by Calculated Risk on 9/07/2008 11:08:00 AM

From Treasury: Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Conservatorship

Preferred Stock Purchase Agreements

Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth.
...
With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
emphasis added

Important for some FDIC insured institutions:

[C]onservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

Secured Lending Facility.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Treasury to buy GSE MBS

Treasury is initiating a temporary program to purchase GSE MBS.

Fact Sheets from Treasury:

FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: FHFA Conservatorship
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility

by Calculated Risk on 9/07/2008 10:38:00 AM

From WSJ: Treasury to Outline Fan-Fred Plan

U.S. Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart are expected to release details of the planned conservatorship of Fannie Mae and Freddie Mac at an 11 a.m. press conference in downtown Washington.

by Calculated Risk on 9/06/2008 06:35:00 PM

First, several people sent me this article from the NY Times. I'm skeptical of the accusation of accounting issues causing the deal to be rushed. Notice the phrase "not necessarily in violation of accounting rules" - I doubt Freddie violated any accounting rules this time:

From the NY Times: Loan Giant Overstated the Size of Its Capital Base (hat tip Sam & Devang)

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.
...
The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies’s capital resources and financial stability.

And another update from the WSJ: Treasury to Outline Fan-Fred Plan

The U.S. Treasury is expected to announce early Sunday afternoon details of a plan under which regulators will effectively take temporary control over government-sponsored mortgage investors Fannie Mae and Freddie Mac.

The Treasury won't necessarily make a large injection of capital immediately into the ailing companies ...

Dividends on the companies' preferred stock are likely to be suspended, people familiar with the plan say, and those on common shares to be eliminated. Any injection of capital by the Treasury would likely greatly reduce or wipe out the value of common shares currently outstanding.

by Calculated Risk on 9/06/2008 03:01:00 PM

From the WSJ: Frank Confirms Treasury Intervention To Shore Up Fannie Mae, Freddie Mac

Rep. Barney Frank (D., Mass.) [chairman of the House Financial Services Committee] said in a statement Saturday that Mr. Paulson "intends to use the powers that Congress provided it" in a law passed in July to keep Fannie Mae and Freddie Mac stable and functioning. But Mr. Frank said he didn't "know the details of the proposed interventions,"

With all this publicity, the plan will have to be announced Sunday.

by Calculated Risk on 9/06/2008 09:08:00 AM

More details will leak out today, but the plan will probably be announced Sunday afternoon a few hours before the Asian markets open. (like with Bear Stearns). I wonder if the Fed will make some sort of announcement too ...

Stories (some contradictory on the Preferred shares):

Bloomberg: Paulson Plans to Bring Fannie, Freddie Under Government Control

WSJ: U.S. Near Deal on Fannie, Freddie

WaPo: U.S. Nears Rescue Plan For Fannie And Freddie

NY Times: U.S. Rescue Seen at Hand for 2 Mortgage Giants

LA Times: Fannie, Freddie takeover possible

by Calculated Risk on 9/05/2008 09:20:00 PM

Update2: WaPo says preferred protected: Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say

Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. The value of the company's common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government.

That makes more sense than the NY Times article.

Update: Here is the NY Times story: U.S. Plans Takeover of Fannie and Freddie

Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage-finance giants, that the government is preparing a plan to seize the two companies and place them in a conservatorship ...

Under a conservatorship, most if not all of the remaining value of the common and preferred shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers.

A little thread music:



The WSJ has update their story: U.S. Near Deal on Fannie, Freddie

The Treasury Department is putting the finishing touches to a plan designed to shore up Fannie Mae and Freddie Mac ... a move that would essentially result in a government takeover of the mortgage giants.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency ...

It is also expected to involve the government injecting capital into Fannie and Freddie. ... Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually.

This weekend will be interesting.

by Calculated Risk on 9/05/2008 04:55:00 PM

From the WSJ: Treasury Is Close to Finalizing Plan to Backstop Fannie, Freddie

Precise details of Treasury's plan couldn't be learned. The plan is expected to involve a creative use of Treasury's new authority to make a capital injection into the beleaguered giants.
...
An announcement could come as early as this weekend.

Another Sunday announcement (like for Bear Stearns)?

by Calculated Risk on 8/28/2008 07:40:00 PM

From the Financial Times: Bank of China flees Fannie-Freddie

Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June.

