irresponsibility of the housing bubble.
But some very rich and very powerful people don’t like this situation—stockholders in Fannie and Freddie, mostly a collection of vulture hedge funds. They have fought on Capitol Hill and in the courts to force a re-privatization of Fannie and Freddie, so their profits can accrue to investors. Most of these hedge funds bought Fannie and Freddie stock at a bargain, and would win a major payday if the government ever spun them out.
Enter Joseph Otting, the brave knight who is trying to deliver the Holy Grail to the hedge-fund community. And it’s already begun to pay off.
Otting, who led OneWest (with Steve Mnuchin as his chairman) as critics lambasted it as a foreclosure machine, took over for Mel Watt when his term expired on January 6. President Trump relied on the Federal Vacancies Reform Act, which gives presidents the ability to designate a formerly confirmed member of the executive branch as an acting officer of a federal agency. This was the subject of legal wrangling around Mulvaney’s appointment to CFPB, and Mulvaney eventually won out as the challengers to his appointment dropped their case.
But Otting’s appointment is different. The Housing and Economic Recovery Act of 2008 (HERA), which gave the executive branch the legal authority to take Fannie and Freddie into conservatorship, is explicit in its rules around vacancies: one of three specific deputies within the FHFA organizational chart must serve as acting director until a successor is appointed.
Of course, those deputies have been aides to Mel Watt, who Obama appointed to the position. Because HERA provides that a president can only fire an FHFA director “for cause,” Trump was stuck with Watt throughout his first term. When his term expired, he clearly didn’t want to wait around for his nominee for director—Mark Calabria, the chief economist to Vice President Mike Pence—to get Senate confirmation. So the Otting appointment was a rapid way to immediately change priorities at FHFA.
Critics have spoken out about the Otting appointment’s weak legal footing. “There are really serious questions about its legality,” says Brianne Gorod of the Constitutional Accountability Center. “The statute quite clearly appears to limit the president’s authority.”
Though Otting has only been at FHFA for a few weeks, he has already made waves. The hedge fund managers desiring the privatization of Fannie and Freddie have sued the government, claiming that the FHFA is unconstitutional, because the president cannot fire the director unless it’s for cause. Many bank regulatory agencies have this structure, including the CFPB and the Federal Deposit Insurance Corporation. But the hedge funders got a friendly three-judge panel on the Fifth Circuit Court of Appeals to agree with them, and rulethe FHFA’s for-cause provision unconstitutional.
The case has been appealed to the full Fifth Circuit for an en banc hearing. But Otting’s FHFA filed a brief with the court that it would no longer defend the constitutionality of that provision, a reversal of its previous stance. This leaves the FHFA with no defender in court against attempts to undermine its authority.
Otting subsequently told Politico that “a lot” could get done in his tenure at FHFA, and his top priority was ending the conservatorship. The White House proposed privatizing Fannie and Freddie last June, and Calabria also supports the idea. “Our goal is to be able to complete the release of [Fannie and Freddie] but at the same time make sure that it supports the U.S. housing market,” Otting said. Privately, Otting told FHFA employees that a plan to end the conservatorship would be announced in a matter of weeks.
This has set off shares of Fannie and Freddie like a rocket ship. The stocks are up over 170 percent this year, and dividend-bearing preferred shares are up 37 percent. Even if this plan, which would likely require Congressional sign-off, never materializes, Otting’s loose lips have provided a serious boost to hedge fund fortunes.
A privatized Fannie and Freddie without oversight could exploit a government guarantee to take massive risks, grabbing profits while throwing any losses onto the taxpayers.
I’m not sure why markets believe that House Democrats would work with the Trump administration to overhaul the housing finance system and set up the same kind of private mortgage-backed securities market that failed so miserably in 2008. A privatized Fannie and Freddie without oversight could exploit a government guarantee to take massive risks, grabbing profits while throwing any losses onto the taxpayers. And homeowners could get caught in the crossfire, as they did in the crisis.
But one iteration of the privatization plan being floated would have the government sell warrants for common stock that could earn up to $125 billion. This would probably lose money over time, but the up-front injection of cash could prove attractive to those looking to reduce federal deficits. Of course, it would transfer enormous profits to hedge funds, who have used federal courts and lobbying muscle to try to pay off a big bet.
Of course, there’s no actual plan yet. The Democratic leaders of the House and Senate banking committees, Representative Maxine Waters and Senator Sherrod Brown, wrote to Otting last Friday, demanding to see any plan for Fannie and Freddie’s future by February 1. “Your comments call into question the independence of the FHFA under your leadership,” Waters and Brown wrote.
In response to this, the White House slightly walked back Otting’s remarks, saying that “the administration will work with Congress to formulate a plan that fully addresses the risks to taxpayers presented by the current housing finance system and that improves the ability of creditworthy Americans to buy a home.” While this removed the threat of working unilaterally toward privatization, it still keeps alive the notion of pushing a plan through Congress.
Even if you believe that Fannie and Freddie should be spun out of the government—for the record I don’t, I think effective nationalization has worked fairly well—there’s no reason that hedge fund shareholders should be made rich in the process. Otting appears to be putting the financial interests of hedge funds over sound policy. And everyone with a home mortgage or wanting to purchase one has a stake in that decision.
