navycmdr
43 minutes ago
Kamikaze GSE Release?
(Hack Whalen ignores Facts: GSEs Superior LOANS - 750 avg credit score)
R. Christopher Whalen - December 2, 2024 -
In this edition of The Institutional Risk Analyst, we return to the world of mortgage finance and publish our checklist of what needs to happen before Fannie Mae and Freddie Mac emerge from 16 years of government control. A lot has changed in the secondary market for residential mortgages since September 7, 2008, when the United States seized the GSEs.
The Mortgage Bankers Association wants to see new legislation to facilitate early release, but our informal survey of DC housing mavens and Wall Street credit folk suggests that is not going to happen -- even with GOP control of Congress. We are reminded of the words of Professor Ed Kane from our 2021 discussion about COVID and monetary policy (“Ed Kane on Inflation & Disruption”):
“Many seem to be hoping that things will go back to the way things were, back to ‘normal.’ But I am always reminded of the concept of ‘hysteresis’ which basically says we may travel up one path in response to outside forces, but when these outside pressures subside, we should not expect that we will return to the same ways of doing things. We have to recognize that hysteresis is a general phenomenon. Investors, in particular, must ask what kind of paths will unfold if and when we establish herd immunity, and accept that the good old days cannot completely return.”
No less than Bill Kilmer, Head of Legislative and Political Affairs of the MBA, reportedly said last week: “I think for this to happen this time, it’s really got to be led by the Treasury and by FHFA building a framework for the Congress to act upon. That may not be achievable in any one administration — unless you've got the right people that are going to dedicate the time and energy and effort to it.” Ditto Bill, but we suspect that the new POTUS has a faster agenda in mind for the GSEs.
Below for subscribers to our Premium Service follows our checklist of what needs to happen if the Trump Administration really, really wants to release the GSEs without any new legislation. Can this be done? Yes, but be careful what you wish for. You may get it. We also suggest some significant business model changes for the GSEs that can reduce the regulatory capital requirements of Fannie and Freddie, and maybe even help the Treasury get par for its $200 billion equity investment.
At the outset, the GSEs will be majority owned by the United States once the Treasury exercises its preferred equity position. Using General Motors (GM), American International Group (AIG), and Citigroup (C) as models, Treasury is likely to seek an organized sale of some or all of voting stake in the enterprises upon release. The big question is whether the Treasury can get par value for its stock for the GSEs “as is” or perhaps in a new iteration, as discussed below. Yeah, the sweep and the equity investment are two different things folks. Live with it.
You may call release “as is” the kamikaze route to GSE privatization. Pre-2008, we pretended that the GSEs were private and holders gathered supra-normal returns for taking no risk, as shown in the chart above. Owning GSE shares and preferred was like carried interest in private equity, a free ride on the US taxpayer.
Now we are going to behave like the GSEs are really private, but with a credit line from the Treasury and a specific resolution path created by Congress in the event of default. Fannie Mae and Freddie Mac, you understand, have never actually been “private” in terms of the credit markets, but don’t let that fact make you think that release is not a priority for the Trump Administration.
Upon release, the GSEs likely will get at least a one category credit rating downgrade from Moody’s et al. Today the GSEs are "AAA" rated buyers of loans who compete with the Federal Home Loan Banks in the primary market for residential mortgages. As private issuers, the GSEs face future competition with customers such as JPMorgan (JPM), Mr. Cooper (COOP), PennyMac (PFSI), U.S. Bancorp (USB) and United Wholesale Mortgage (UWMC).
Remember GSE release is a trade, not a destination. The actual chances of release from government control remain less than one in five in our judgement. The odds of success for both of these entities post-release in direct competition with large banks and nonbank mortgage issuers is even more uncertain. But the changes to the GSEs and their business models that must occur to make release possible also open some interesting possibilities.
