Blown Mortgage » GSEs

Freddie Mac Up Next for Additional Aid

phillenbrand — Wed, 13 May 2009 21:11:57 +0000

When it comes to Freddie Mac and Fannie Mae, good news is hard to come by. If you’ve been following the blog, you probably already know that Fannie Mae reported a rather large loss in the first quarter, but what about Freddie? Unfortunately things aren’t much better there, either, although arguably not quite as bad with the firm reporting a loss of $9.9 billion in the first quarter of 2009.

The reason for another huge loss stems as you might expect from “credit-related expenses.” These expenses stem mostly from provisions for loan losses, which continue to increase. Declining home prices and a stubbornly weak economy have continued to pound the firm’s results. Of course despite these difficulties, the firm has also tried to play a role in an economic recovery by injecting $148 billion into the market. According to the interim CEO John Koskinen, the mortgage giant also prevented about 40,000 homeowners from heading into foreclosure. That’s a comforting sentiment, until you look at the fact that according to a recent report from RealtyTrac, there were about 342,038 foreclosure filings in April alone.

As with Fannie, Freddie Mac will need additional money from the Treasury in order to continue operating. Once again the losses drive the company’s net worth back into negative territory. In total the director of the Federal Housing Finance Agency asked for another $6.1 billion to bring the cover the firm’s “net worth deficit.”

If you’re wondering if there’s a light at the end of the tunnel, the Obama administration recently clarified what it expects the total tab to be for the government takeover of both Fannie Mae and Freddie Mac: A cool $171.1 billion from taxpayers. So far, the firms have received about $78.8 billion after they were nabbed in September because their failure could have cause irreparable damage to the financial system. The administration is also considering a number of paths for the mortgage giants, with the budget documents outlining returning them to their status as government-charted public companies with private management. Alternatively, they could be gradually winded down and sold off piece meal. They’re also considering turning the firms into a federal agency or public utility. I wonder how many billions of dollars in losses the government and taxpayers alike will tolerate.

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Fannie Mae Continues to Bleed

phillenbrand — Fri, 08 May 2009 20:03:58 +0000

I, like many individuals out there, have a hard time really wrapping my brain around large numbers. This isn’t to say that I can’t do math, just that after a certain denomination, I tend to lose sight of the impact that amount of money can have. So when Fannie Mae recently reported that it lost $23.2 billion in the first quarter of 2009. I largely shrugged it off. If you look at what just one billion dollars looks like, however, you can get a much better grasp of the situation.

So, in the midst of good news glimmers and lower unemployment numbers, why the terrible quarter? Well to be fair it still wasn’t quite as bad as the fourth quarter of 2008 when the firm lost $25.2 billion, but the firm stated that the problems came from “Credit-related expenses, securities impairments and fair value losses” as “persistent deterioration in housing, mortgage, financial and credit markets continued to adversely affect our financial results.” No kidding?

As you might expect, with Fannie Mae currently operating under a federal conservatorship, the losses have forced the firm to scramble over to the U.S. Treasury with hat in hand. The company has requested an additional $19 billion in capital investment. In addition, Fannie also hinted that the only way for it to survive is dependent upon a continued stream of government funding. That isn’t too surprising, considering that the loss pushed Fannie Mae’s net worth below zero for the second time. The loans and bonds that the company owns have continued to deteriorate even as they try to help struggling homeowners make changes to their mortgage terms.

That is part of the problem. As Fannie Mae helps homeowners modify the mortgages it guarantees, the company’s results get worse. The firm itself stated that “Future activities that our regulators, other U.S. government agencies or Congress may request or require us to take to support the mortgage market and help borrowers may contribute to further deterioration in our results of operations and financial condition.” That would be a little easier to accept if the initiatives were successfully halting foreclosures, which doesn’t appear to be the case yet. About 803,489 properties received a default or auction notice in the first quarter. It is still too short a time to make an assessment as to whether government modification efforts are having an effect, but in the interim Fannie seems to be endlessly bleeding taxpayer money, and it may need more.

