Monday, May 13, 2013

Analyze The Reports

Now the Rampant Speculation Should Begin

I received the email below from a financially/economically bright , colorful, and creative friend, who shipped it  following Fannie's announcement last week that it will send $59.5 Billion in cash to the Treasury.

If one adds fairly minimum amounts for the three quarters of the rest of the year, (Fannie will send Treasury) north of $75 billion for the year. In fact, (Fannie now is) paying so much to Treasury in dividends that it will push back the date that the whole country hits the debt ceiling and Obama has to lock horns with congressional Republicans again.”

Of course, the way that Henry Paulson arranged the deal in 2008, it's like being in hock to the Mafia; (Fannie) can pay and pay but never get free.”

Or, as the song “Hotel California” goes”:

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave! "

That's a Lot of Money, Jeb, What Should We Do Now??

Fannie/Freddie, each reporting record earnings this past week, have created quite a buzz among those who understand the stakes and are aware that some Congress heavyweights—notably the Chairman of the House Financial Services Committee, Jeb Hensarling (R-Tex)--see the two as twin cancers requiring legislative eradication. And Jeb controls the agenda in the House committee.

It could be that Hensarling understands all too well that the income F&F are generating—and projecting--could influence his peers and colleagues to think Fannie and Freddie would be helpful to the nation (remember those people, guys?) and a more productive way to deal with Fannie Mae and Freddie Mac exists rather then Hensarling's desired evisceration.

For those who despise Fannie because they somehow manifest the federal government—and got bailed out by the same--or that the two encouraged homeownership back in the day (and God forbid once –at least at Fannie--had prominent Democrats working there), your complaints could become transitory.

A closer review shows that Fannie’s and Freddie's “mortgage sins” were the same that every major “PRIVATE” financial institution in the nation committed (with each benefiting from their own federal subsidies).

F&F bought Wall Street private label subprime (PLS) mortgage securities--not because they were encouraged by the federal government to make mortgage funds money available to low, moderate and middle income Americans—but because they faced revenue and market share losses and hoped to recoup.

Opponents like to conflate those separate matters because they want to blur the systemic benefits that the “old” Fannie and Freddie brought to the nation and, in some sense, still do.

Lots of Good News Embedded in F&F Earnings

Let me suggest to those on the Hill, not already wedded to the Tea Party ideology, the good news-- despite the reactionary chants from Hensarling and others—is that you have time to digest just what these positive earnings represent. Maybe look closely at why Bush Treasury Secretary Hank Paulson structured his F&F “take over deal” the way he did, so Fannie and Freddie never would appear to pay back the governmental (unlike GM, AIG and others). And, also, while the Federal Housing Finance Agency (FHFA), F&F's current regulator is too hands-on, it successfully has made it impossible for the two to finance any form of subprime mortgage, which deals with legitimate concerns over future financial taxpayer risk.

As my lyrical friend notes above--and I will add the Freddie perspective-- between the two of them, conservatively, Fannie could pay back an additional $25-$35 Billion this year and Freddie $20 to $25 Billion, with an emphasis on conservative.
The revenue opportunities go on.

I am not counting any Deferred Tax Account (DTA) Freddie could employ, as Fannie just did, which could send even more to the taxpayers or future financial damages received by both from several active lawsuits they have against major banks for fraudulent bad mortgage loan deliveries.

A additional F&F revenue wild card is—as large banks already have begun to do—Fannie and Freddie could reduce their loan loss reserves and convert them to bottom line income, increasing their profitability and expand what they plan to send the big money house at the corner of Pennsylvania Avenue and 15th Street.

Someone suggested that F&F—at current loss rates—already have 10 to 12 years worth of loss reserves on their books, which their regulator soon will have to agree to allow them to move down and then give it to the Treasury.

The Full Financial Return to Treasury Could Be Real Soon!

Play with those variables and, in any sense of the “paying back” concept, Fannie and Freddie could pay back the government in two years or less and be financially viable and a systemic asset to the nation.

Are these the types of institutions a majority in Congress should vote to disassemble or otherwise destroy because in the past they were cheerleaders for homeownership, as both parties demanded, or initially spawned by the Roosevelt Administration?

And, finally, what is the mortgage investing substitute?
Rampantly speculate on a Fannie/Freddie successor, since that's what Washington has been doing since 2008--when Paulson first bollixed the two--and explain why that mortgage model would be an improvement.
I've made my case against the big banks exclusively owning the nation's mortgage finance systems and I don't need to repeat it.

The big 7 or 8 Too Big Too Fail Banks (see link below to Barry Ritholz column) are not reliable partners to mortgage seeking consumers, as least when they don't have a Fannie or Freddie on which to layoff their mortgage risks.
I've also written often, I think the large banks enjoy having F&F in their current mortgage investor roles, because it makes it easier for banks to manage their mortgage business. But the big guys are “commercial banks” and recent reports suggest they are ramped up to do more of that needed lending and bless them for it....if it is true. I am betting keeping some form of Fannie and Freddie in place helps the big banks.
Use The Time Wisely to Consider and Understand

So, policy makers, their staffs, think tanks, media, and all who propound politically on new designs for the nation's mortgage finance system, take a timeout offered by the Fannie/Freddie earnings flow and try and understand and ask why many feel need dramatic changes when statutory and regulatory changes may already have created most of the future market structure the nation needs.

Two recent articles, one in Barron's, and one in “The Hill” discussing matters in today's blog are worth reading.

Again, nobody is suggesting that F&F, if used in some future capacity, never be altered. I suggest that people understand how these very productive institutions achieved success in the past and to consider, with several operational regulatory changes already made, how they can do it again.