Out of the gate at release, the US Treasury will own more than 80% of the GSEs on a fully diluted basis. Each GSE also pays part of its income under the “sweep” to compensate the US for the full faith and credit wrap today that stands behind the issuers and their $8 trillion in MBS. As discussed below, we expect a new amendment to the sweep agreement with the US Treasury to continue government support for all residential and multifamily conventional MBS, but no explicit credit support for the issuers.
Once the GSEs exit government control, however, the issuers will for the first time be treated as private companies and, more important, rated by Moody’s et al as finance companies instead of sovereigns. No amount of private capital replaces the full faith and credit of the United States. And only a sovereign credit earns a “AAA” rating from Moody’s. Federal support for the GSEs, keep in mind, is why we have a 30-year fixed rate conventional residential mortgage.
In the event of release w/o legislation, the market for 30-year fixed rate mortgages will likely change. Post-exit, the conventional mortgage market is likely to shrink from the top down, leaving conventional issuers with smaller and more problematic loans in terms of probability of default, servicing cost and overall profitability. The bank/jumbo market, on the other hand, will grow as the now “private” GSEs compete with large banks and IMBs for bigger loans.
Just before the turkey went into the oven last week, Jonathan Miller of Miller Samuel penned a provocative note in his must-read blog (“Fannie And Freddie’s Regulator Loves Moral Hazard Like I Love Cranberry Sauce”). He writes:
“It is clear from the chart that mortgage volume collapsed during the GFC but enjoyed a smaller spike during the pandemic. Note the spike in the conforming loan limit since the pandemic of 2020 – the spread widens substantially – but the gap has been widening for decades. The concept of lower loan limits, when prices fall, has never been entered into FHFA’s calculation. Certain markets a designated as high-cost, where the conforming loan limit exceeds 115% of the median sales price of the local county, the limit can be set up to 150%.”
Our question, inspired by the work of Laurie Goodman at Urban Institute and Ed Pinto at American Enterprise Institute, is why are we goosing consumer demand for housing in a supply constrained market? More financing means higher prices. But as we discuss below, if the GSEs come out of conservatorship, look for spreads on conventional loans and GSE unsecured exposures to rise ~ 25-50bp. We also expect the market for jumbo and private bank loans to grow at the expense of volumes for the GSEs.
Five years after the release of Fannie Mae and Freddie Mac, the big banks, Ginnie Mae, the GSEs and private label loans could each have roughly a quarter of total mortgage market. Remember, JPM and other banks will pay up for larger, higher quality loans and servicing, and leave the smaller, less profitable loans for the IMBs and bond investors. Upon release, large banks and IMBs will have a significant operating efficiency advantage over the private GSEs.
Last week at the IMN MSR event, we asked whether truly private GSEs will be tempted or even compelled to retain the mortgage servicing rights from conventional loans. The GSEs do not currently retain the MSR at the point of purchase of the loan in the primary market and allow the sellers to retain and finance the servicing asset.
Given that the conforming limit for high-priced markets has just been raised another 5% for 2025 to $1.2 million, that servicing strip from larger, high quality conventional loans looks mighty tasty. The MBA says it costs $176 per year to service a performing conventional loan vs $1,800 a year for a delinquent loan. That 25bp conventional servicing strip on an average $350,000 loan is worth $875 a year. The 25bp servicing strip on a $3.5 million condo loan is worth $8,750 per year, but the cost of servicing is the same.
Bank owned mortgages are larger than average and have much lower delinquency rates. Now you know why large banks want nothing to do with smaller, lower-FICO loans and avoid government-insured loans entirely. You also now understand why JPM CEO Jamie Dimon is the biggest mortgage servicer and jumbo MBS issuer in the US. JPM cares only about bigger jumbo and conventional loans.
If private GSEs must compete with JPM, which is rated “AA” at the bank, then why do the GSEs let Jamie Dimon have the conventional MSR strip for nothing? As we discuss below, we suspect that as part of release, Fannie Mae and Freddie Mac will exit providing insurance for conventional MBS. Yet the GSEs may need to retain the full MSR when they purchase loans, and also exert control over the related escrow balances.
