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Posts Tagged ‘Freddie Mac’

[Treasury Resource] Government Sponsored Lawyers

September 11, 2008 | 12:53 am |

Last week I discussed the surge in litigation concerning the abuses in subprime lending and the corresponding need for more lawyers, especially for pro bono work.

Next up, the legal state of Frannie.

Just because the US Treasury took over the GSE’s and moved them into a conservatorship under FHFA doesn’t mean they have a plan on what do with them. The first order of business was to prevent them from collapsing. Next, structure and direction, Lastly, prosecution.

There is a brief but excellent article in the New York Law Journal that summarizes the army of lawyers needed: “Scores of Lawyers Tapped in Takeover

In the weeks leading up to the federal government’s takeover of Fannie Mae and Freddie Mac, dozens of top lawyers worked to figure out the best way to save the two Washington-area mortgage giants.

The in-house teams at the U.S. Department of the Treasury and the Federal Housing Finance Agency, which is now the conservator for the two companies, were dealing with lawyers from at least nine private firms

Many were involved and are still involved. Here are total counts, but not all were working on the takeover:

  • 2,000 US Treasury attorneys plus outside counsel
  • 90 Freddie Mac attorneys plus outside counsel
  • 130 in-house Fannie Mae lawyers plus outside counsel
  • 40 in-house FHFA lawyers plus their outside counsel

The total is…a lot.

The attorneys are there to interpret and structure the unprecedented legal arrangement of the new entity as well as going after those responsible:

Even the battalions of lawyers may not be able to ward off lawsuits in the wake of the takeover.

AFSCME’s Mr. Ferlauto said that “there is activity going into holding those people responsible for not appropriately providing guidance.” He said he expects some pension funds to look for ways to sue the outgoing boards and management, and said lack of transparency, inaccurate guidance, fraud, and market manipulation could all be grounds.

A lot has to go into the mix before we can begin to talk about things getting fixed.

So in the meantime, please, please, don’t kill all the lawyers.


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[The Surge Redefined] This Time It’s Financial, International

September 9, 2008 | 1:08 am |

Not surprisingly the Dow surged today, signaling the US Treasury is moving in the right direction. This size of this action was beyond the ability of the Fed’s balance sheet.

Do you really think this action was taken to protect the housing market? The GSEs were too big to fail? Dan Gross at Newsweek sees things a bit differently:

The bailout of Fannie Mae and Freddie Mac will be sold and marketed as efforts to shore up the U.S. housing market. That could be. But they are really meant at shoring up our damaged international financial standing, preserving leadership and making sure the U.S. Treasury Secretary doesn’t get tarred and feathered at the next G-8 meeting. In a world of significant global financial imbalances, the doctrine of “too big to fail,” has been replaced by the doctrine of “too international to fail.”

There is a very well laid out explanation of the US government’s balance sheet in Randall Forsyth’s column in Barrons called: Beginning of the Financial “Surge”. If you don’t subscribe to Barrons Online, you should consider since the financial markets and the housing/credit market are now joined at the hip.

The Treasury Sunday acknowledged the federal government’s role in creating the “ambiguity” leading investors to assume it would stand behind Fannie and Freddie debt and MBS. Now it said it had a “responsibility” to “avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and mortgage backed securities,” totaling some $5 trillion held by investors around the globe. That doesn’t include the trillions more in derivatives contracts entered into by Fannie and Freddie.

Trillions: I wonder what those derivatives contracts are worth in relation to outstanding MBS? My very limited experience working with Wall Street and housing related derivative products last year tells me it has got to be a mind boggling amount. All the more important to facilitate stabilization now.

Another Barrons piece by Steven Sears, “The Fannie Mae, Freddie Mac takeover signals big trouble, not an all-clear.

indicates there are a lot of market gyrations in the future for investors…

“Once the euphoria ends, we need to decide where to go,” Credit Suisse’s strategists told clients…Investment-bank traders, who cannot be identified because they are not allowed to speak to media, say trading is very slow and what they are seeing gravitates toward adjusting bearish positions. “No call buyers,” is what one trader said.

