by Calculated Risk on 10/26/2009 03:30:00 PM

From San Francisco Fed Senior Economist John Krainer: Recent Developments in Mortgage Finance

As the U.S. housing market has moved from boom in the middle of the decade to bust over the past two years, the sources of mortgage funding have changed dramatically. The government-sponsored enterprises—Fannie Mae, Freddie Mac, and Ginnie Mae—now own or guarantee an overwhelming share of originations. At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.

Click on graph for slightly larger in new window.

This is figure 3 from the Economic Letter. This shows the surge in non-agency securitized loans, and loans held in bank portfolios, in 2004 through 2006 (the worst loans).

[T]he sources of mortgage finance have shifted as the housing market has gone from boom to bust. Figure 3 plots the evolution of these funding sources over the past decade. Fannie Mae and Freddie Mac combined have consistently been the largest players in the market, owning or guaranteeing about half or more of the mortgages in the sample at any given time. Non-agency securitization peaked in the first quarter of 2006, when it accounted for nearly 40% of new originations. Finally, the share of mortgages retained in the originating institution's portfolio averaged about 15% throughout the boom, but has fallen considerably since.
...
In the present day, when Ginnie Mae's activities are included, the three GSEs are providing unprecedented support to the housing market—owning or guaranteeing almost 95% of the new residential mortgage lending.

Although Krainer doesn't mention it, notice the increase in bank portfolio loans in early 2007 - that was probably because the banks were stuck with loans when the securitization market seized up.

Krainer concludes:

With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal.

Note: Tanta wrote this last year on the naming of the GSEs: On Maes and Macs. An excerpt:

Trivia buffs will know that once upon a time there were three "agencies": the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. It didn't take all that long for market participants to start coming up with pronunciations for the abbreviations GNMA (Ginnie Mae), FNMA (Fannie Mae), and FHLMC (Freddie Mac, which makes no sense whatsoever except that nobody liked "Filly Mac." ... Old farts whose favorite childhood treat was a box of Pixies will remember the old-time candy company Fannie May, whose name is said to have inspired the whole thing, probably in the throes of a major sugar rush.

by Calculated Risk on 8/06/2009 06:03:00 PM

Fannie Mae Press Release: Loss of $14.8 Billion Driven by Credit-Related Expenses

Fannie Mae (FNM/NYSE) reported a loss of $14.8 billion, ... in the second quarter of 2009, compared with a loss of $23.2 billion, ... in the first quarter of 2009. Second-quarter results were driven primarily by $18.8 billion of credit-related expenses, reflecting the ongoing impact of adverse conditions in the housing market, as well as the economic recession and rising unemployment. Credit-related expenses were partially offset by fair value gains. The company also reported a substantial decrease in impairment losses on investment securities, which was due in part to the adoption of new accounting guidance.

Taking into account unrealized gains on available-for-sale securities during the second quarter and an adjustment to our deferred tax assets due to the new accounting guidance, the loss resulted in a net worth deficit of $10.6 billion as of June 30, 2009. As a result, on August 6, 2009, the Director of the Federal Housing Finance Agency (FHFA), which has been acting as our conservator since September 6, 2008, submitted a request for $10.7 billion from the U.S. Department of the Treasury on our behalf under the terms of the senior preferred stock purchase agreement between Fannie Mae and the Treasury in order to eliminate our net worth deficit. FHFA has requested that Treasury provide the funds on or prior to September 30, 2009.
...
Credit-related expenses, which are the total provision for credit losses plus foreclosed property expense, were $18.8 billion, compared with $20.9 billion in the first quarter of 2009. Our provision for credit losses was $18.2 billion, compared with $20.3 billion in the first quarter of 2009. The reduction in the provision for credit losses in the second quarter was attributable to a slower rate of increase in both our estimated default rate and average loss severity, or average initial charge-off per default, as compared with the first quarter. Our provision exceeded net charge-offs of $4.8 billion by $13.4 billion, as we continued to build our combined loss reserves, which represent our current estimate of probable losses inherent in our guaranty book of business as of June 30, 2009.

Combined loss reserves were $55.1 billion on June 30, 2009, up from $41.7 billion on March 31, 2009, and $24.8 billion on December 31, 2008. ...

We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers. Risk layering is the combination of risk characteristics that could increase the likelihood of default, such as higher loan-to-value ratios, lower FICO credit scores, higher debt-to-income ratios and adjustable-rate mortgages. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices. Certain states, higher risk loan categories and our 2006 and 2007 loan vintages continue to account for a disproportionate share of our foreclosures and chargeoffs.

