by Calculated Risk on 7/14/2008 08:48:00 PM

From Deborah Solomon and Sudeep Reddy at the WSJ: Paulson Drove Plan to Shore Up Fannie, Freddie

The WSJ reports that about two weeks ago Paulson ordered his staff to draw up contingency plans in case Freddie or Fannie faltered. When that planning was leaked in a WSJ article last Thursday, equity investors realized that any bailout plan would seriously dilute their holdings, and this led to more selling of Fannie and Freddie. Apparently Paulson believed this selling forced his hand.

There really are no specifics to the plan. The increase in the Fannie and Freddie lines of credit with the Treasury will be "increased to an unspecified level to be determined by the government later".

And any possible equity investment is unclear. The WSJ quotes Brian Bethune, Chief U.S. Financial Economist for research firm Global Insight as saying the equity investment could be as high as $20 billion. That would seriously dilute existing shareholders.

And on the Fed:

Once Treasury made it clear there was a plan, the Fed decided it could offer Fannie Mae and Freddie Mac access to its lending facility, known as the discount window, but purely as a backstop. It was a move that could happen right away without congressional approval.

The Fed views this as a bridge line of credit just until Congress approves the Paulson plan.

It seems the plan is bad for equity holders, but good for debt holders ... and potentially bad for taxpayers (like the Bear Stearns bailout). However Professor Hamilton thinks there will be a limit set on the losses by taxpayers, and the remaining losses will fall on creditors:

... such action by Congress would take the form of a dollar limit-- here's how much we're willing to stake, and no more-- with residual losses presumably laid on the GSE creditors.

Maybe, but I don't see that in the plan.

The WSJ article shows how quickly this rescue plan came together; basically another ad hoc move by the government. Let's hope this plan work out better than the Super SIV / MLEC.

by Tanta on 7/14/2008 09:40:00 AM

Paul Krugman has a new column on Fannie and Freddie which I think is important. I'm going to take issue with a fair amount of it, but not with the basic argument that the uproar over the GSEs is "overblown." That, I think is a point worth making.

************

Krugman starts with a sweeping claim and a mini-history lesson:

Well, I’m going to take a contrarian position: the storm over these particular lenders is overblown. Fannie and Freddie probably will need a government rescue. But since it’s already clear that that rescue will take place, their problems won’t take down the economy.

Furthermore, while Fannie and Freddie are problematic institutions, they aren’t responsible for the mess we’re in.

Here’s the background: Fannie Mae — the Federal National Mortgage Association — was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America.

Because credit risk is now the front and center concern in everyone's minds, here in this bust of the bubble, I think it's very difficult for people to grasp the primary liquidity function of the GSEs. They have always been about recycling lending capital and taking long-term fixed interest rate risk off depository (and eventually non-depository) lenders much more than about merely absorbing credit risk. This goes against the grain of much current media over-simplification of "securitization" of mortgage loans that sees laying off credit risk as the main or even the only point of selling loans. The GSEs do take on the credit guarantee obligation of the securities they issue, but nobody sells loans to the GSEs just to offload credit risk--in fact, more than a few lenders work hard to negotiate contracts with the GSEs that leave quite a substantial part of the credit risk with the original lender: recourse agreements, indemnifications, servicing options that put a lot of the cost of default on the seller/servicer, not the GSE. They have historically done this because the credit risk of GSE-eligible loans has always been modest, but the benefits of getting 30-year fixed interest rate loans off your balance sheet has been substantial.

It's important to remember that, but not to overstate the case, which I think Krugman does:

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

Fannie and Freddie had about as much to with the "explosion of high-risk lending" as they could get away with. We are all fortunate that they couldn't get away with all that much of it. It is a fact that their market share dropped like a brick in the early years of this century, except of course for years like 2003, when fixed rates dropped to cyclical lows, refis boomed, and GSE market share shot up again, only to plummet in the years following during the purchase boom.