In other words, its really a new playing field. Let’s not let our expectations surge too soon.


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[GSEs Get A Seizure] It’s About Time

September 8, 2008 | 12:01 am | |

It finally happened. The GSEs are no longer private corporations. The bailout is finally here.

I called this bailout on October 5, 2005 and was teased or ignored. History teaches us we forget history.

I have been lamenting (whining) for the past several months that nothing has really changed since last summer when the credit markets imploded. Sure, we had the stimulus plan and the housing bill became law, NY AG wrangles a deal with the GSEs to change the way with mortgage brokers and appraisal management companies were involved in the mortgage process. The housing bill created the FHFA which was a new and improved OFHEO, which had been in charge of GSE oversight before the seizure.

GSEs have been taken over and we are in bailout mode. Its fair to say this is the worst mortgage crisis in history.

Why the GSEs were doomed

They had an unfair advantage over competitors because they were protected by the federal government. Thats the very same government that was forced to bail them out. It makes a strong argument for promoting fair competition.

You can’t serve two masters:

the investors who put up capital and a government that wanted to help the housing industry and extend home ownership. In the end, they failed to serve either one very well.

The irony about the GSE set up is that was consistent with most members of the mortgage pipeline. Appraisers served the mortgage broker and the lender. Mortgage brokers served the borrower and the lender. Banks served the investors and their shareholders.

Fannie Mae continued to play with their spreadsheets even after the accounting scandal.

Fannie Mae did not have a grip on their accounting practices, OFHEO/FHFA was ill equipped to keep them in check, or they were simply incompetent. Remember FNMA kept revenue off the books in the original accounting scandal a few years back so they would not draw attention and be able to show better results the following year. Now they didn’t meet capital requirements to offset their mortgage market exposure.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid.

Despite all the confidence telegraphing by Lockhart (OFHEO), Mudd (FNMA) and Syron (FHLMC), few really believed the GSEs had a grip on the extent of the situation. After all they were part of the process.

They hold or back 5.3 trillion in US mortgages which is about 50% of the mortgages out there. The GSEs accounted for about 80% of new mortgages being issued since last summer’s credit crunch. With investor confidence fading fast, the Treaury department could not let the last pillar left in the mortgage market crumble and it appeared to be headed that way.

What does this mean to housing?

Its not clear until this all shakes out, but probably not much initially.

However, if the investors see the faith and credit of the US in action and this brings them to the table, it may eventually bring more liquidity to the credit markets and that may bring some of the risk down, lowering rates or tempering their rise. However, housing still has a lot of shakeout with foreclosures and inventory, but at least this is a step in the right direction.

It’s actually the first constructive step towards recovery. If we are going to pay through the nose, it might as well be towards something positive, as painful as that is. The stimulus plan and the housing bill are painful, but don’t do anything about solving the financial crisis.

“I would view it as the beginning of the markets recognizing and accepting the reality of our financial problems, which is the beginning of fixing them,” said Mr. Rosner, a managing director at Graham Fisher, a financial research firm.

In other words, perhaps there is hope credit markets will get a grip in the next couple of years.

An aside
It has always been my observation that Freddie Mac was the step child of Fannie Mae. It stemmed from my appraisal background. Freddie Mac let Fannie Mae design their forms. Freddie Mac was essentially created after Fannie Mae to provide competition for it yet it nearly always let Fannie Mae take the lead. Even its stock price seemed to mirror Fannie’s. But Freddie didn’t get into hot water in the accounting scandal and Freddie Mac was agreeable to the Treasury take over before Fannie Mae because they had more of a handle on how short their capital was. In fact one could suggest that when it counted, Freddie Mac was the leader all along. Of course, that doesn’t matter any more. CORRECTION: It was Freddie not Fannie…nevermind.

Inter-office announcement
Its a time for change: I win the office pool on the WAMU bet. Good grief, he should get an award for outstaying his welcome.


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[Pink Houses] Pre-fab Factory Made Fad To Not Really Mobile Homes

August 20, 2008 | 11:24 am | |

I am struck by the extreme range and contrast of housing development beyond traditional on-site construction. From mobile homes on the low end to art-like pre-fab homes on the high end.