Total nonperforming loans in our guaranty book of business were $171.0 billion on June 30, 2009, compared with $144.9 billion on March 31, 2009, and $119.2 billion on December 31, 2008. The carrying value of our foreclosed properties was $6.2 billion, compared with $6.4 billion on March 31, 2009, and $6.6 billion on December 31, 2008.
emphasis added

Fannie Mae has reserved seating at the confessional. NPLs of $171.0 billion. Wow.

by Calculated Risk on 8/05/2009 08:09:00 PM

From Zachary A. Goldfarb and David Cho at the WaPo: Administration Considers Splitting Fannie Mae, Freddie Mac

The Obama administration launched a broad government effort this week to overhaul mortgage giants Fannie Mae and Freddie Mac and is considering splitting the companies and putting their troubled assets in a new federally backed corporation, administration officials said.
...
The companies' regulator ... confirmed that the administration is discussing the "good bank bad bank" model.

There are no details on a proposed structure.

by Calculated Risk on 7/30/2009 01:51:00 PM

From the WSJ: GSEs Unlikely to Repay U.S. in Full

... "My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship," Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. "That will mean that some of the losses will never be repaid."

The Treasury has agreed to pump $200 billion into each company in order to keep them solvent. In exchange, the government receives senior preferred stock that pays a 10% dividend. So far, it has injected $85 billion in total into the companies, but Lockhart said that figure was likely to rise in the coming months.

Fannie and Freddie together own or guarantee $5.4 trillion in mortgages. ...

Mr. Lockhart said Fannie and Freddie would likely see their reserves continue to decline next year, but could return to strong profits in two to three years.

I'm shocked!

by Calculated Risk on 5/08/2009 01:03:00 PM

From Bloomberg: Fannie Mae to Tap $19 Billion in Treasury Capital

Fannie Mae ... asked the U.S. Treasury for a $19 billion capital investment and raised the possibility that its long-term survival may be dependent on continued government funding.

Fannie Mae, which took $15.2 billion in aid on March 31, cited the “unprecedented” housing market slump and government- mandated programs that are creating “conflicts in strategic and day-to-day decision making,” according to company filings today with the Securities and Exchange Commission.

Here is the section from the SEC 10-Q filing:

We face a variety of different, and potentially conflicting, objectives, including:

providing liquidity, stability and affordability in the mortgage market;

immediately providing additional assistance to the mortgage market and to the struggling housing market;

limiting the amount of the investment Treasury must make under our senior preferred stock purchase agreement with Treasury in order to eliminate a net worth deficit;

returning to long-term profitability; and

protecting the interests of the taxpayers.

These objectives create conflicts in strategic and day-to-day decision-making that could lead to less than optimal outcomes for some or all of these objectives. For example, limiting the amount of funds Treasury must invest in us under the senior preferred stock purchase agreement in order to eliminate a net worth deficit could require us to constrain some of our business activities, including activities targeted at providing liquidity, stability and affordability to the mortgage market. Conversely, to the extent we expand our efforts to assist the mortgage market, our financial results are likely to suffer, at least in the short term, which will increase the amount of funds that Treasury is required to provide to us and further limit our ability to return to long-term profitability. We regularly consult with and receive direction from our conservator on how to balance our objectives.

Accordingly, we currently are primarily focusing on the first two objectives listed above ...

Notice they are concentrating on the first two objectives above, and that does not include "protecting interest of taxpayers", "returning long-term profitability" or "limiting the investment from Treasury".

by Calculated Risk on 2/13/2009 05:18:00 PM

From Freddie Mac: FREDDIE MAC EXTENDS MORATORIUM ON FORECLOSURE SALES

Freddie Mac (NYSE: FRE) today announced it is immediately suspending all foreclosure sales involving occupied single family and 2-4 unit properties with Freddie Mac-owned mortgages through March 6, 2009. The suspension does not apply to vacant properties.

The extension will provide servicers with more time to help troubled borrowers find an alternative to foreclosure.

Freddie Mac gives lenders servicing its mortgages broad authority to provide forbearance to borrowers facing financial difficulties, and permanent rate reductions, mortgage term extensions, forbearance of principal or other modifications to borrowers who are already delinquent.

From Fannie Mae: Fannie Mae Suspends Foreclosure Sales Pending Administration Announcement

Fannie Mae (FNM/NYSE) today announced it is suspending all foreclosure sales and evictions of occupied properties through March 6 in anticipation of the Administration's national foreclosure prevention and loan modification program.