Rodney5
1 hour ago
FFFacts. Mr. Calabria was obviously more than qualified to the appointment of FHFA Director. The man is highly intelligent no question about it. He knew the illegal commitment fee attached to the SPS violated Federal Statue, he wrote about that to. His authority as Director was given to him by Congress not the Treasury Secretary. The man caved in setting the capital requirements as bank like standards and attached a dollar-for-dollar liquidation preference on all retained earnings: by design to keep the companies in conservatorship.
This reminds me of the governor Pilate when he saw that he could prevail nothing, he took water, and washed his hands before the multitude, saying, I am innocent of this just person. His conscience was eating him up.
FFFacts said, Quote: “He may have helped write the statue but obviously the court ruled against him and his interpretation. Also, he was prevented because doj took the lead in the cases.”
Not may have helped, He did help write HERA, he said it.
No, the court did not rule against him. THE PLAINTIFFS BROUGHT THE WRONG LAWSUIT. BARRED FROM JUDICIAL REVIEW The Plaintiffs never mentioned Federal Statutes.
“We hold that the stockholders’ statutory claims are barred by the Recovery Act’s strict limitation on judicial review. See 12 U.S.C. § 4617(f).”
The FHFA Director doesn’t need the Treasury approval to pay down the Senior Preferred Stock the Director has the authority from Congress written in HERA:
HOUSING AND ECONOMIC RECOVERY ACT OF 2008
RESTRICTION ON CAPITAL DISTRIBUTIONS.— page 2731
‘‘(1) IN GENERAL.—A regulated entity shall make no capital distribution if, after making the distribution, the regulated entity would be undercapitalized. The exception.
Quote: “Page 2732
EXCEPTION.—Notwithstanding paragraph (1), the Director may permit a regulated entity, to the extent appropriate or applicable, to repurchase, redeem, retire, or otherwise acquire shares or ownership interests if the repurchase, redemption, retirement, or other acquisition— ‘‘(A) is made in connection with the issuance of additional shares or obligations of the regulated entity in at least an equivalent amount; and ‘‘(B) will reduce the financial obligations of the regulated entity or otherwise improve the financial condition of the entity.’’.
NOTE: REPURCHASE, REDEEM, RETIRE...
WILL REDUCE THE FINANCIAL OBLIGATIONS OF THE REGULATED ENTITY.
navycmdr
1 hour ago
$Jim $Cramer $Thinks $These 13 $Stocks $Will $Benefit $From the $New $Administration
https://www.insidermonkey.com/blog/jim-cramer-thinks-these-13-stocks-will-benefit-from-the-new-administration-1400401/
Published on November 30, 2024 at 7:19 pm by Syeda Seirut Javed in Hedge Funds, News
Our Methodology
For this article, we compiled a list of 13 stocks that were discussed by Jim Cramer during a recent episode of Mad Money on November 25. We listed the stocks in ascending order of their hedge fund sentiment as of the third quarter, which was taken from Insider Monkey’s database of 900 hedge funds.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
13. Federal National Mortgage Association (OTCQB:FNMA)
Number of Hedge Fund Holders: N/A
Cramer noted that the rallying of Federal National Mortgage Association (OTCQB:FNMA) stock in November was understandable as the election turned out in Trump’s favor.
“What else? Oh, here’s a tough one. Fannie Mae and Freddie Mac, two government-sponsored enterprises that prop up the mortgage market, have seen their stocks more than double on hopes that Trump will recapitalize and release these companies. I don’t know if you remember them from the Great Recession. Oh boy, they were front and center. I don’t wanna get too deep in the weeds on this tonight because it’s a complicated situation, but in general, it makes sense for Fannie and Freddie to rally on this Republican sweep.”
Federal National Mortgage Association (OTCQB:FNMA), commonly known as Fannie Mae, provides mortgage financing solutions in the United States, including the securitization and purchase of various types of residential and multifamily mortgage loans, as well as credit enhancement for bonds and investments in housing projects. It reported a strong performance in the third quarter, achieving $4.0 billion in net income.