Single-wide, double-wide, wide-load

The mobile home market, which often represents the lower end of the housing demographic, is seeing particular hardship right now in the availability of financing. It is sort of a a hybrid of real estate and chattel (personal property).

In the development of mobile home parks it is not unusual for the home owner to be situated on leased land, something not generally done in traditional home building. Pre-fab homes (the kind you see being hauled in two halves on semi-tricks) are generally lumped into the same category. A few years ago there was a meltdown in the manufactured home mortgage market so now the new housing law directs Fannie Mae and Freddie Mac to come up with new loan products and flexible underwriting standards for manufactured homes. Don’t count on it.

Tubes on stilts

On the other end of the spectrum, pre-fab housing is seen as making a statement, an artistic interpretation of housing. The exception would be the type where the art/brand transcends the house, like the Frank Lloyd Wright utilitarian homes scattered throughout the midwest and Levittown. Long since bastardized to match today’s living standards. Worthy of the Museum of Modern Art, the emphasis is placed on design over functionality and practicality.

And of course, The Haute Couture of Suburbia



I digress… Little pink houses for you and me. And while we are thinking rock n roll, here’s proof that the wheels really coming off the wagon.


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[GSE Reminder] Hey, There Are No Guarantees

July 21, 2008 | 1:58 pm | |

Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.


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[Premature Lecture] Agencies Go Full Court Press On Self-reflection

May 20, 2008 | 11:05 am | |


It seems a bit early to start reflecting on the lessons learned from the housing/mortgage problems we face, since, well, we still face them.

Don’t get me wrong.

It is always good to look back over your efforts and evaluate whether anything different could have been done to yield a different result. It is just that this infers closure and it is too early to summarize.

OFHEO – James Lockhart, the director spoke last week at the 44th Annual Conference on Bank Structure and Competition in Chicago (think Auto show, only less metallic paint) on the “Lessons Learned from the Mortgage Market Turmoil.”

He arrived on the scene after the party already begun and despite the criticisms levied towards both him and his agency, I actually think he did well with what powers he has to employ.

Plus, he likes charts “To set my remarks in context, I often like to start with a chart that gives some perspective…” Start with a chart and I am on your side.

Key lessons learned

  • what goes up too far goes down too far. In other words, bubbles burst.
  • mortgage securities are risky and that there is a long list of financial firms that have had problems with those securities, including problems related to model, market, credit, and operational risks. A key lesson from the savings and loan crisis that was ignored was not to lend long and borrow short, as structured investment vehicles (SIVs) did.
  • Another lesson ignored is that in bull markets investors and financial institutions tend to misprice risk, which can result in inadequate capital when markets turn.
  • A new lesson that should be learned is that putting subprime mortgages, which almost by definition need to be worked, into a “brain dead” trust makes no sense.
  • Another lesson is that overreliance on sophisticated, quantitative models promotes a hubris that has frequently caused serious problems at many financial institutions

Lessons learned specific to the GSEs

  • The first is about pro-cyclical behavior during the credit cycle. An important issue for supervisory agencies is how to create incentives for institutions to behave in a less pro-cyclical manner without interfering with their ability to earn reasonable returns on capital.
  • A second lesson from recent experience is the importance of capital. Capital at individual institutions not only reduces their risk of experiencing solvency and funding problems and of contributing to financial market illiquidity, but also helps them avoid the need to retrench in bad times and miss what may be very attractive opportunities in weak markets.
  • Those two lessons provide compelling arguments for a third: legislation needs to be enacted soon that would reform supervision of Fannie Mae and Freddie Mac and, specifically, give a new agency authority to set capital requirements comparable to the authority the bank regulatory agencies possess.

These are important points because the GSEs dwarf other debt and the GSEs have been losing money as of late. Here’s a few charts that may be of interest from his speech:


FDIC – Sheila Bair, FDIC CHairman was speaking in Washington, DC at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another http://www.fdic.gov/news/news/speeches/chairman/spmay1608.html on the same day Lockhart was speaking in Chicago. A full court press of self-reflection. Like Lockhart, Bair has been very outspoken and I believe lucid in her depiction of the problems at hand. To her credit, she has clearly articulated the problem with the mortgage system.

