Monday, April 8, 2013

Fannie, Freddie and More Fannie

What he said:

“----* Man,  F&F could ship Treasury $100 billion in revenue over the next two Years!”

After Fannie Mae announced its robust 2012 earnings, that was the observation from someone who does “GSE” very well.

He is the source who alerted me weeks ago to a Fannie's SEC submission—which,then, most seemed to have missed--saying that Fannie was considering use of some $60 billion in available deferred tax assets in its final 2012 earnings statement.

While that document was there for the world to see, few had noticed or thought through the implicit positive financial implications of the bold forecast. They were poised to make a ton of money.

When I blogged the information, multiple things occurred, including a jump in awareness that Fannie and Freddie were growing in financial strength, that they could--if allowed by the Treasury--pay off their bailout debt in a few short years.

Like it or not, understand it or not, the Congress had to weigh this strong suit as it struggled to figure out how, if at all, to change the US secondary mortgage market structure.

Fannie's regulator stepped in, objected, and later blocked the DTA use, at least in the 2012 earnings statement. Although that decision now seems to have been reversed and Fannie's and Freddie's vitality suddenly looks much stronger to the world.

Treasury owns 80% of the two companies through the senior preferred stock it acquired in the 2008 takeover, but the junior preferred stock, which Hank Paulson conned small banks and community lenders into buying and then tanked when Treasury (Paulson) took over the two companies, was bought for pennies on the dollar by speculators. It has since short up 250% or more in value, suggesting somebody thinks they still is market value in Fannie Mae and Freddie Mac.
Yes, my friend could be way off, but he also believes the future payments largely will be revenue/real cash, not tax expenditures (which still would be there  to cover out year income, indicating even greater income).

It all just heightens/lengthens/deepens the problem I cited three months ago, paraphrasing myself, “Congress is confused now about the future of the country's secondary mortgage market, what does it do when Fannie and Freddie start kicking off lots of profits?”

The California Association of Realtors

When I lobbied for Fannie Mae, I built strong personal relationships with Realtors everywhere, but better than with the California Association of Realtors, their chief executive, Joel Singer, and his deputy Leslie Appleton Young. They are people I like and admire.

The group recently asked me to speak to a leadership in LA and I jumped at the chance join my friends.

In a smallish afternoon gathering, I commenced my remarks by telling the mixed group of execs from all over California, “Washington DC and the Congress are all ------* up” and I proceeded to discuss why.

While some might have been taken back by my opening, few doubted my initial observations
when I concluded, after answering a ton of their questions.

Be assured that my “evidence” was even handed bipartisan, bicameral, and touched the Obama Administration, too.

For the most part, these California men and women were the principals of their firms, as well members of an influential state trade association. Many (with an emphasis on “many”) will soon will come to Washington to lobby Congress, agencies, and the White House on their industry business priorities.

The Realtors and I talked about issues, process, personalities and--as smart people--they quickly understood how difficult their advocacy roles are going to be.

As if to underscore what I told them, shortly after I returned home, the Washington Post ran a feature article (well written by Zach Goldfarb) about the stark ideological and personality contrast between House Financial Services Committee Chairman Jeb Hensarling (R-Tex), a vocal conservative, who wants government out of as many segments of the national economy as possible, and Maxine Waters (D-Cal) an equally pugnacious liberal progressive who sees government participation assisting the nation.

Goldfarb's themes will warm the heart cockles of those seek the status quo and no changes or improvements in anything within the Committee’s broad financial services jurisdiction, which includes most things money and housing, including, the federal financial regulatory agencies, Fannie Mae and Freddie Mac, HUD, FHA and the Home Loan Banks.

Pithy comments from an unidentified staffer underscore the Hensarling/Waters differences, suggesting little possible agreement on financial matters most political as well as substantive.