This marked the company’s twenty-seventh consecutive quarter of positive results, reflecting consistent operational success. Its net worth grew to $90.5 billion, a notable increase. Since the beginning of the year, the company has reduced its minimum regulatory capital shortfall by $17 billion, further strengthening its financial position.
Despite the ongoing challenges in housing affordability, the Federal National Mortgage Association (OTCQB:FNMA) continued to provide vital liquidity to the housing market. In the third quarter, the company facilitated $106 billion in liquidity, helping 383,000 households with purchasing, refinancing, or renting homes.
12. Federal Home Loan Mortgage Corporation (OTCQB:FMCC)
Number of Hedge Fund Holders: N/A
At the time of writing on November 28, Federal Home Loan Mortgage Corporation (OTCQB:FMCC) stock was up 156.56%. Here’s what Mad Money’s host had to say:
“What else? Oh, here’s a tough one. Fannie Mae and Freddie Mac, two government-sponsored enterprises that prop up the mortgage market, have seen their stocks more than double on hopes that Trump will recapitalize and release these companies. I don’t know if you remember them from the Great Recession. Oh boy, they were front and center. I don’t wanna get too deep in the weeds on this tonight because it’s a complicated situation, but in general, it makes sense for Fannie and Freddie to rally on this Republican sweep.”
Federal Home Loan Mortgage Corporation (OTCQB:FMCC) operates in the U.S. secondary mortgage market, purchasing, securitizing, and guaranteeing both single-family and multifamily loans, while managing associated credit, market risk, and investments. For the third quarter, the company reported net income of $3.1 billion, reflecting a $0.4 billion increase year-over-year.
This growth was mainly attributed to a decrease in non-interest expenses, as the prior year’s figures included a one-time $0.3 billion additional expense accrual. Net revenues also saw a 3% increase from the previous year, totaling $5.8 billion, largely driven by higher net interest income.
As reported by the Wall Street Journal in September, allies of Republican candidate Donald Trump, along with bankers, have been considering plans to end government control over Federal Home Loan Mortgage Corporation (OTCQB:FMCC) and Fannie Mae.
Among the proposed paths for privatization is a strategy to bypass congressional approval and instead work through the Federal Housing Finance Agency (FHFA), which oversees both entities, as well as the U.S. Treasury Department. This follows previous, unsuccessful attempts to free the mortgage giants from government control, including those made during the Trump administration.
navycmdr
2 hours ago
$Trump $May $Renew a $Housing $Fight that could rattle mortgage rates
By Samantha Delouya, CNN - Mon December 2, 2024
https://www.cnn.com/2024/12/02/economy/fannie-mae-freddie-mac-mortgage-rates-housing/index.html
During his second term, President-elect Donald Trump is widely expected to privatize Fannie Mae and Freddie Mac,
the mortgage giants that guarantee 70% of America’s mortgages.
Comments ...
“My Administration would have sold the government’s common stock in these companies at a huge profit and
fully privatized the companies,” Trump wrote in a 2021 letter after he left office to Republican Sen. Rand Paul.
“My Administration was denied the time it needed to fix this problem.”
Some of Trump’s supporters, including Bill Ackman, the billionaire hedge fund manager at Pershing Square
Holdings, are invested in the two companies and stand to potentially make millions of dollars if they
are spun off.
“The U.S. Presidential election in November 2024 may present the opportunity for a change in the status
quo,” Pershing Square’s 2023 annual investor letter said. “The Trump administration had begun the process
of releasing Fannie and Freddie from conservatorship, a process which would likely be completed in a
future Trump administration.”
But the way the Trump administration may usher in a new era of housing market finance, whether it be
privatizing Fannie and Freddie with the promise of government backing or a separate plan entirely, will
make all the difference.
“It’s going to be the big challenge walking this fine line because it’s been more than 15 years of this
conservatorship,” Tozer said.
During his second term, President-elect Donald Trump is widely expected to privatize Fannie Mae and Freddie Mac,
the mortgage giants that guarantee 70% of America’s mortgages.
