Monday, August 18, 2014

Slow Legal and Legislative Processes

Waning Summer GSE Issues


More Lawsuits

I love the wide speculation over, now, 20 lawsuits filed charging the federal government over a variety of transgressions against Fannie. Freddie and their investors. Pershing Square’s Bill Ackman, largest individual common stock holder in each company, filed two more last week. 

To this layman, the Ackman charges appear similar to the previous legal actions aimed at Treasury. I’ll need one of you trenchant observers or lawyers to tell me exactly what I am missing, since I am sure there is something. 

But, in the traditionally slow summer months, these developments keep Fannie/Freddie in the news, which is positive and forces policy makers to realize the GSEs and their advocates won’t quietly go away, almost no matter what Judge Sweeney decides. And, depending on its nature and scope, her decision could jolt some political/market creativity from minds that have approached the nation’s mortgage market naively and simplistically.

As I keep reminding, we are talking about a national economic segment—with Fannie and Freddie, like it or not, at the helm--which historically has accounted for 17% or so of our GNP.

Read Dan Freed’s Ackman article in “The Street,” linked below.

Discovery Crawls in “Takings” Case


The diligent CRT Capital’s Michael Kim produced a superb/comprehensive report this past week of highlights of Judge Margaret Sweeney’s hearing into progress or lack of same on plaintiffs discovery efforts in the “Third Amendment” and “takings” case.

As Michael notes, it’s a slogging effort and might be another four months before completed. 

The good news is his content, the bad news is I can’t link his work for you’ (I am a self-proclaimed “tech idiot.”) But Michael has agreed to provide a copy to anyone who contacts him. Here is Mike’s email address


Bank Earnings and GOP Yearnings

As the WSJ’s Robin Sidel reported in Yahoo, US banks are compiling record earnings, again, but still seem to bitch and moan that they need additional tools to make more cash; see the Financial Services Roundtable (FSR) segment later in the blog.

The earnings story dovetailed nicely with a second story appearing in Politico, saying the GOP has its sights on Wall Street hoping to milk the big financial institutions for even more campaign cash.

Does anyone doubt the strategy will be successful and produce beau coup GOP Street-friendly legislative and policy decisions?


"Poor" Bigguns Seek Treasury Help

Speaking of the big banks and financial services companies, the Financial Services Roundtable (FSR), the Washington trade group for many of them—responding to a Treasury request for comments--asked the agency to try and facilitate greater trust among players in the Private Label Securities (PLS) market which has not been as liquid or lucrative since the big guys, bypassed the F&F systems and issued over $2 Trillion dollars in poorly underwritten and soon to fail PLS securities.
OK, who feels sorry for those institutions? 

Those tainted bonds generated more than four times the losses Fannie and Freddie incurred (over $700 billion in PLS red ink, source Laurie Goodman, to F&F’s well known $187.5 Billion or $140, if you don’t the money the GSEs initially had to borrow to pay Uncle Sam, interest because they had no earnings to employ.) 

The FSR’s letter was signed by John Dalton—The FSR’s Housing Policy President--an old friend and colleague from my days at the Federal Home Loan Bank Board, where once John was a board member and later named Chairman in 1981, after I left for a Fed position. 

Here is a brief email I sent John with my take on his letter. 

Isn't the biggest issue the fact that the market for PLS securities doesn't trust the big institutions which stand behind them? Those institutional investors still are leery of the bad old days, as they should be. 

What's Treasury supposed to do short of killing F&F and giving your guys a new federal guarantee on your securities losses? 

That won't happen until the nation has a single political party controlling the WH and both congressional chambers, possibly in 2017. 

I thought I went high road with my FSR commentary, but not so a wizened senior banking industry observer, who sent me the following after reading the FSR Treasury letter.


The financial behemoths led by the FSR, with the ABA following behind, haven't changed their spots. 

They want it all--systemic risk and TBTF be damned including: the housing GSE's market share, Fed support for resuscitation of the PLS market when the FED should concentrate on the unwinding of its own bubble, its $4,365,666 million balance sheet; and of course destruction of Dodd Frank now focusing on the living will requirements which seek to impose bankruptcy market discipline on those who apparently benefit and enjoy their wards of the state status. 

Of course they are willing to handle more systemic risk--with a government guarantee. Can the Yellen Fed say "no?"

Ouch and all I asked him was, “What do you think of the FSR letter?”

Fannie & Freddie to Issue Common MBS

Federal Housing Finance Agency (FHFA) Director Mel Watt took steps last week to have Fannie and Freddie issue identical mortgage backed securities, after almost 35 years of each having a different structure.
Watt’s action was driven by the fact that investors valued the Fannie MBS higher, preferring the structure and payment schedule of the Fannie MBS, causing Freddie’s to lag in market acceptance. 

In previous blogs, I advocated just having teams from each entity meet and quickly model the Freddie bond on the Fannie model, which probably was too simple a direction and doesn’t occur when federal departments tackle problems.

It looks like that now will happen, but over a period of 18 months or so.

The problem won’t be adapting a new Freddie security but how the market will price Freddie legacy portfolio.  

Even though I am a huge Fannie fan, I consider Watt’s actions mostly benign to constructive, although it will make merging the two far easier down the road. Freddie had the option, years ago, to remodel their MBS but for institutional ego purposes chose to maintain their “brand.” 

I never felt that Watt’s predecessor, Ed DeMarco, pushing the common securitization platform (CSP) and related goals was being helpful, just his own agenda of facilitating his own agenda of abolishing the GSEs.


What Others are Saying


Read why Gretchen Morgenson, in her Sunday NYT column, believes that bulldozers are a necessary component of any government settlement with the Bank of America and she’s correct.



Al Jazeera’s Marwan Bishara instructs readers on how to interpret terminology in UN Middle East resolutions.


Most mortgage players are opposed to any increase in F&F guarantee fees, but not the Security Industry and Financial Markets Association (SIFMA), which urges FHFA to mandate those increases to make PLS more attractive alternatives to F&F bonds. (But won’t that make mortgages in those securities more costly?)

Charles Wisniowksi had this story last week in Inside Mortgage Finance.



For your house hunters, the NAR says mortgage rates are at their yearly low.$5B871apbR&om_ntype=RMODaily


Maloni, 8-18-2014


1 comment:

Bill Maloni said...

With sadness, I noted the Washington Post today carried the obituary of former House Banking Committee Chairman, Fernand "Freddie" St Germain, a Rhode Island Democrat, who was one of the most colorful (in many ways, including wearing pastel colored suits) Members in the Committee's history.

Anyone who lobbied the Banking Committee got to know Freddie, warts and all.

Many exposes and articles were written about Freddie's flamboyance and closeness to the savings and loan industry.