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The Impact of Freddie Mac’s CFO Suicide

phillenbrand — Thu, 23 Apr 2009 16:46:43 +0000

If you happened to be a conspiracy theorist, you’d almost have to be salivating at a story like this. Freddie Mac, which has been at the center of attention in regards to the nationwide housing crisis, had their Chief Financial Officer die in an apparent suicide. The company currently owns or guarantees about 13 million mortgages, so David Kellermann’s death has had a significant impact both in the company and the broader economy.

Certainly the pressures of turning around such a massive company had to come with a fair amount of stress. I know I wouldn’t want to be anywhere near the firm in terms of employment, and apparently Kallermann had his hands full. He was often heading to the company’s executive suite at night to speak with his boss, David Moffett, where they would clash as to how to best serve the future of the firm.

Regardless of the reasoning, it seems likely that Kellermann’s unfortunate departure will cause further stress to the company itself. Kellermann was an experienced veteran, having 16 years under his belt, and without him the company has lost it’s direction. High level execs leaving the firm (under different circumstances of course) are nothing new, as both Freddie and Fannie have lost the CEOs that the government had put in last fall. Other high-level executives have headed for the exits as well. One analyst, Paul Miller from FBR Capital Markets, said that the departures are due in part to the belief that the agencies would be spun off in due time, likely within a year.

The question now becomes whether Freddie Mac and Fannie Mae will be able to handle their new expansive roles under the Obama administration’s housing rescue efforts. Both agencies have said that they may need additional lifelines from the government (Freddie reported a fourth-quarter loss of $23.9 billion) even after Uncle Sam has pledged $200 billion and bought up about $60 billion in preferred shares. James Lockhart, who is the director of the Federal Housing Finance Agency, which regulates both Freddie and Fannie alike, said that the search is underway for a new CEO and CFO, but ultimately Kellermann’s unfortunate passing is a blow to the firm that has already had to withstand much.

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Government Intervention In Housing: Pros and Cons

phillenbrand — Mon, 06 Apr 2009 19:16:39 +0000

Ask the average person what they think of the government intervening in the mortgage market on behalf of consumers (and in many cases lenders, too), and you could receive a wide ranging number of answers. Many people are upset at the seemingly rampant spending of taxpayer dollars, and voice concerns (a valid one) about the future value and stability of our currency. On the other side there are those that are happy to see the little guy get some assistance during hard economic times. Recent programs have gone a long way in providing assistance to new and existing homeowners alike, but the real question is, ultimately, what will the cost of such help be, and who will take on the burden of paying those costs?

One advantage for homeowners is that rates are incredibly low, and so they’re scrambling to take advantage. It may or may not be worth it to go ahead and try to get a better loan in this market, but the Obama administration has a fix in mind. The new program, which begins as of this month, will allow borrowers whose loans are owned by Freddie or Fannie to be able to refinance for up to 105% of a home’s value. Credit scores, which have thus far prevented many from obtaining refinancing, may not be such a huge hurdle, as refis are an available opportunity for those with credit scores that are as low as 620. It makes me uneasy hearing that (isn’t lending to troubled borrowers what got us here in the first place?) but it isn’t exactly a free lunch. You’ll need to be current on your mortgage, and you’ll also need a solid payment history. Full details can be found at Makinghomeaffordable.gov.

Now yes, this does provide tangible benefits to the average consumers, even to those that aren’t drowning with an underwater house or bit off more than they could chew, but let’s look at the cost. At present, the Federal Reserve is buying hundreds of billions of dollars in these low interest mortgages. Present tab is running $250 billion, but expect that number to grow as time goes on, up to $1.25 trillion.

Running the printing press to pick up these mortgages has problems in and of itself. Inflation (weren’t we just worried about deflation?) is a real risk here. In addition, these buys tip the mortgage purchases balance on the Fed’s balance sheet, which in total could run up to 20% of the country’s GDP. Once Uncle Sam bows out of the buying spree, it seems likely that mortgage rates could rise sharply once again. The question then becomes when exactly should the Fed get out, before investors come to assume that the government will step in if problems arise again in the future.