Amid a housing market marked by stubbornly high mortgage rates, a long-standing supply shortage and soaring
home prices, some economists warn that privatizing these two mortgage behemoths, worth a combined $146 Billion
as of the third quarter of this year, would be overly complicated and could make it more expensive for many
Americans to borrow money to purchase a home.
Trump’s first administration tried — and failed — to wrest Fannie and Freddie from the government conservatorship
that’s been in place since the 2008 financial crisis. The government’s stake in the two mortgage giants could be
valued at billions of dollars, meaning a spinoff would potentially net a big payday for the government and private
investors in the two companies, said Ted Tozer, who led Ginnie Mae, a separate government-sponsored mortgage
company, during the Obama administration.
“Bringing them back to private companies isn’t outlandish,” Tozer said. “The question is, is it worth the
pain of the transition?”
In a 2016 paper, Mark Zandi, chief economist at Moody’s Analytics, estimated that full privatization of Fannie and
Freddie would cost the typical American taking out a new mortgage $1,200 annually. Taking into account home
prices and interest rates in 2024, that added cost today would be between $1,800 and $2,800 per year for a
typical mortgage holder, Zandi told CNN after updating his original paper’s calculations. Zandi said the added
cost would be even greater for Americans with lower incomes or credit scores.
The risk is that privatization efforts could spook investors without assurances that the government would bail
out Fannie and Freddie in a crisis like in 2008. Investors who buy up the loans would likely demand higher
rates for lower-income borrowers to compensate.
“If you’re a lower-quality borrower, you’re more risky and therefore will be charged more,” Zandi said.
“Today, you don’t have to pay that because you’re backstopped by the government.”
Karoline Leavitt, a spokesperson for the Trump-Vance transition, said, “No policy should be deemed official
unless it comes directly from President Trump,” in response to questions about a potential Trump administration
plan to privatize Fannie and Freddie and its possible effect on mortgage rates.
Many Americans already have whiplash after recent swings in mortgage rates: After the average 30-year fixed
mortgage rate peaked at nearly 8% last fall, rates fell steadily ahead of the Federal Reserve’s first interest rate
cut in September. That trend has since reversed, and mortgage rates have climbed back up to nearly 7% as
investors bet that the Fed will cut rates fewer times than initially expected due to recent strong economic data.
Last week, Trump doubled down on his promise of massive tariff hikes on goods from Mexico, Canada and China
starting the first day of his administration. Most mainstream economists believe those tariffs will stoke inflation,
meaning that borrowing rates will likely stay higher for even longer.
Potential complications
Fannie and Freddie don’t directly issue mortgages to borrowers. Their aim is to buy mortgages from lenders
and repackage them for investors. This helps enable a reliable flow of money to mortgage lenders, allowing
them to offer more affordable rates to would-be homebuyers.
During the housing meltdown of 2008, the two companies were brought under government control in an effort
to stabilize the housing market. Ever since, they have been overseen by the Federal Housing Finance Agency.
The two companies’ ability to effectively operate has propped up the 30-year fixed mortgage, the most popular
home loan type due to its relatively lower monthly payments that stay the same over a 30-year period. Without
the government backing of Fannie and Freddie, bond traders might deem their mortgage-backed securities
riskier investments.
“As a politician, the last thing you’d want to do is cause problems when the problems don’t exist,” Tozer said.
“To have a hiccup occur and all of a sudden credit becomes more costly or people can’t get a mortgage at a
reasonable rate, I don’t think any politician wants to face those unintended consequences.”
“The law says they are eventually to be privatized,” she said. “But the stakes are very, very high as to how
this is carried out.”
If the government were to charge a fee to Fannie and Freddie for the guarantee of a bailout in another crisis,
some of the mortgage market swings from going private could be mitigated, Wachter said.
“I do believe they can be privatized with a government commitment fee,” she said. An additional fee could
be passed to the consumer, raising the cost of mortgages, though that depends on how the privatization
is carried out, Wachter said.