But they didn't like losing their market share, and they pushed the envelope on credit quality as far as they could inside the constraints of their charter: they got into "near prime" programs (Fannie's "Expanded Approval," Freddie's "A Minus") that, at the bottom tier, were hard to distinguish from regular old "subprime" except--again--that they were overwhelmingly fixed-rate "non-toxic" loan structures. They got into "documentation relief" in a big way through their automated underwriting systems, offering "low doc" loans that had a few key differences from the really wretched "stated" and "NINA" crap of the last several years, but occasionally the line between the two was rather thin. Again, though, whatever they bought in the low-doc world was overwhelmingly fixed rate (or at least longer-term hybrid amortizing ARMs), lower-LTV, and, of course, back in the day, of "conforming" loan balance, which kept the worst of the outright fraudulent loans out of the pile. Lots of people lied about their income (with or without collusion by their lender) in order to borrow $500,000 to buy an overpriced house in a bubble market. They weren't borrowing $500,000 from the GSEs.

Furthermore, both GSEs were major culprits in the growth of the mega-lenders. Over the years they were struggling so hard to maintain market share, they were allowing themselves to experience huge concentration risks. As they catered more and more to their "major partners"--Countrywide, Wells Fargo, WaMu, the usual suspects--they helped sustain and worsen the "aggregator" model in which smaller lenders sold loans not to the GSEs but to CFC or WFC, who then sold the loans to the GSEs. In large measure this was a function of pricing: the aggregators got the best pricing from the GSEs--the lowest guarantee fees, the best execution options--making it more attractive for a number of reasons for small lenders to sell to the aggregators.

The mentality at the GSEs seemed to many of us to have become too focused on letting these "deep pocket" mega-players continue to push the GSEs toward low doc, "near subprime," interest-only ARMs, low-down loans with iffy subordinate financing, etc. If you were Podunk National, you weren't going to get a master commitment with the GSEs to sell "fast and easy" doc-lite ARMs with a razor-thin guarantee fee. But if you were HSBC, you got that, and so Podunk either lost market share or made those loans and sold them to HSBC, who sold them to the GSEs. From the GSE's side it looked like they had the balance sheet and servicer strength of HSBC--or CFC or WFC or BAC or whoever--on the other side of those loan sales. From Podunk's side it often looked like you could take advantage of the GSEs' power to keep the mortgage market liquid only by consolidating the gargantuan servicing portfolios of the 800 pound gorillas, whose seemingly endless appetite for higher and higher-risk products made it hard for you to compete with conservative vanilla offerings.

I think we can give Fannie and Freddie their due share of responsibility for the mess we're in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren't the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box. But Krugman is right to focus on the fact that it was the regulatory and charter constraints of the GSEs that kept that box closed. In the schizoid reality of the GSEs, when they had their "shareholder-owned private company" hats on they did plenty of envelope-pushing. When they had their "affordable housing" hats on, they rationalized dubious theories of credit quality--like the fervent belief that low or no down payment can be fully offset by a pretty FICO score--to beef up their affordable housing goals, often at the expense not of the poor put-upon "private sector" but of FHA, whose traditional borrower pool they pretty thoroughly cherry-picked. Nonetheless, the immovable objects of the conforming loan limits and the charter limitation of taking only loans with a maximum LTV of 80% unless a well-capitalized mortgage insurer took the first loss position, plus all their other regulatory strictures, managed fairly well against the irresistible force of "innovation." If there has ever been an argument for serious regulation of the mortgage markets, the GSEs are it.

So, as Krugman asks:

In that case, however, how did they end up in trouble?

Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines.

Also, Fannie and Freddie, while tightly regulated in terms of their lending, haven’t been required to put up enough capital — that is, money raised by selling stock rather than borrowing. This means that even a small decline in the value of their assets can leave them underwater, owing more than they own.

Well, that and the fact that the minute it looked like the party was over, Congress and the administration both fell all over themselves to push the GSEs into jumbo markets they had at least managed to stay out of during the worst of the boom, cheerfully lifting their portfolio caps at the same time. How do you go on a stock-selling binge at the same time you have just become the official lender of last resort (along with FHA), handed the mandate to take out all those toxic ARMs with too-large loan balances into "safe" 30-year fixed that the borrowers in question still can't afford? If credit risk wasn't, heretofore, mostly the GSEs' problems, it will be now.