Fannie Overhaul to Focus on Legislative, Regulatory Changes, Sources Say
By Elizabeth Dexheimer - January 29, 2019, 1:57 PM PST
--- Trump administration is said to focus on legislative overhaul
--- White House intends to work with lawmakers, spokeswoman says
Prospective home buyers arrive to tour a house for sale in Dunlap, Illinois. Photographer: Daniel Acker/Bloomberg
The Trump administration’s push to free Fannie Mae and Freddie Mac from federal control will likely start with the White House calling on federal agencies to put forth ideas for a legislative and regulatory overhaul of the housing-finance giants, said people familiar with the matter.
The White House may outline a broad set of recommendations, such as increasing competition for the companies and protecting taxpayers from losses, and then request that the Treasury Department and the Department of Housing and Urban Development propose plans for implementing them, said the people who asked not to be named because plans are subject to change.
The move, which could come within the next few weeks, would be the culmination of months of meetings among administration officials on what to do about Fannie and Freddie.
Fannie Mae has rallied as investors await a U.S. government overhaul.
Some of the changes that the White House has discussed could be done by federal agencies, such as allowing Fannie and Freddie to hold more capital. Others would require congressional action, including providing an explicit government guarantee of mortgage securities backed by the companies. In meetings, officials have been resistant to any plan that would completely circumvent lawmakers, the people said.
Less Ambitious
Such an approach indicates the administration’s ambitions aren’t as sweeping or as far along as some investors hoped. And a White House spokeswoman confirmed Tuesday that they want to work with Congress, providing more evidence that changes might not be imminent. Controversial issues routinely move slowly on Capitol Hill, particularly during times of divided government.
Fannie and Freddie both fell more than 22 percent Tuesday, the biggest daily declines since February 2017. The shares had been rallying this month after acting Federal Housing Finance Agency Director Joseph Otting reportedly said a proposal for freeing the companies would be released in the next two to four weeks, and that the FHFA and Treasury were willing to bypass lawmakers.
“Housing finance reform is a priority for the administration,” White House spokeswoman Lindsay Walters said in a Tuesday statement. “The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly.”
Walters said no decisions have been made on any reform plan. The administration intends to work with Congress to formulate a proposal that fully addresses the risks to taxpayers and that improves the ability of creditworthy Americans to buy a home, she added.
Slow Process
Figuring out what to do with Fannie and Freddie, which the government took over during the 2008 financial crisis, has confounded policy makers for more than a decade.
Hedge funds have been hopeful that President Donald Trump would help end the decade-long stalemate for Freddie and Freddie in a way that allows shareholders to get their hands on the companies’ profits, which now go to the Treasury. But two years into his term, little progress has been made.
Fannie and Freddie underpin the housing market by buying mortgages from lenders, packaging them into securities and offering bond investors guarantees in case borrowers default. The companies backstop nearly $5 trillion in mortgage bonds, which keeps borrowing costs low and helps make loans readily available.
In a potential directive to Treasury and HUD, the Trump administration is almost certain to demand that their plans ensure that taxpayers will be compensated for federal backing of the mortgage market, the people said. The administration also wants Congress to create an explicit guarantee of mortgage securities, ending decades of ambiguity over whether the government will step in during a crisis.
Boosting Capital
The White House has also discussed recommending that lawmakers empower other companies to compete with Fannie and Freddie, the people said. That could be accomplished by passing legislation that allows FHFA to grant charters to additional firms, permitting them to also guarantee mortgage securities.
Lawmakers say housing finance is also a priority for them. Senate Banking Committee Chairman Mike Crapo, an Idaho Republican, said Tuesday that trying to tackle it is one of his goals for the current Congress. House Financial Services Committee Chairwoman Maxine Waters, a California Democrat, has said she would consider working with the Senate on developing a plan.
There are some aspects of what the White House is considering that would be good news for hedge funds. For example, officials have discussed allowing Fannie and Freddie to hold more capital, the people said. But the White House hasn’t endorsed an approach that would let Treasury and the FHFA permit the companies to build up bigger capital buffers and then free them from federal control, the people said.
The White House has also outlined its desire to see Fannie and Freddie’s portfolios shrink, the people said. The administration would like to mitigate some of the companies’ risks, which could lead to changes in loan limits and credit underwriting requirements.
Otting’s Comments
Otting’s remarks, made privately this month to FHFA staff, have fueled shareholder optimism that a windfall is coming soon. But even he indicated that any changes might be months or even years away. Otting, who also serves as the comptroller of the currency, said the Trump administration intended to make progress on a Fannie and Freddie overhaul within six to 18 months, Politico reported Jan. 24, citing a recording of his comments it obtained.
John Paulson, a hedge fund billionaire who invests in Fannie and Freddie, has a history with Otting and Treasury Secretary Steven Mnuchin. In 2008, Mnuchin joined forces with Paulson to buy troubled mortgage lender OneWest. Mnuchin recruited Otting to run OneWest two years later.
Otting’s recent comments have raised eyebrows on Capitol Hill. Representative Waters and Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, have demanded that he provide a copy of any Fannie and Freddie proposal that’s in the works and more details about his own plans for the FHFA.
— With assistance by Joe Light
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