The company had previously put in place a suspension of foreclosure sales through January and had previously suspended all evictions through the end of February. In addition, the company adopted a national Real Estate Owned (REO) Rental Policy that allows renters in Fannie Mae-owned foreclosed properties to remain in their homes or receive transitional financial assistance should they choose to seek new housing.

by Calculated Risk on 1/26/2009 06:31:00 PM

From the Fannie Mae 8-K SEC filing today:

Fannie Mae (formally, the Federal National Mortgage Association) is in the process of preparing its financial statements for the fourth quarter of 2008 and the year ended December 31, 2008. Based on preliminary unaudited information concerning its results for these periods, management currently expects that the Federal Housing Finance Agency, acting in its capacity as conservator of Fannie Mae (the "Conservator"), will submit a request to the U.S. Department of the Treasury ("Treasury") to draw funds on behalf of Fannie Mae under the $100 billion Senior Preferred Stock Purchase Agreement entered into between Treasury and the Conservator, acting on behalf of Fannie Mae, on September 7, 2008, and subsequently amended and restated on September 26, 2008 (the "Purchase Agreement"). Although management currently estimates that the amount of this initial draw will be approximately $11 billion to $16 billion, the actual amount of the draw may differ materially from this estimate because Fannie Mae is still working through the process of preparing and finalizing its financial statements for the fourth quarter of 2008 and the year ended December 31, 2008.

Under the terms of the Purchase Agreement, Treasury committed, upon the request of the Conservator, to provide funds to Fannie Mae after any quarter in which Fannie Mae has a negative net worth (that is, the company’s total liabilities exceed its total assets, as reflected on the company’s balance sheet prepared in accordance with generally accepted accounting principles).
emphasis added

This follows the SEC filing from Freddie Mac outlining the request of up to $35 billion from the Treasury. These are the first requests to use the $200 billion emergency fund set up by Treasury in September.

No word if we all get Free Ice Cream!

by Calculated Risk on 12/03/2008 11:51:00 AM

I've heard from industry insiders (not confirmed) that Fannie Mae is putting a limit on the debt service-to-income (DTI) ratio of borrowers regardless of the Automated Underwriting System (AUS) decisions for loans requiring mortgage insurance (Loan-to-value (LTV) > 80%). This is apparently due to pressure from the mortgage insurers (MIs).

These are essentially caps on DTI. Previously the max was determined by the AUS.

For conforming loans in stable markets (as defined by MIs), the DTI limit is 45% when PMI is required (LTV > 80%). For expanded approval loans in stable markets, the DTI limit is 41%.

In soft markets, the max DTI is 41%. Previously this could be exceeded if approved by DU/LP (Desktop Underwriter Version 7.0® / Loan Prospector® ).

This raises a great point. The MIs were locked out (luckily for them) of many of the worst loans, because Wall Street securitized 2nds instead of using MI. Now that MI is needed again for loans with LTVs greater than 80%, the MIs once again have a say in the underwriting process.

I'm sure Krugman would respond with YHTMAAAIYP.

by Calculated Risk on 11/20/2008 04:43:00 PM

Press Release from Fannie Mae (no link yet): Fannie Mae to Suspend Foreclosures Until January

In order to support the streamlined modification program announced on November 11, 2008, Fannie Mae (NYSE: FNM) today issued a notice to its loan servicing organizations and retained foreclosure attorneys directing them to suspend foreclosure sales on occupied single-family properties as well as the completion of evictions from occupied single-family properties scheduled to occur from November 26, 2008 until January 9, 2009.

The temporary suspension of foreclosures is designed to allow affected borrowers facing foreclosure to retain their homes while Fannie Mae works with mortgage servicers to implement the streamlined modification program scheduled to launch December 15.

Freddie Mac also announced they are suspending foreclosures.

by Calculated Risk on 11/11/2008 12:19:00 PM

From the WSJ: Fannie, Freddie Work on Mass Loan Modification Plan

Fannie Mae, Freddie Mac and U.S. officials are expected to announce plans Tuesday to speed up the modification of hundreds of thousands of loans ... The streamlined effort will target certain loans that are 90 days or more past due ... The program will aim to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal debt ...

The announcement is expected to come at a press conference at 2 p.m. at the Federal Housing Finance Agency ...

by Calculated Risk on 11/10/2008 05:49:00 PM

From Bloomberg: Fannie Says $100 Billion Pledge From Treasury May Not Be Enough

Fannie Mae may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt.

``This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,'' if there are further ``substantial'' losses or if the company is unable to sell unsecured debt, Washington-based Fannie said in a filing today with the U.S. Securities and Exchange Commission.