Krugman concludes:

And let’s be clear: Fannie and Freddie can’t be allowed to fail. With the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole.

I actually buy the idea that they can't be allowed to fail. I also agree with Atrios:

Actually, Fannie and Freddie can be allowed to fail. Their shareholders can eat shit, and they can be reconstituted as a wholesale federal entities. There are zero reasons that I can think of that we should have shareholder owned entities which "probably but not necessarily" are going to get a government bailout every time they need it.

Both short and long term we might think that having such creatures exist to be mortgage backstops is a good idea. I probably agree with that. But there is no reason for them to be publicly traded companies.

Fannie Mae didn't start out as a "GSE," it started out as a government agency. It can go back to being a government agency if the government needs to further the economic goals of liquidity in the home mortgage market--and maybe it can go back to doing business with Podunk National, rather than lavishing its capital on mega-lenders who aren't going to be subject to regional liquidity crunches. All this uproar over "nationalizing" the GSEs seems to me the part that is really overblown. If they can't raise enough capital as shareholder-owned entities to prevent the necessity of periodic bailouts, then let's end the experiment with "GSEs" and make them agencies of the government. Any "rescue" that doesn't wipe out the shareholders is simply making a bad thing worse.

The irony of the "subprime" situation, it seems to me, is that we probably all would have been better off if the GSEs had gotten into it in a big way. If the GSEs had been able to create a market in "vanilla" subprime--fixed rates, no prepayment penalties, careful documentation requirements, competitive pricing--and forced their seller/servicers into a "subprime box," the subprime loan market would have been a lot better off. The "pseudo-Maes and Macs" have never really been very good at providing the kind of market discipline within their purview that the real Mae and Mac have. But we wanted "innovation" and "choice" and "flexibility," not domesticated subprime and "alt" financing with low margins, uniform loan terms, and front and side airbags.

What we certainly don't need is the GSEs to continue to flirt with the dark side of the mortgage market in the booms in the name of chasing "market share" and then have to clean it all up willy-nilly during the busts.

However . . .

by Calculated Risk on 7/13/2008 07:14:00 PM

Update2: NY Times report: Rescue Sought for Fannie and Freddie

WSJ report: U.S. Announces Rescue Plan For Fannie Mae, Freddie Mac

Update: From the Fed Board grants Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary

From Bloomberg: Paulson Statement on Freddie Mac, Fannie Mae: Full Text

... I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. ...

The two keys points are: "temporary authority for Treasury to purchase equity", and an "increase in the line of credit". I think we need more specifics.

by Calculated Risk on 7/13/2008 02:41:00 PM

From the WSJ: Treasury to Issue Statement Supportive of Mortgage Giants

The Treasury is expected later today to make a statement supportive of beleaguered mortgage giants Fannie Mae and Freddie Mac ...

Here is the Treasury News page.

by Calculated Risk on 7/13/2008 10:46:00 AM

From Jeffrey Birnbaum and Steve Mufson at the WaPo: Freddie Mac's Next Hurdle: Raise Cash (hat tip SS)

Treasury Department officials were working the telephones yesterday to make sure that Freddie Mac ... will be able to sell $3 billion of its securities tomorrow in a previously scheduled sale that has now become a crucial test of investor confidence.
...
Treasury officials were considering several options to backstop the sale in case they discover that interest in the securities is flagging ... Under one alternative, the Treasury or Fed would purchase the securities directly.

Other possibilities are allowing the Federal Reserve Bank of New York to buy the debt indirectly through private brokers or asking private firms to purchase the debt while extending to them either a public or private assurance that the government would back the securities if Freddie were ultimately unable to cover its obligations.

This is a previously scheduled debt sale, and should be very doable.

More concerning is the planned stock offering.

by Calculated Risk on 7/13/2008 01:18:00 AM

From The Times: US Treasury rescue for Fannie Mae and Freddie Mac

US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.
...
Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders.
...
The capital injection would also see both lenders granted permission to use the Federal Reserve’s discount window - a short-term emergency funding source.
...
Some in Wall Street believe a rescue plan may be announced ahead of tomorrow’s US market opening to calm nerves and support the debt auction.