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Push-Pull at Fannie Mae and Freddie Mac

phillenbrand — Thu, 02 Apr 2009 13:01:38 +0000

Ever since Fannie and Freddie were taken over by Uncle Sam, both consumers and politicians alike have been wondering what exactly the future holds for the two firms. Certainly from a pragmatic perspective they’ll be eventually released back into the wild once they’re “stable” enough for the task, but what will their functionality be? Will Freddie and Fannie expand their lending duties even as they struggle to eat billions of dollars in loan losses and streamline their operations?

The answer right now seems to be maybe. Fannie Mae recently came out and said that it shrank its gross mortgage portfolio in February. The company’s holdings dropped 1.3 percent annually to about $784.7 billion. Late payments on loans that the firm guarantees continued to go up in January, where the “seriously delinquent” rate on conventional single-family homes. The company has been pretty tight lipped about the portfolio, and their spokesman Terence O’Hara declined to comment on it. Still, the government has been using both mortgage firms to buy up mortgage assets and help to stabilize a housing market here in the U.S. that can’t seem to find a floor.

Both Fannie and Freddie, despite rising delinquencies, are being considered for new roles in the U.S. housing market. A spokeswoman for the Federal Housing Finance Agency, for example, recently stated that it will consider letting the two firms help to finance small mortgage banks. The thinking is that currently the surviving giant banks like Wells Fargo and Bank of America are increasing their dominance of the mortgage market. If smaller mortgage banks are going to be able to compete they’ll need more credit. As you might expect, credit isn’t really readily available right now. So, the FHFA has asked the Mortgage Bankers Association to come up with a new plan to help Fannie and Freddie provide said mortgage banks with credit. Even more interesting is that the regulator may bypass getting congressional approval, with the argument that it isn’t necessary to do so. As we’ve heard so often, time is of the essence…again: “We just don’t have the luxury of time for going through the legislative meat grinder.” said John Courson of the Mortgage Bankers Association.

Ultimately the question is whether we really want to give Freddie and Fannie an even larger role in the U.S. housing market even as they currently stand as the poster children for everything that went wrong. Will the government be able to cut out the bad and put in the good for these companies? Or are we just setting the stage for additional problems down the line?

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Fannie to Loosen Underwriting Guidelines

Morgan — Fri, 06 Feb 2009 08:45:06 +0000

Because good rates don’t do any good when no one can qualify, Fannie Mae is relaxing underwriting standards to make it easier for homeowners to refinance (h/t Mortgage Insider). They’ll be loosening credit, appraisal and income requirements in order to open up the tight refi market.

From Bloomberg:

Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site. The changes apply to loans that the company owns or guarantees.

The company, which accounts for more than 40 percent of the $12 trillion in U.S. residential mortgage debt, is seeking to break a “logjam” in refinancing and allow more homeowners to take advantage of near-record low interest rates, according to Brian Faith, a Fannie Mae spokesman. The increased flexibility for consumers isn’t large enough to significantly harm mortgage- bond investors and mortgage insurers, analysts said.

This is the problem with trying to “fix” the market. The only way to make refinancing more widely-available is to open it up to poorer credit risks, which in turn makes the entire system more susceptible to ongoing weakness as loans continue to go bad. Fannie, by loosening underwriting guidelines is basically saying that the American public is happy to subsidize more sub-standard loan risks in order to let more people participate in the refi market.

But as we know, this is a terrible assumption. Americans don’t want to subsidize more bad risk – they want to get the risk out of the system so that our banks and institutions are sound once again. This is just one more example that clearly demonstrates that the only way out is to take the pain of getting rid of the excess (homes, banks, etc.) and getting our financial system back on firm ground. Only when we stop trying to prop up the faltering bubble by making more bad choices can we actually have a chance at the beginning of a recovery.

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Let Banks (Not the Government) Be Banks

phillenbrand — Sat, 17 Jan 2009 23:51:43 +0000

Note: The article written below is not meant to defend the actions nor advocate the interests of the American banking system in regards to the real estate market, or the financial markets as a whole.