Here is the Fannie 10-Q filed with the SEC. This statement is under "Risks Relating to Our Business" and is not a prediction from Fannie, just a statement of a possible risk. The huge loss reported today was mostly because of a reduction in deferred tax assets.

Here are a few excerpts from the Fannie section on Housing and Economic Conditions:

Growth in U.S. residential mortgage debt outstanding slowed to an estimated annual rate of 2.0% based on the first six months of 2008, compared with an estimated annual rate of 8.3% based on the first six months of 2007, and is expected to continue to decline to a growth rate of about 0% in 2009.

We continue to expect that home prices will decline 7% to 9% on a national basis in 2008, and that home prices nationally will decline 15% to 19% from their peak in 2006 before they stabilize. Through September 30, 2008, home prices nationally have declined 10% from their peak in 2006. (Our estimates compare to approximately 12% to 16% for 2008, and 27% to 32% peak-to-trough, using the Case-Schiller index.) We currently expect home price declines at the top end of our estimated ranges. We also expect significant regional variation in these national home price decline percentages, with steeper declines in certain areas such as Florida, California, Nevada and Arizona. The deteriorating economic conditions and related government actions that occurred in the third quarter of 2008 have increased the uncertainty of future economic conditions, including home price movements. Therefore, while our peak-to-trough home price forecast is at the top end of the 15% to 19% range, there is increasing uncertainty about the actual amount of decline that will occur.

So Fannie is expecting house price declines of around 32% using the Case-Shiller index.

by Calculated Risk on 11/04/2008 04:46:00 PM

From Bloomberg: Fannie Mortgage-Bond Spreads Fall to Lowest in Almost Two Weeks (no link yet)

Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds tumbled to the lowest in almost two weeks relative to U.S. government notes, potentially lowering home-loan rates.

The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year Treasuries fell about 23 basis points to about 183 basis points ...

A little more progress.

by Calculated Risk on 9/11/2008 03:04:00 PM

From Bloomberg: Senators Ask Fannie, Freddie to Freeze Foreclosures

U.S. Senate Banking Committee members urged Fannie Mae and Freddie Mac, the mortgage lenders placed under federal control this week, to freeze foreclosures on loans in their portfolios for at least 90 days.

I suppose the goal is work out more modifications ... nothing else will change in 90 days.

by Calculated Risk on 9/10/2008 09:12:00 AM

“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed [in 2005].
...
All the handwringing and bedwetting is going on without remembering how the House stepped up on this. What did we get from the White House? We got a one-finger salute.”
former Congressman Mike Oxley (R-Ohio), Sept 9, 2008

From the Financial Times: Oxley hits back at ideologues (hat tip Paul Krugman)

Note: Greenspan was at the Fed. John Snow was the Treasury Secretary.

by Calculated Risk on 9/09/2008 04:50:00 PM

This is an hour show with guests: NY Times Floyd Norris, PIMCO's Mohamed El-Erian, NY Times Gretchen Morgenson and New York University Professor Nouriel Roubini. (hat tip Michael)

by Calculated Risk on 9/09/2008 09:35:00 AM

From CFO.com: Fannie, Freddie Get Tax Pass, Too (hat tip Alain)

Treasury Secretary Henry Paulson ... had the IRS issue Notice 2008-76, which essentially allows the two government-sponsored enterprises to retain all of their [net-operating losses] NOLs, despite a change of control of ownership, tax expert Robert Willens told CFO.com.

Under the tax code — specifically Section 382 — NOLs are severely limited when there is a change of control. The rule is in place to prevent acquiring companies from buying up targets just to gain access to their NOLs. The NOLs for Fannie and Freddie are substantial. Over the last four quarters, Fannie and Freddie recorded about $14 billion in aggregate losses.

In essence, Paulson changed tax law so that the two lenders aren't paying more in taxes to the government as a result of that same government becoming their controlling investor. ...

"I am not saying that the IRS ruling is a good thing, or a bad thing, it is just unusual," asserts Willens. "Then again, this is a very unusual situation."

Not a big deal - but another interesting aspect of the Paulson Plan.

by Calculated Risk on 9/08/2008 04:23:00 PM

by Calculated Risk on 9/08/2008 09:24:00 AM

Floyd Norris wonders in the NY Times which master the new Fannie and Freddie will serve: The Dilemma of Fannie and Freddie

In recent months, Fannie and Freddie raised the fees they charged to purchase or guarantee loans. ... Now the new managers of Fannie and Freddie will have to decide how they want to run enterprises controlled by the government.