The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities.

This selling is probably why the spread between Fannie and Freddie debt yields and Treasury debt is so high. From the WSJ last week: Deflating Mortgage Rates

The differences, or spreads, between Fannie's and Freddie's debt yields and Treasury yields have widened considerably since the start of the housing crisis because of jitters about the highly leveraged companies' stability. Last September, Fannie issued three-year debt at 0.55% over Treasury yields. Last week, it paid 1.23% over Treasury yields.

So there was probably more foreign selling in July and August.

by Calculated Risk on 8/23/2008 10:13:00 AM

A quote from Bloomberg: Freddie, Fannie Failure Could Be World `Catastrophe,' Yu Says

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' [Yu Yongding, a former adviser to China's central bank] said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.'

And from the WaPo: Treasury's Vigil On Fannie, Freddie

A top concern of Treasury Secretary Henry M. Paulson Jr. as he ponders whether to pull the trigger on a rescue plan for mortgage financiers Fannie Mae and Freddie Mac is the fate of its "preferred" shareholders, which include regional and community banks across the nation and central banks around the world, according to private analysts who closely follow the department.
...
Treasury officials are worried that a sell-off of these [preferred] shares poses serious risks to the broader financial system, the analysts said.

And from the NY Times: Uncertainty Over Fannie and Freddie

“We’re in a Catch 22,” said an executive with one of the mortgage firms who was not authorized to speak to the media. “As long as there is uncertainty over Treasury’s plan, we can’t raise money, and as long as we can’t raise money, there’s going to be more and more speculation about Treasury’s plan.”
...
“You would have to be insane to invest in these companies right now, and we’ve basically told them that,” said an investment professional with one firm that was approached by Freddie Mac, but who is not authorized to speak to the media. “When Treasury comes in, they are guaranteed to get a better deal than us, which would push down the value of our investment. So why would we ever invest before we know what Treasury is going to do?”

It seems like just a matter of when - not if - Paulson's hand will be forced and the Treasury will rescue Fannie and Freddie.

by Calculated Risk on 8/21/2008 09:46:00 AM

"FNM and FRE should just have a new single consolidated ticker: FUBAR"
Reader BR

From the WSJ: Fannie, Freddie Fears Stifle Stocks

Investors are increasingly concerned about the possibility of a federal bailout that could wipe out holders of the companies' common equity. The uncertainty swirling around the government-sponsored enterprises also may complicate the companies' efforts to win new financing to buy mortgages. Freddie and Fannie have been forced to pay higher yields to investors in recent debt offerings.

If Fannie and Freddie stumble, it could further cripple the U.S. housing market, a troubling scenario for banks and brokers already struggling under the weight of soured mortgage investments.

To me, it seems that bond market participants are trying to force Paulson's hand. That is why Freddie and Fannie have had to pay more in recent debt offerings.

My initial reaction to the rescue plan was: "It seems the plan is bad for equity holders, but good for debt holders ... and potentially bad for taxpayers.". That still seems right. I'm not sure what the equity holders expected.

From Bloomberg: Paulson's Fannie-Freddie `Bazooka' Shakes Investors

The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired -- may end up making a bailout more likely, say analysts and investors.
...
``The common shareholders will probably be completely wiped out,'' Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. ``Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.''

by Calculated Risk on 8/20/2008 03:59:00 PM

Fannie and Freddie were the story of the day. Here are the most recent quotes:

FNM 4.47 off 1.54 (25.62%)

FRE 3.23 off 0.94 (22.54%)

From Bloomberg: Fannie, Freddie Slump on Concern Bailout Is Likely

Fannie Mae and Freddie Mac tumbled in New York trading to the lowest levels since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders.
...
Freddie paid its highest yields over U.S. Treasuries on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.

Fannie and Freddie have $223 billion of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion ...

It seems like market participants are trying to force Paulson's hand.

by Calculated Risk on 8/10/2008 04:10:00 PM

Paulson interview starts at about 1 min 30 secs and runs to about 28 minutes. Brokaw ask him what happened to "containment" and about President Bush's comment about Wall Street getting drunk.

by Calculated Risk on 8/08/2008 03:01:00 PM

From Bloomberg: Fannie Mae Unsecured Second Loans Often Don't Fix Delinquencies

Fannie Mae's initial attempts to restore delinquent homeowners to on-time payments with unsecured second loans failed 41 percent of the time.