Occasionally I read a piece of information that seems to leap off the page and shout at me, and an article recently published in the Los Angeles Times featured just such a nugget. In the article, which can be read here, it states that JPMorgan Chase has withheld foreclosing on over $22 billion worth of mortgages in order to focus on reviewing the terms of those mortgages, implying that the dollar amount of bad mortgage debt on their books is well over $22 billion. JPMorgan also managed to eke out a profit in the last quarter of 2008 (which, as always, could just be the result of some creative accouting), so God only knows what that means about the balance sheets of the other national banks.

In correspondence with the numbers on JP Morgan?s books, 1 in every 54 American homes has been on the brink of foreclosure this year. This includes over 500,000 homes in California, and 1 in 14 Nevada homes, received foreclosure notices in 2008. The sheer size of these numbers can be daunting for anyone trying to take stock of the situation, including the policymakers whom we hold accountable for finding a solution. It?s much easier to strike a deal when you can attach a face to an issue, such as the CEO of a major automobile corporation. Likewise, when you have one man perpetrating a $50 billion dollar fraud and losing money for charities, among other investors, immediate action can be taken.

Unfortunately, the fact is that it is impossible to put a face upon a tragedy that has affected millions upon millions of individuals, and has been perpetrated by a web of self-interested corporation, agents, brokers, and bankers. Each of those individuals has a unique set of variables that factor into the circumstances that led to their houses being foreclosed on, or in danger of being foreclosed on. They may have lost their job, they may be dealing with personal strife i.e. health issues, divorce, or death, or they may not have been able to afford the house in the first place. Due to the complexity of the circumstances both causing and resulting from the status of mortgage, the idea that the government could possibly come up with a single solution that would be effective in preventing any further damage in the real estate market is extraordinarily naïve and unrealistic.

Perhaps most alarming is this suggestion by a group calling itself the National Community Reinvestment Coalition. In summary, their proposal to the House Finance Committee is to use eminent domain as a vehicle through which the government would be able to buy distressed properties at 30-50% of their original value, bypassing the secondary lien holders, and modifying the loans on their own terms. While most observers will probably give this proposal a slim chance of ever coming to fruition, the fact that it has even been suggested indicates that the government is in fact considering an intervention in the real estate market.

It need not be said that this would be of the worst conceivable outcomes of the real estate crisis. If the government were to take any action to interfere in the housing market, it would set a frightening precedence for future lawmakers to follow. Banks, and to some extent the GSE?s, should be responsible for setting mortgage terms and for modifying them when necessary. The government can make suggestions, and should set terms on how TARP money can be used. But the banks are in the business of surviving, and as was highlighted by the LA Times story on JPMorgan Chase, the strong banks will do what they can to stay in business. The reason that banks create local branches is so competent individuals can micromanage in the unique effects of each local economy. The government is not remotely capable of performing such a task, which is what the eminent domain solution would require. One could certainly make the argument that several of our national banks are just zombie corporations, but that is not the case. Having the government insure your assets and provide you with capital is not the same as having the government run your board meetings. It’s the difference between allowing for checks and balances within branches of the government, and turning the Justice Department into your own private think-tank.

Generally speaking, what is in the homeowner?s best interest (remaining in their house) will also be in the bank?s best interest. The strong banks will conform to this principle, and the weak will go the way of all individuals at an evolutionary disadvantage.

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Ritholtz, Yun on the Housing Market

Morgan — Sat, 10 Jan 2009 18:07:36 +0000

I was at the Inman Real Estate Connect conference in New York all week. I had the great opportunity to hear Dr. Robert Shiller speak as well as see this panel which featured Barry Ritholtz of The Big Picture and Lawrence Yun, Chief Economist of the NAR.

The video is 42 minutes, but it was a great discussion. It includes Yun telling the audience he was wrong about his predictions, which was refreshing.