Lowering fees and buying large numbers of mortgages would serve as an economic stimulus, but could increase the ultimate cost to the government if the housing market gets worse. Raising fees, and being cautious in lending, could prolong the housing slump. Being generous in restructuring loans could help borrowers, but cost the enterprises money.

Henry M. Paulson Jr. ... tried to assure the public that the enterprises would follow both courses, an indication that the need to serve multiple masters remains. On one side, he promised that “the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.”

On the other side, he said Fannie and Freddie “will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking.”

It may not be easy to take less risk while lending more and charging lower fees.

For a discussion of how GSE MBS works (and g-fees) see Tanta's MBS for UberNerds I: GSE Pass-Throughs

by Calculated Risk on 9/07/2008 10:18:00 PM

In three parts (all about 10 minutes each).

"Our economy and our markets will not recover until the bulk of this housing correction is behind us."
Treasury Secretary Hank Paulson, Sept 7, 2008 (see part 2)

by Calculated Risk on 9/07/2008 06:28:00 PM

When the Paulson Plan was announced in mid-July, my initial reaction was:

It seems the plan is bad for equity holders, but good for debt holders ... and potentially bad for taxpayers ...

Nothing has changed.

Although the common shares will continue to trade, they are further behind with new senior preferred shares being issued to the Treasury. And even if the common is worth something again someday (more than the option value they will trade at soon), the Treasury received warrants that will significantly dilute the common.

Warrants for the purchase of common stock of each GSE representing 79.9% of the common stock of each GSE on a fully-diluted basis at a nominal price

On the other hand, the debt holders should see a rally tomorrow since the Treasury has guaranteed they will provide enough capital such "that each enterprise maintains a positive net worth".

Those are the easy calls.

The bigger questions are (in no particular order): 1) How much does this cost taxpayers (if anything)? 2) What happens to treasuries? 3) What happens to the existing preferred? 4) What happens to FDIC insured banks that hold the existing preferred? 5) What happens to the stock market? 6) What happens to mortgage rates? 7) What happens to the housing market and the economy?

These are some of the questions we will be discussing.

Just like with the common, the existing preferred will continue to trade (although the dividend is eliminated).

"The common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding."

This will have a significant impact on some banks, as the FDIC noted earlier today. Many banks will have to take write-downs (as they mark to market), and some smaller banks will probably fail.

UPDATE: From Fitch: Fitch Affirms Fannie Mae & Freddie Mac's 'AAA' IDR; Lowers Pfd Stock; Sub Debt on Watch Evolving

Fitch has also downgraded FNM and FRE's preferred stock to 'C/RR6' from 'BBB-'. The downgrade of the preferred stock reflects the subordination of the preferred to any Treasury interest and interest payments are unlikely to resume in the foreseeable future. Thus, any recovery is expected to be minimal.
emphasis added

As far as treasuries, I expect a sell-off. This is uncertain, but it would seem investors have a choice between Fannie and Freddie debt and Treasuries (although treasuries are state tax free). The Ten Year closed on Friday with a yield of 3.66%; I expect a sell-off.

I suppose mortgage rates will decline as Fannie and Freddie's borrowing costs decline. Also the Treasury will be buying GSE MBS and that should push down mortgage rates:

Treasury will begin later this month by investing in new GSE MBS, which are credit-guaranteed by the GSEs. Additional purchases will be made as deemed appropriate. Treasury can hold this portfolio of MBS to maturity and, based on mortgage market conditions, Treasury may make adjustments to the portfolio.

I suppose the stock market will rally tomorrow. See Bloomberg Stock Futures. But this is just short term. Longer term, investors will look at the impact of the economic slowdown on earnings - and that picture is still grim.

The cost to taxpayers is also very unclear. It is possible that taxpayers will not be negatively impacted in the long run. This depends heavily on the losses in the retained portfolios of Fannie and Freddie, and the cash flow from the good portion of the portfolio, and also on future defaults and house prices. Even if the Treasury has to purchase $50 billion or $100 billion in senior preferred shares to maintain the positive net worth of Fannie and Freddie, the Treasury will own the first equity in line to be paid off from future profits (assuming future profits). This makes the losses very unclear.

For housing, this doesn't change anything. Housing fundamentals remain the same: excess supply (especially distressed supply), tighter lending standards, and prices are still too high compared to incomes and rents. The possible slightly lower mortgage rates are almost inconsequential compared to supply and price issues.

And the economy is still in recession that will linger for some time.

And finally how, when, and into what do Fannie and Freddie eventually transition? This will be a huge issue for some time.

Just some thoughts ... I'm very open to alternative questions and outcomes.