Her salient points are:

  • …things may get worse before they get better. As regulators, we continue to see a lot of distress out there.
  • Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.
  • Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.
  • The slowdown we’ve seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.
  • Reform is not happening fast enough
  • She explains HOP loans are NOT a bailout
  • The housing crisis is now a national problem that requires a national solution. It’s no longer confined to states that once had go-go real estate markets.
  • The FDIC has dealt with this kind of crisis before.

Take away

Both OFHEO and FDIC seem to be saying we need to take action now and they were powerless to do anything before this situation evolved into its current form?

It makes me wonder whether any regulatory proposals will do much good. Regulators did not take action or propose safeguards while the problem was building. How can they suddenly have wisdom now? While these recommendations and insight seem prudent but isn’t it kind of late for that?

Speaking of monoliths, here’s Steve Ballmer getting egged in Hungary.


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[GSE Pin Cushion] Will The Saviours Of Housing Need Saving?

May 8, 2008 | 12:57 am | |

Ok, let me get this straight. Fannie Mae:

Actually Fannie Mae’s stock dropped 5.7% yesterday so maybe it’s not love afterall.

Ok, what am I missing here? It seems to me that the GSEs can not be the housing market’s sole saviours and we risk serious damage to our financial system if housing drops sharply this year and Fannie & Freddie get taken over by the government and assume the liabilities…

But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year.

More regulation is need to protect the GSEs from faltering. OFHEO lowered their capital requirements in exchange for making Fannie Mae go out and borrower $6B to help protect against further housing market declines.

“Regulators need all the tools they can get to make sure these companies don’t fail, especially since we’re talking about entities that have over $5 trillion in financial commitments and debt,” said Senator Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee. “Six billion dollars looks like a pretty paltry sum, and if we get into a further housing downturn, that capital can go pretty fast.”

The dilemma (although its not really a dilemma because there few other options) is whether to entrust the GSE to get the nation out of the mortgage problem that is keeping housing from stabilizing.

Increased roles for Fannie and Freddie could be just what the doctor ordered to maintain confidence and liquidity in the mortgage markets at a crucial time and stave off a far greater crisis. However, if the crisis continues to deepen, these companies could go under and possibly push the worldwide financial system into turmoil.

William Poole, a former Federal Reserve Bank president, said that Fannie and Freddie are “at the top of my list of sources of potentially serious trouble.” And according to Senator Mel Martinez, a former secretary of housing and urban development, the companies “could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.”

It seems to me like this is one small solution of many others that are needed. It’s going to be a long time to ride out this downturn and common sense says that the GSEs can’t weather it alone. FHA lost money last year too. I am starting to think we are making things worse by trying to fix the problem.

Here’s a great piece by Randall Forsyth of Barrons called Show Me the Monet where he says more than half of all homeowners who bought in ’06 are underwater and that’s the tipping point for foreclosures. He wonders how the worst of the credit crisis can be behind us.


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[Credit Spiral] Declining Home Prices Primary Cause Of Declining Home Prices

May 6, 2008 | 9:51 am | |

The FRB’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices showed that:

In the April survey, domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the previous three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey.

In other words, it’s a lot harder to obtain financing.

Chairman of the Federal Reserve said in a speech yesterday that the decline in home prices was different this time and more flexibility in solving the problem is called for.

In a 10-page speech, Mr. Bernanke said (is 10 pages double spaced supposed to be significant?) that some regions of the country including California, Florida, Colorado and parts of the Midwest have experienced sharp increases in the number of homeowners who are delinquent on their mortgages, despite data that does not reveal the classic causes of foreclosures, like higher unemployment rates.

Instead, much of the problem can be attributed to a decline in home prices, which, Mr. Bernanke said, can “reduce the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.”

(image of lightbulb turning on) Borrowers were allowed to have mortgages they could not afford and speculators have less incentive to hold on to their properties. Economic vulnerability is made even more precarious by the vulnerability of the GSEs. (Today, Fannie Mae Posted unexpected losses associated with credit performance).