The company purchased 17,901, or $121 million, of ``HomeSaver Advance'' loans through June 30 after it started five months ago to offer the debt to cover borrowers' missed payments ... Of the loans made through May 30, only 59 percent resulted in the associated mortgages being current on June 30 ...

by Calculated Risk on 8/08/2008 11:04:00 AM

Opening comments from the conference call (hat tip Brian):

“You will recall, by way of background, that even though our second quarter books closed on June 30, subsequent events factor in, and in fact, heavily weight our outlook and our expectations going forward. And those events in July loom significantly in that calculus. That week of July 7 was one of the worst Fannie Mae has experienced in the debt and equity markets. The Treasury-fed backstop plan that was announced on July 13 calmed the market somewhat, and the passage of the Housing bill on the 26th of July added more certainty. But on the downside, July was a tough month for our credit performance. We experienced higher defaults and higher loan loss severities in the markets that were experiencing the steepest home price declines. And that gave us higher charge-offs than we had experienced in any month in the second quarter, and higher than we had expected. We also saw a higher proportion of foreclosures coming from states and products with higher loan balances, which increases the absolute dollar losses. In terms of severity, the loss that we experienced when a loan defaults also increased from 19 basis points in the first quarter to 23 basis points in the second quarter. And that rose again in July to 27 basis points. We are now seeing average initial charge off severities of 40% for loans in California. Home prices have cratered in certain markets since the peak -- Cape Coral, Florida, down 50%; Las Vegas, down 35%; northern Virginia, down 30%; and in California, Modesto, and Stockton, down 50%; Riverside, down 40%. The list goes on. Alt-A foreclosures have doubled in southern California. Our average serious delinquency rate in Florida increased in June to over 3% -- four times the average on our total book of business last year. Almost 2% of the loans in our Florida book are now referred to foreclosure. So, the housing market has returned to earth fast and hard. Some signs do offer rays of positive light. Foreclosures actually fell in Michigan . Same-period home sales were up in California . And as the GSEs provide most of the liquidity to the primary market, that market is functioning, and a safe center of credit risk pricing and product is being restored. All told however, that story all put together led us to again revise our credit loss estimate upward from the year, from 13 to 17 basis points to 23 to 26 basis points. And that, as you will note, commensurately drives our addition to loss reserves of almost $4 billion."
emphasis added

See the previous post from Tanta on Fannie Mae Push Backs. Alt-A lenders are probably pretty nervous.

by Tanta on 8/08/2008 10:49:00 AM

Aside from the announcement today that Fannie Mae will end Alt-A lending by the end of the year, there was this little nugget in the press release:

[Fannie will be] ramping up defaulted loan reviews to pursue recoveries from lenders, focusing especially on our Alt-A book. The objective is to expand loan reviews where the company incurred a loss or could incur a loss due to fraud or improper lending practices. To achieve this, we are increasing post-foreclosure loan reviews from 900 a month in January to 4,000 a month by the end of the year, expanding our quality-control reviews for targeted products and practices, and are on track to double our anti-fraud investigations this year. We expect this effort to increase our credit loss recoveries in 2008 and 2009.

More great news for BOA.

by Calculated Risk on 8/08/2008 09:42:00 AM

From the WSJ: Fannie Posts Deep Loss, Slashes Dividend Payment

Fannie Mae swung to a second-quarter loss as the largest buyer of home loans booked $5.35 billion in credit-costs from boosting loss provisions and charge-offs. ... eliminating higher-risk loans -- namely newly originated Alt-A acquisitions ... As of June 30, Alt-A mortgage loans represented 11% of Fannie's total mortgage book of business and 50% of its second-quarter credit losses.

And from Bloomberg: Fannie Mae, Battling Losses, to Stop Accepting Alt-A Mortgages

Fannie Mae, the largest U.S. mortgage- finance company, will stop buying or guaranteeing Alt-A home loans, such as those that require little or no documentation of borrower incomes or assets, by yearend.
...
``Over 60 percent of our losses have come from a small number of products, but especially Alt-A loans,'' ... the Washington-based company said in a statement.