Note: I just got back from a great hike in the Sierras and I'm definitely a little tired. Wow, I knew the news would be exciting while I was gone (with breaking news on IndyMac, Fannie and Freddie). Thanks to Tanta and everyone who sent me emails.

If this story is accurate, this bailout will be announced Sunday evening or Monday morning. The Bear Stearns announcement was on a Sunday around 7PM ET, so I would expect a Sunday announcement this time too (if this is going to happen).

by Tanta on 7/12/2008 08:48:00 AM

Which is not the name of a band but probably should be.

Via Big Picture, we find this at Bloomberg:

July 11 (Bloomberg) -- The Federal Reserve has not had any discussions with Fannie Mae and Freddie Mac about access to direct loans from the central bank, Fed spokeswoman Michelle Smith said.

``Federal Reserve officials are following the situation closely,'' Smith said in a telephone interview today. ``However, there have been no discussions'' with the companies ``about access to the discount window,'' she said.

This is what Reuters reported yesterday afternoon:

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to a source familiar with the conversation.

The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies.

I got my first email on the subject Friday morning at 10:20 a.m., the burden of which was that opening the discount window was one of a number of proposals the Fed was "considering." I gather it took only a few hours for an anonymous source to have recollected overhearing a phone conversation between Bernanke and Syron on Thursday for Reuters that made it a done deal.

This morning, the Washington Post has managed to construct a narrative that makes it all true, you see:

Senior government officials prepared emergency steps yesterday to rescue troubled mortgage giants Fannie Mae and Freddie Mac but stopped short after a campaign of public statements eased immediate concerns about the stability of the institutions.

In this version, apparently, the Fed was ready to open the discount window but Hank Paulson's masterful calming of the waters yesterday made it unnecessary. I think. The Post story stops attributing its knowledge of Fed thinking and planning to any source rather early in the story, and having read it twice now I'm still not sure I exactly follow the bouncing ball. But it sure sounds better than saying the press credulously printed an unfounded rumor, doesn't it?

by Tanta on 7/11/2008 11:11:00 AM

This clears things up:

Secretary Henry M. Paulson Jr. made the following comment today on news stories about "contingency planning" at Treasury:

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.

"We appreciate Congress' important efforts to complete legislation that will help promote confidence in these companies. We are maintaining a dialogue with regulators and with the companies. OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission."

by Tanta on 7/11/2008 08:44:00 AM

The whole essay is worth reading, if only as a refreshing change from the overheated rhetoric of the last few days. Note that Pearlstein will be having an online chat today at 11:00 Eastern to discuss Fannie and Freddie.

A financial crisis like this one calls for policymakers and regulators who can keep a cool head and remain flexible and practical rather than insisting on strict adherence to economic orthodoxies. Not every instance of regulatory forbearance need be viewed as a step down a slippery slope toward Japanlike stagnation. Nor is it particularly constructive to characterize every instance of government involvement in the private sector -- whether it be refinancing a troubled home mortgage, opening the Fed lending window to cash-strapped investment banks or orchestrating a private-sector rescue of a failing hedge fund -- as a massive government bailout.

As for Fannie and Freddie, nobody would be particularly happy if it became necessary for the Treasury to inject some fresh capital into the mortgage giants, in exchange, say, for newly issued preferred stock that could be sold back at a profit when the mortgage market recovers. But even the editorialists at the Wall Street Journal acknowledged yesterday that this wee bit of socialism might be the most effective and least costly way to keep the mortgage market functioning and prevent a meltdown in global credit markets.

A financial crisis is not a morality play. What matters most isn't the precedents that are set, the amount of taxpayer money that's implicated or whether people are made to suffer fully for their financial misjudgments. In the end, what matters most is that we get through it as quickly as possible with an economy and a financial system intact.

If this blog's comment threads are any kind of representation of a slice of reality--I am often agnostic on that question, but still--there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. Lord knows that a lot of bad policy can be floated along under the guise of "pragmatism," but I for one would rather try debating with a pragmatist than a purist or a moralist.

by Calculated Risk on 7/11/2008 12:54:00 AM

Two articles ...