Some analysts advocate for full privatization, meaning the government would not provide assurances to
backstop the two mortgage companies. Norbert Michel, a director at the libertarian think tank the CATO
Institute, has argued such government backing stifles competition.
“In a private market, as opposed to a government-controlled market, you’re going to have more widespread
opportunities for everybody, whether it’s businesses coming in or people on the consumer side — and that’s
what you want,” he said.
Hopes of Fannie and Freddie privatization
Fannie Mae’s and Freddie Mac’s stocks both surged after Trump’s electoral victory, indicating that investors
believe Trump will renew his efforts to privatize the companies.
View Comments
“My Administration would have sold the government’s common stock in these companies at a huge profit and
fully privatized the companies,” Trump wrote in a 2021 letter after he left office to Republican Sen. Rand Paul.
“My Administration was denied the time it needed to fix this problem.”
Some of Trump’s supporters, including Bill Ackman, the billionaire hedge fund manager at Pershing Square
Holdings, are invested in the two companies and stand to potentially make millions of dollars if they
are spun off.
“The U.S. Presidential election in November 2024 may present the opportunity for a change in the status
quo,” Pershing Square’s 2023 annual investor letter said. “The Trump administration had begun the process
of releasing Fannie and Freddie from conservatorship, a process which would likely be completed in a
future Trump administration.”
But the way the Trump administration may usher in a new era of housing market finance, whether it be
privatizing Fannie and Freddie with the promise of government backing or a separate plan entirely, will
make all the difference.
“It’s going to be the big challenge walking this fine line because it’s been more than 15 years of this
conservatorship,” Tozer said.
Rodney5
12 hours ago
70,000 foreclosure’s vast majority were delinquent before pandemic. Fannie and Freddie had minimal losses.
Pandemic Mortgage Forbearance Design: A Practitioner’s Perspective
By Mark A. Calabria
Highlights
“ Requiring borrowers to pay back any forbearance”
“ While politicians might prefer giveaways to all, we did not have that option (not that we would have pursued it if we had).”
“ Fannie and Freddie are private companies, even if chartered by Congress and in conservatorship. Appropriately, there was no broader public expectation that private companies should voluntarily suffer losses or give away their products for free because of COVID. Fannie and Freddie operated under the same set of rules.”
“ For policymakers, the solution to this problem is to provide borrowers with loan forbearance, not forgiveness. Forbearance gives borrowers a “time-out” on their monthly payment, allowing them to add missed payments back into their loan balance so the money will eventually be repaid.”
The FHFA Plan
“ When Congress later codified our plan into statute as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the maximum assistance period was fixed at 12 months.”
“ Whether it would have been better to just forgive rent and mortgage payments was a question far outside our scope at the FHFA. Most importantly, we did not have the legal authority to do so. It would have to be the decision of Congress, not us.”
“ FHFA’s first responsibility was to oversee the safety and soundness of Fannie, Freddie, and the Federal Home Loan Banks. Forcing any of the entities into massive losses would have been the exact opposite of our legal responsibilities.”
“ Fannie and Freddie borrowers had significant equity in their homes. Less than 1 percent of Fannie and Freddie forbearance borrowers had loan-to-value ratios over 97 percent. The typical mortgage holders in forbearance had 20 to 30 percent equity in their homes. That is, they had the ability to pay back any paused mortgage payments.”
“ Results / Ultimately, about 8 million borrowers—roughly 1 in 10 homeowners—entered mortgage forbearance during COVID. By 2022, over 90 percent of them would exit forbearance, getting back on their feet, at least in relation to their mortgage.”
“ Still, more than two years later, just under half a million borrowers who entered COVID forbearance remain behind on their mortgages. Over 70,000 of those have entered foreclosure. It should be noted that the vast majority of those were delinquent before the pandemic, but others have been unable to recover lost jobs or income.”
Link: https://www.cato.org/regulation/spring-2023/pandemic-mortgage-forbearance-design-practitioners-perspective
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