Congress needs that review before they get swayed by those in power who, thoughtlessly, would pitch Fannie and Freddie out with the bath water.

(BTW. Kudos to my old friend—not the author of the opening email—Rob Zimmer, a former Fannie colleague before going to be one of Freddie's top lobbyists, who now has his own financial government relations practice. Someone called my attention to my Feb. 26, 2011 blog, in which Rob essentially predicted the F&F turnaround, two years ago, which the world recently has seen.)

Maloni, 5-13-2013


Robert Mae said...

"F&F bought Wall Street private label subprime (PLS) mortgage securities--not because they were encouraged by the federal government to make mortgage funds money available to low, moderate and middle income Americans—but because they faced revenue and market share losses and hoped to recoup"

Excuse me?

1996: HUD requires 42% of FnF financing go to borrowers with income levels below median level for given area

2004: HUD again increases FnF low income targets, and mandates 12% of ALL mortgages be special affordable to borrowers with incomes 60% below area's median level.

Remove HUD and Community Reinvestment Act initiatives, and was FnF ever in a position of requiring conservatorship? Nope, each withstood an almost 30% drop in home prices like champs - minus those who never considered home ownership until HUD called with the deal of a timetime - or a couple of years, as it turned out. Remove HUD and would FnF be going concerns today with full backing of Congress? Yup.

With all due respect, Bill, get it right. For the last time, both sides of the eisle have no problem with FnF. It's who's regulating and essentially forcing non-payers into 6 figure loans they all have a problem with. And ironically, it's them. They can't stop their damn selves.

Bill Maloni said...

I'll treat your thoughtfulquestion/comment with what believe are the facts.

Freddie Mac--which always was a laggard on low mod and the goals, employing a variety of artifice--may have petitioned HUD to allow the PLS to qualify but an initial HUD approval, was there rescinded or never applied across the board.

While execs at both companies--whom I've consistently argued made bad decisions--may have argued low-mod was the rationale for buying the poison, it was far more about F&F's lost of market share and revenue.

Remember, most of the PLS mortgages were "liar loans," meaning they had false or no documentation and those mortgages never qualified for the goals business.

I'll also insist--for several running years--Fannie did do 55% of their annual business in low mod, without having to resort to Wall Street PLS.

While many of us can wish D&R Secretaries had acted differently, they didn't and ratcheting up the goals just was a fact of life for us at Fannie and a fact that many, many people worked strenuously and creatively--again not utilizing PLS subprime--to achieve.

Fannie activities to achieve those growing HUD goals included outreach top minority Realtors, lenders, housing fares in communities all across the nation, marketing material in 12 different languages (including two dialects of Chinese), advertising on NBA basketball games to reach the NBA demographic which also as one underrepresented as homeowners, etc, and creation of 50 local, regional, and state housing Partnership Offices (PO's) with their own targeted marketing plans to increase Fannie business in those communities. It was hard work but it was done, well, before 2005.

Robert Mae said...

I think the argument that FnF lobbied for the right to insure these loans is specious at best. Not unlike a 10% reduction of their portfolios, each year they're given a list of goals they should meet, and each year they meet those goals. If HUD mandates that 42% of FnF financing go to those with lower income levels, it is FnF's duty to oblige. And if that means FnF place pamphlets on cars at an NBA game, so be it.

But that said, I'm not sure there's much difference between FnF's regulator forcing or obliging bad loans on the two. The point is that programs and bills had existed for decades, which were specifically written to increase the level of homeownership and include those who couldn't afford it.

Bill Maloni said...

Thanks, Bob.

Two things, one related to your comment and one not.

The latter comes with an apology!

You sent me a comment on another blog and I misread your name, thinking you were a close friend of mine, whose last name is one letter off your, so the "old farts" reference I made then applies to that Bob and me, not you.

Second, you may be missing my point. The pre-2005 Fannie hit the lofty "55% of your business must serve..." goal, without restoring to buying Wall Street PLS, proving it was possible.

It wasn't easy, but the 2005 F&F could have done the same or come very close without going for the garbage (which was more about revenue and market share than "goals").

Robert Mae said...

I don't mean to ignore your response, but it has been 100+ in TX this week, leaving me without the motivation to scour pre-2008 10k's to prove you wrong. And you are wrong, but I want to be specific.

Bill Maloni said...

Robert--Where you stand is where you sit, so I am not sure I'll be able to convince you to reconsider your position (but I do hope your weather improves, markedly).
There, reportedly, will be an article tomorrow in the American Banker--hardly a Fannie/Freddie mouthpiece or tool--discussing the loss rates on 30 years worth of Fannie Mae mortgage financing, It should be an eye opener for you.
The article's numbers are supported by data Fannie filed with a variety of federal agencies (including the SEC, Fannie's regulator, the Department of Housing Urban Development, Treasury, the Fed, House and Senate Banking Committees, media, Wall Street analysts--when Fannie was privately held--and others.

The latter point being, unless all of these elements--save the AEI--are lying and you believe are part of some grand cabal to resurrect the GSEs, you can believe the numbers.

I hope you get some relief from those temps!

Bill Maloni said...

Robert--Here is a link to the article I said would be out today (Friday).

You can comment on it further here or to me,

Robert Mae said...

I'm lost; That article points out that FnF did not succomb to the easy money, which, I believe was your point.

Oh well, another 100 degree day and with a marguerita now in my hand. I will get to those numbers that prove that FnF was small-fries during the RE bubble, with any deviation from their standard insuring being inconsequential, but it may take until winter!

Nice read, we need more of that.

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