From the WSJ: Mortgage Giants Face Pressure Over Capital

Even as federal officials sought to reassure investors about the financial health of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold.
...
One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear.

From the NY Times: U.S. Weighs Takeover of Two Mortgage Giants

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
...
Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Guaranteeing the debt of Fannie and Freddie would not double the public debt because they have somewhat offsetting assets. This would lower the borrowing costs for Fannie and Freddie and is probably the most effective solution (if one is needed). Its not clear to me how a conservatorship helps. Pretty scary discussion ...

by Calculated Risk on 7/10/2008 12:23:00 AM

From Bloomberg: Fannie Mae, Freddie Losses Make Them `Insolvent,' Poole Says (hat tip Dwight)

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in an interview.

And Fannie and Freddie are on page 1 of the WSJ: U.S. Mulls Future of Fannie, Freddie

The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter ... The government doesn't expect the entities to fail and no rescue plan is imminent ... Treasury officials are nonetheless talking about what the government could -- or should -- do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating.

It seems like everyone is piling on ...

by Calculated Risk on 7/09/2008 04:52:00 PM

From Fortune: The Fannie and Freddie doomsday scenario

Here's a scary, and relevant, question to ponder as the housing market continues to slide: What would it take for the government to step in and help Fannie Mae and Freddie Mac, and how would a rescue affect you, the taxpayer?

Although S&P argues it is unlikely that either Fannie or Freddie will fail, one thing is pretty certain - there is no way politically that Fannie and Freddie would be allowed to fail.

So what might it look like if the government had to lend a hand? Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.

More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid.

Some investors apparently don't think the government will guarantee Fannie and Freddie debt since the (link fixed) spreads to treasuries on Fannie two year notes are at record levels. An explicit loan guarantee would reduce the borrowing costs for Fannie and Freddie, and reduce mortgage rates. Of course this would probably mean the end of the dividend (both companies pay hefty dividends) until the loan guarantees are lifted, possibly a change in management, and would still require raising more dilutive capital. No wonder Fannie and Freddie equity investors are scared.

Mish argues that the Nationalization of Fannie and Freddie is unavoidable.

by Tanta on 7/08/2008 12:47:00 PM

You really want to watch this CNBC video interview with OFHEO's Director James Lockhart. Although you won't get an answer to one nagging question--who let that man out of the house in that shirt with that tie and that jacket?--you might enjoy Lockhart's dogged ability to keep making calm answers to increasingly hysterical questions.

by Calculated Risk on 7/07/2008 01:25:00 PM

From Bloomberg: Freddie Mac, Fannie Mae Plunge on Capital Concerns (hat tip BB)

Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force Fannie Mae to add $46 billion of capital and Freddie Mac to add $29 billion.
...
Fannie Mae and Freddie Mac will probably get an exemption from the new FASB 140 rule that would force the companies to bring their off-balance sheet assets back onto their balance sheets ...

And there are concerns about more write downs:

``There's a lot of apprehension about writedowns,'' Tierney, [a credit strategist at Deutsche Bank AG] said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''

by Tanta on 6/24/2008 12:37:00 PM

The rhetoric of this Bloomberg report has to be read to be believed. Apparently, Fannie and Freddie have power make benefit glorious Nation of Jumbo, and they're blowing it all on people with downpayments in non-bubble markets instead of single-handedly throwing themselves on the grenade to Save the Housing Economy. Really:

June 24 (Bloomberg) -- Three months after Fannie Mae and Freddie Mac won the freedom to step up home-loan purchases, the government-chartered mortgage-finance companies are doing what critics in the Federal Reserve and Congress had predicted. . . .

``They were granted expanded opportunity to help recovery in a troubled housing market and yet have appeared to focus on their own recovery,'' said former U.S. Representative Richard Baker, a critic of the companies who left office earlier this year to run the Managed Funds Association in Washington. . . .

The slowness of Fannie Mae and Freddie Mac in injecting cash for new jumbo loans may have exacerbated the housing slump in markets including California and Florida, where prices have already fallen more than the national average, said Jerry Howard, 53, president of the National Association of Home Builders.

``Had they been quicker into the marketplace, they could have helped slow the downward spiral in housing prices,'' Howard said. . . .

