Monday, February 28, 2011

Libya, Fannie and Freddie, and Geniuses

“Mister Market” is funny. Last week, he went crazy, dropping 200 points in one day, because of concern over terror in Libya, a country which produces two million gallons daily of high quality crude, primarily for European export.

What the market was not signaling, however, was concern over psychotic leader Moammar Gadaffi or the fact that this S.O.B was machine gunning his own people.

The market jolt all was about the oil supply, which became less of an issue later in the week when our “friends” the Saudis started producing more “black gold” and filling their own coffers based on the rapidly escalating oil price.

I’m not surprised that the stock market responds to threats to commerce not civilian murder, but whoever ends up running Libya isn’t going to leave that oil in the sand.

To President Barack Obama: If the Libyan people are willing to give their lives to overthrow a scumbag, who hates the US, let’s figure out a way to help them, not just cheer them on. The best help is given when it is needed by the helpless not when it is convenient for the helper.

If Gadaffi can hire mercs from Africa, we and/or our European allies could provide the same; just give them a name like the “Libyan Freedom Fighters!”

How about just having the Egyptians smuggle in some its US provided arms and trainers for the elements of Libyan’s army which have “defected” from Gadaffi? Maybe even suggest that the nearby French Foreign Legion or the vaunted Turkish military—both NATO members--might want to help end the slaughter?

I don’t think it would take much to topple Gadaffi and his “Devil’s spawn” children. C’mon Mr. President, get your mad on and man up!!

If you take my advice re our “allies,” suggest that the French not use those military vehicles with the one forward gear and five reverse gears, unless they employ them backwards.

And please make sure whomever tries to take him out gets the right guy, not Qadaffi, Quadafi, Gaddafi, Gaddffi, but Gadaffi (the guy with the yellow umbrella, who was wearing what looked like used TP on his head!)

Fascinating GSE Market Developments

Lots of interesting news in the mortgage market this past week, including financial news about Fannie Mae and Freddie Mac.

It’s likely the two financially are healing faster than anyone thought; witness the losses they reported last week and the much lower requests from Treasury than even the former GSE regulator the Federal Housing Finance Agency (FHFA) predicted at the end of last year.

I hope Congress is watching and understands what is happening.

Rob Zimmer, a long time friend, who now represents several small banks and other mortgage lenders, said that the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie and the Federal Home Loan Bank System, just a few months ago over estimated just how much federal support Fannie and Freddie would need, even applying the most optimistic of the agency’s three “likely business scenarios.”

“Improvements from projections are coming faster than even the most crazed GSE could have foreseen, Zimmer explained.

In fairness, some credit must go to FHFA--they are conserving assets, as is their defining mission currently. They seem to be doing a good job at it.

“Both entities are now doing better than government predictions less than 6 months old, and are essentially profitable on a "current" basis were the punitive 10% dividend to be adjusted to the 5% rate that applied to big banks repaying Uncle Sam,” wrote Zimmer.

No Lost Money on the GSEs?

Stuart McFarland, a managing partner of Federal City Capital Advisors (FCCA) and an experienced industry veteran of large mortgage workouts, believes that the Fannie and Freddie’s combined trillion dollar plus mortgage portfolios—if carefully managed—can slowly be sold off with the federal government getting almost all of its investments in the two companions returned, with even the possibility of a taxpayer profit.

Ironically, McFarland told me that that Freddie just reported a last quarter profit before preferred payment to the Treasury, underscoring Zimmer’s point that the GSEs interest costs are both exorbitant and, ironically, puts them in a deeper financial hole from which they must borrow more from the Treasury!

(Post publication edit. I got McFarland's information backwards. It was Fannie which would have shown a profit last quearter, had it not had to pay Treasury a 10% dividend. My bad!)

As I often have written, if a 5% repayment rate was good enough for the big TARP fund recipient banks why not apply the same to the former GSEs?

Fear the Big Banks!

Zimmer points to another issue that most small lenders view with great concern, big banks –specifically Bank of America, Wells Fargo, JP Morgan and Citicorp—dominating the mortgage markets.

A lot of his clients, Zimmer states, believe that the Treasury is tilting the table toward these big four bank lenders, even to the extent of undermining the GSEs, to permit these behemoths to be the ultimate market survivors.

In Zimmer’s view these “lender GSEs”—large commercial banks with the implicit power of the former government sponsored enterprises--have been made “too big to fail,” have many advantages beyond just federal deposit insurance, including Treasury and Fed acquiescence on general regulatory questions, and often act as Washington policy agents’

Small lenders are the ocean’s food supply to the large lenders voracious game fish. The Fannie and Freddie mortgage function always meant that the small guys could sell directly to the GSEs without having to”pay a toll” by going through the large banks first. That’s likely to change if the Obama Administration and Tim Geithner have their way.

Given the near mythical role that the “small guys,” banks as well as mortgage lenders, play in the ideological heart of every Republican, Zimmer and the small mortgage lenders are hoping that Congress understands this big lender-small lender history and won’t force structural legislative actions which help the big guys at the expense of the small lenders.

Listening When Genius Speaks!

Lew Ranieri often called the “father of mortgage backed securities,” on the Obama Administrations new mortgage plan.
--"We have to, especially if you look at the Treasury plan, the three alternatives to the Fannie and FHA [Federal Housing Administration] are bank portfolios, which is why we created the mortgage security in the first place, 'cause it can't fund housing on a balance sheet because it requires too much equity—you can do some, but you can't do most," Ranieri said.
--He continued, "Covered bonds, which really don't work for our type of mortgage in this country, 30-year loans. And the alternative is some form of a securitization, if not Fannie, Freddie, it's got to be a RMBS, we just have to do it better this time."
--“The housing market is very fragile and that is really a function of the overhang, Ranieri said, "We have something like 23 months inventory—that's three times the normal and it continues to grow."
--"I do not believe people realize how tight credit is from the banking system.”

From Robert Scheer –editor in chief of Truthdig, writing last week about the Admin’s mortgage plan.

“A most dastardly deed occurred last Friday when the Obama administration issued a 29-page policy statement totally abandoning the federal government's time-honored role in helping Americans achieve the goal of homeownership. Instead of punishing the banks that sabotaged the American ideal of a nation of stakeholders by "securitizing" our homesteads into poker chips to be gambled away in the Wall Street casino, Barack Obama now proposes to turn over the entire mortgage industry to those same banks.”

Maloni, 2-28-2011


Bill Maloni said...

My Bad!

I transposed information given to me by FCCA founding partner Stuart McFarland, that Fannie Mae would have had a profitable quarter had it not Bean required to pay a 10% dividend to the Treasury.

I mistakenly wrote "Freddie Mac." My mistake entirely.

The primary point remains that the two companies are nearing financial health.

John M said...

Hi Bill,

Check out my post from this morning where we compared Ranieri's substantive discussion with Warren Buffet's sugar-coated homilies from over the weekend. The CNBC story linked to there has a video embed of Lew's interview with some great stuff that didn't make it into the article.

I hope to lightly edit the financial sections of this post and re-post them on Doom overnight. As always, thanks!

Bill Maloni said...

Always a pleasure John.

I saw Buffet's comments and sent them on to a major trade group official, who follows the business closely.

Buffet's "housing bets" are interesting, primarily suppliers.

But, if I had the money, I'd be "betting with him," both on the housing recovery and just on how much cash he seems to make Berkshire investors.

(Many years ago, when David Maxwell was Fannie's Chairman, WB--after making a smallish profit-- prematurely sold Fannie Mae stock which then went on to explode upward. Buffet later wrote in one of his famous investor letters that selling Fannie was the "biggest mistake he ever made.")