Bernanke’s comments on GSEs

Separately, the government-sponsored enterprises (GSEs)–Fannie Mae and Freddie Mac–could do more. Recently, the Congress expanded Fannie Mae’s and Freddie Mac’s role in the mortgage market by temporarily increasing the limits on the sizes of the mortgages they can accept for securitization. In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.

As the GSEs expand their role in housing markets, the Congress should move forward on GSE reform legislation, which includes strengthening the regulatory oversight of these companies. As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose–one that transcends just shareholder interests–for the accumulation of assets held in their portfolios.

Bernanke actually says “Location, Location, Location”
There is significant locational disparity in the performance of housing markets across the country. Bernanke showed a very cool set of heat maps on a variety metrics.










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[GSE Searchlight] Oversight Is So Not Over

April 23, 2008 | 12:35 am |

There is a whole lot of oversight going on these days. OFHEO [Office of Housing Enterprise Oversight] and others are very concerned about the ability of the GSEs to avoid getting into trouble.

I wonder why there was so little oversight before the credit crunch? Was it an…oversight (sorry)?

It’s pretty scary to think that Fannie and Freddie (and HUD) are seen as the saviors of the housing market in the creation of a jumbo conforming mortgage product, expanded portfolio size and a housing market condition that continues to weaken (default rates rise as prices decline). They are already vulnerable.

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.

Fannie Mae and Freddie Mac are getting a lot more attention from the Treasury Department these days.

Treasury officials have stepped up efforts to strengthen the regulation of Fannie Mae and Freddie Mac, the two largest buyers of home mortgages, pressing key senators to break a legislative stalemate that has lasted for years.

In OFHEOs Report to Congress, it summarizes the concerns quite efficiently:

$5.0 trillion in guaranteed mortgage-backed securities outstanding and mortgage investments. Their market share of total mortgage originations grew from 37.4 percent in 2006 to 75.6 percent by the fourth quarter of 2007. There is increasing pressure for Fannie Mae and Freddie Mac to do even more to support the mortgage market, which is problematic in absence of GSE reform legislation to strengthen the regulatory process.

As evidenced by the lack of market enthusiasm for the new jumbo conforming mortgage product that was supposed to help the housing market (allowing some homeowners to refi their way out of trouble – which can’t be good for FNMA’s portfolio). And OFHEO is just wrapping up actions against former FNMA executives who manipulated earnings to enhance their bonus income.

It doesn’t seem reasonable to place all of our hopes for a solution on the GSEs.

Consider oversight in the classroom: How students see their classroom today.


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[WaMu Goes Retail] Wholesale Mortgage Pipeline Goes Dry

April 8, 2008 | 6:08 pm | |

Back in the day, WaMu was one of the fasted growing mortgage originators and was affectionately known as the lender of last resort to mortgage brokers. Their appropriate “Power of Yes” advertising campaign was particularly accurate.

Implode-O-Meter reports that:

Washington Mutual will announce later today they are backing out of Wholesale entirely, and Retail is retreating to the bank footprint. Expect an email blast to Brokers later today.

Word is “They will leave the retail division in Jacksonville & Downers Grove” and all wholesale deals must close by June 30th.

It appears there may have been some conditions attached to that $5 billion.

Last week they reportedly allayed investor concerns that they were receiving a cash infusion of $5B.

I believe there are only a handful of national lenders left that are providing wholesale mortgage products in significant quantity. With this trend unfolding, combined with Fannie Mae’s upcoming ban on appraisal ordering by mortgage brokers, the high fees and unfavorable rates of jumbo conforming mortgages, a return to more core lending practices, proposed mortgage broker legislation, it’s not a good time to be a mortgage broker.

The mortgage bankers association expects the industry to contract in the current regulatory environment. There are many good mortgage brokers out there, but the profession needs weeding out, not unlike appraisers and real estate agents.

There is no love lost between WaMu and me because of the poor way it treated its long-time residential appraisers in 2006.

My question is: how will WaMu make money now? I had assumed wholesale mortgage origination was a big part of their business and their growth was fueled by mortgage origination. Their servicing business must be very lucrative.