Contrasting current Chairman Hensarling with his immediate predecessor, Spencer Bachus (R-Ala), the staffer explained:
Under Hensarling, the GOP is more intent on promoting its ideology and delivering a broader message that government is too big, said a GOP aide.
That is a change from the approach under Bachus, who became chairman in 2010 but was term-limited and had to step down and who was seen by staffers as too willing to accommodate Democrats such as Frank.
Hensarling is very focused on making sure the committee puts out a message that’s in line with his ideology,”said the GOP aide, who was not authorized to speak on the record.“There is a lot bigger messaging focus than when Bachus was in charge.”
Or, as I assessed the political environment for the CAR,“Washington DC and the Congress are “...... up!”
Chipping Away at the Fannie Myth 
Reversing belief in a false narrative, which many in the nation's capital hold dear, is no easy chore.
The Fannie Mae mythology suggests it spent years underwriting loans for people who could not afford the financial obligations. Those loans were “subprime” and they led, directly, to the 2007 financial collapse of the real estate market and dozens of financial institutions. In 2004, the myth goes their leadership was forced out because they “cooked the books and paid themselves big bonuses.”(sic.)
I've spent years, with only partial success, correcting the errors in the fallacious scenario above, pointing out the longtime Fannie Mae achievement of its statutory mission; the fact that loans it underwrote from 1990 through 2004 had extremely low default rates and losses and that in 2004, and how it's leadership was hounded from office by a dishonest/dishonorable political “report”--issued by its regulator--suggesting that senior Fannie officials engaged in securities violations for personal gain.
When the SEC piled on in agreement, the individuals and the company were doomed, which, not surprisingly, had been a long time GOP objective.
Some of this myth got corrected last fall--eight years after the fact--when federal judge Richard Leon issued three separate decisions saying the securities violation charges again the three had no basis in any fact presented to his court.

But that didn't stop New York Times columnist Gretchen Morgenson from raising that specter, again, in a recent article when she besmirched a recommendation from the Bipartisan Housing Commission (BPC) for federal reinsurance of certain bank securities.
In excoriating the Commission's recommendation—and noting that some commissioners had ties to the old Fannie or Freddie--Morgenson bloviated and dragged in her Fannie/Freddie prejudices, and employing a guilt by association mugging of the Commission's proposal, while fingering who had nothing to do with the BPC or its policy suggestions.

She wrote:
Among the retirees receiving pensions courtesy of the taxpayer are Franklin D. Raines, Fannie Mae’s former chief executive; J. Timothy Howard, the company’s former chief financial officer; and Leland C. Brendsel, former chief executive of Freddie Mac.

"All three men were ousted from their companies amid accounting scandals —Freddie’s in 2003 and Fannie’s a year later."

Morgenson--utilizing tools from the "Big Lie," carefully avoids noting that Raines and Howard were exonerated in court (along with Fannie Mae Treasurer Leanne Spencer) or that Judge Leon's findings were unambiguous regarding the charges.
From Leon's decisions.

"There is not only no direct evidence that [former CEO Franklin] Raines intended to deceive Fannie Mae’s investors.….

At bottom, plaintiffs make much ado about earnings management, but plaintiffs present no evidence that Raines was ever aware that these transactions may have violated GAAP or, more importantly, were being used for an improper purpose.

Plaintiffs fail to point to any evidence from which a reasonable jury could infer that [former CFO Timothy] Howard believed any of these transactions were improper or sought to conceal them from the public. Indeed, plaintiffs' own expert recognized that earnings management does not necessarily show an improper purpose.
... In sum, plaintiffs offer no evidence from which a reasonable juror could conclude that any of Howard's statements concerning Fannie Mae's accounting practices or internal controls were made with an intent to deceive, or were otherwise made without any reasonable basis.
Myth destruction is never helped when the Washington Post--DC's most widely read publication--never has written one word about the Leon decisions.

The Fannie myth won't go away until people who know better lend their voices and experiences and drown out Ms. Morgenson and others trying to manipulate the facts. But it would behoove the Congress to understand what is real and what is false, if it ever moves to remake the secondary mortgage market.

Icing on the F&F Cake

Looking ahead, there are at least two other possibilities where Fannie and Freddie could add

to their bottom lines, meaning giving more money to the Treasury. Both likely are overcapitalizing for their projected losses—Treasury and FHFA saw something which blessed future use of the DTAs--and both former GSEs are suing large banks for defective loans and mortgage backed securities sold by the banks to F&F.

Maloni, 4-8-2013

(*selected technical terms used in the mortgage and political worlds.)


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