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Renters Find Relief

Morgan — Tue, 16 Dec 2008 01:31:35 +0000

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

As we prepare for the Fed to lower rates to an all time low and more consumer hitting the daunting certainty of foreclosure and bankruptcy, it’s easy to forget about the even littler guy in the housing picture, the renter. As I mentioned in a previous post, renters have been feeling their share of pain in this market, too. Many landlords, either overwhelmed and taking what they can or simply abandoning their properties altogether, have left many renters out in the cold. Despite continuing to bleed, it appears that the government controlled mortgage giant, Fannie Mae, may have a soft spot for us consumers after all (well, now that they’re done loading up risk to their eyeballs and paying the price). They’ve officially launched efforts to help renters stay in their homes, even if the property they’re renting heads into foreclosure.

The move, according to Fannie, will allow tenants to sign new leases, and should affect about 4,000 renters that are staying in properties that have hit foreclosure. This is definitely a positive development, considering that the renters have been dutifully paying their rent but still would face eviction without help. The policy is expected to go into place on January 9, according to Brian Faith, a Fannie spokesperson. I’d expect Freddie Mac will follow suit on those efforts as well. Both of them have agreed to temporarily hold evictions.

Of course it wasn’t exactly compassion that moved Fannie to action. An advocacy group, the New Haven Legal Assistance Association recently accused the company of obeying Federal requirements to let renters stay in properties that have hit foreclosure. As part of the bailout, Both Fannie and Freddie are required to allow tenants to stay ?where permissible? in their homes. I guess that was open to interpretation until now.

I suppose it’ll be somewhat comforting to renters to know no matter what happens they’ll have a chance to stay where they are. If the Fed rate cut goes through and credit remains tight..we’ll all be renting soon enough, anyway.

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TARP, Capital Purchase Program…Making It Up As They Go Along?

phillenbrand — Fri, 14 Nov 2008 17:07:30 +0000

There was an eruption across news networks and websites earlier this week as Henry Paulson announced that the Federal bailout package, dubbed the TARP (Troubled Asset Relief Program) would no longer function as a program to purchase troubled assets. Sparing no time to allow the irony of this to sink in, Paulson proceeded to outline what many of us have been suspecting all along. The first portion of the bailout money, approximately $260 billion, has been set aside to purchase stock in banks.This has been fittingly dubbed the Capital Purchase Program (CPP).

There are a few different ways to look at this, but it would seem that the Treasury believes that their primary goal is to ensure that survival of the American banking system, and that the best way to do this is to provide them with excess capital and allow banks to meet the demand for loans. It also would seem that the Treasury is making it up as they go along, but that’s another discussion for another day.

So what to do with all those bad, ugly subprime loans that they were going to purchase? Is there some way to make them, well, not so bad? Ah, yes, by rewriting them! The Federal Housing Finance Agency, in an almost simultaneous announcement, outlined a plan to restructure delinquent and troubled mortgages held by Fannie Mae and Freddie Mac. Homeowners would have the terms of their loan adjusted as follows: payments could not exceed 38% of their household income, the maturity date of the loan could be extended to 40, rather than 30 years, and a portion of the loan principle could be deferred.

I won?t bother to elaborate on the philosophical quandaries presented by this proposal, but rather I will focus on the issues of practicality. First, the fact is that only 20% of the subprime mortgages in America are owned by Fannie and Freddie. Second, of that 20%, only a fraction are actually the whole loans. Since loans have been chopped up, bundled, and sold in fractional shares to investors, any one of those investors could stop the loan modification from going through.

But then why would those investors want to block the restructuring? After all, doesn?t that help them retain the value of their investment? Well, yes and no. Most of those investors are not individual retail investors, but rather are institutional investors, such as banks, investment banks, trusts, hedge funds, etc. That means that in addition to holding the mortgage backed security, they also own the collateralized debt obligation (CDO) tied to that security, and more likely than not have also probably issued a CDO or two (or several) on that security. So whereas with a traditional investment in a security, you have a winning bet and a losing bet, with mortgages and mortgage-backed securities, you could have one winning bet, but multiple losing bets. Michael Lewis, the celebrated author of the Wall Street classic “Liar’s Poker,” describes the situation succinctly in this article.

Let’s not forget that additionally, from the perspectives of homeowners, it would exacerbate the plunge in home values across the country, and could potentially encourage non-delinquent homeowners to stop paying their mortgage in hopes of a loan modification.

Is it any wonder that we’re in this mess?

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