UPDATE: Consolidation effort to eliminate 3,000 jobs
UPDATE 2: WaMu: Only for the Bravest of Investors

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[OFHEO Guidance] Stuck With Mudd On $417,000

March 28, 2008 | 12:57 am |

The Office of Federal Housing Enterprise Oversight, which has actually had to engage in a lot of oversight as of late, has been in the unenviable position of deciding whether to expand the conforming loan limit. It has been stuck at $417,000 for the past three years. OFHEO Director James B. Lockhart, who was nominated by President Bush and approved by Congress back in 2006, just as things began to get interesting. OFHEO used to be a sleepy oversight agency, responsible for the two GSEs: Fannie Mae and Freddie Mac that appear to rubber stamp everthing the GSE requested. No more.

Here’s the official guidance.

President and Chief Executive Officer of Fannie Mae, Daniel Mudd agrees with Lockhart on expanding the conforming loan limits to ease the credit crunch.

OFHEO is now on the hotseat because the GSEs have become a key ingredient to restoring investor confidence in the secondary mortgage market, which is a key ingredient to returning liquidity to the credit markets. I have been fairly critical of the agency of the years, but I have to say that Lockhart’s timely and tireless actions seem to be what the doctor ordered.

In theory, the conforming loan limit should float with the housing market but as the market has been declining, the conforming mortgage ceiling has remained unchanged. OFHEO decided that the rate should not be dropped because of the existing complexity of implementing the temporary increase of the conforming loan limit beginning on Setember 1st as a step to help the credit markets.

The conforming loan limit is adjusted annually through a calculation of year-over-year October changes to the level of home prices based on data from the Federal Housing Finance Board’s (FHFB) Monthly Interest Rate Survey (MIRS). As many commenters suggested, the small and voluntary MIRS price survey is volatile, which is another reason for this guidance to emphasize stability. Pending GSE reform legislation would allow the selection of a broader and more comprehensive price index.

It sounds like there will be more transparency in selecting the way the mortgage cap will be adjusted in the future. While I think that the rate should be adjusted up and down, not just up, it’s a catch-22 really. Lowering the rate will reduce financing availability for markets on the fringe, and that in turn, will weaken certain housing markets causing more defaults. Of course, it has the potential to make investors more skittish about conventional mortgages because the risk/value relationship is being expanded (market values drop, mortgage cap remain the same, risk spread widens).

And why do we borrow until it hurts?

No offense to Daniel or Roger intended, but what’s mud spelled backwards?


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Billion Mortgage March: GSEs To Make Waves

March 19, 2008 | 12:57 pm | |

This is huge.

Federal regulators said Wednesday they would allow mortgage finance giants Fannie Mae and Freddie Mac to reduce the capital they are required to keep on hand, a move that could pump $200 billion into mortgage markets.

The rule change was announced by the Office of Federal Housing Enterprise Oversight, (OFHEO), a normally low-profile agency which sets rules for the two government sponsored companies that between them hold or guarantee nearly $5 trillion in mortgages.

Here’s the OFHEO press release.

OFHEO estimates that Fannie Mae’s and Freddie Mac’s existing capabilities, combined with this new initiative and the release of the portfolio caps announced in February, should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year. This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas.

Fannie Mae and Freddie Mac (as well as FHA) have evolved into critical roles in stabilizing the credit market panic and have assumed important roles in providing greater liquidity to the mortgage markets, a key component in avoiding long term damage to the economy.

The OFHEO assures us that the 20% capital requirement is enough cushion for safety and the GSEs will begin to aggressively raise capital starting now. The $200B in extra funds will allow Fannie Mae and Freddie Mac to buy more mortgage securities and new home loans and increase mortgage guarantees.

Not too sound too rah rah here but I am amazed that we continue to see creative solutions to the credit crisis, seemingly everyday. Of course OFHEO missed the boat while the problems developed but at least now we are seeing some action.

Mandatory reading today: Can’t Grasp Credit Crisis? Join the Club by the NYT’s David Leonhardt. Please read it.

Raise your hand if you don’t quite understand this whole financial crisis.


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