``Fannie and Freddie are catering to low-risk homeowners with high credit scores and a lot of equity in their homes,'' said Dan Green, a loan broker at Mobium Mortgage Group Inc. in Cincinnati and Chicago. ``I'm sure there will be some high-cost areas in the country that will benefit. They just don't happen to be Florida, Michigan, California, Nevada.''

by Tanta on 5/20/2008 08:53:00 AM

Last week--I think it was last week--CR asked me at one point if I were going to write anything about Freddie's financials and the FAS 157 Uproar and I remember saying that our blog colleague Accrued Interest had just that day remarked that he might well write about the subject. I therefore fervently hoped he would do so, and I could just link to it, which would save me the trouble of having to have my own opinion.

So he finally got around to it. Go read it. It's well worth your time.

by Calculated Risk on 5/15/2008 08:04:00 PM

From the WSJ: Fannie Is Poised To Scrap Policy Over Down Payments

Fannie Mae is expected to announce Friday that it is scrapping a policy requiring higher down payments on home mortgages in areas where house prices are falling.

The change comes in response to protests from vital political allies of the government-sponsored provider of funding for mortgages, including the National Association of Realtors, the National Association of Home Builders and organizations that promote affordable housing for low-income people.
...
The current policy, adopted in December and now due to end June 1, limits loan amounts in areas with declining home prices, including most of the densely populated parts of the country.
...
Under the new policy that is taking effect next month, Fannie will have the same maximum loan percentages across the country for people purchasing single-family homes that they intend to occupy, according to people familiar with the plan.

by Tanta on 5/07/2008 04:42:00 PM

Just yesterday Fannie Mae mentioned in its Q1 2008 Earnings Release that, as part of its "Keys to Recovery" initiatives, it would offer "a new refinancing option for up-to-date but 'underwater' borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120 percent of a property's current value." That, so far, is all the information I have directly from Fannie Mae on this subject.

Unfortunately it got Dean Baker worked up. I respect Dr. Baker a great deal--he was calling the housing bubble long before it was cool--but I think he's got the wrong end of this:

This is a difficult move to justify from the standpoint of either taxpayers or homeowners.

The basic point is that homeowners will start out in these mortgages hugely underwater. Fannie’s policy means that it is prepared to lend $360,000 on a home that is appraised at $300,000. This gap implies that the homeowner can effectively put $60,000 in their pocket by turning the house back to the bank the day after the loan is issued. If the price drops another 10 percent in a year (prices are currently falling at an annual rate of more than 20 percent in the Case-Shiller 20 City Index), then this homeowner will be $90,000 underwater next May. If a seller would face 6 percent transactions costs, then in this example, walking away would provide a $106,000 premium compared with the option of a short sale.

This gap provides an enormous incentive for homeowners to default on their mortgage. Many homeowners will undoubtedly choose this option rather than make excessive mortgage payments on a house that is worth far less than the mortgage. A high default rate will of course lead to large losses for Fannie Mae and increase the likelihood that it will need a taxpayer bailout.

Fannie’s policy does have the effect of aiding banks that made bad mortgages. The new mortgages will allow these mortgages to be paid off. If matters were left to the market, the banks would almost certainly suffer large losses.

Baker is assuming that Fannie Mae will allow cash-out refinances in this program; although the mention in the earnings release doesn't specify that, I certainly assumed when I read it that we were talking about no-cash out refinances. (Fannie Mae's term for those, by the way, is "limited cash out" refinances. By this they mean that the loan balance can increase, but only to pay closing costs or pay off subordinate liens. That is what the rest of world means by "no cash out"--no cash disbursed to the borrower or to pay off non-mortgage debts.)

Fannie does make it clear that we are talking about Fannie Mae-owned loans. That is significant for two reasons. First, if the loans are upside down, it's already Fannie Mae's problem. To use Baker's example, if the borrower already owes $360,000 on a $300,000 home, the situation isn't made worse by refinancing it into a new loan with a lower payment. For Fannie to purchase a refinance of loans it already owns--presumably at a lower rate or payment, which improves the borrower's position and thus the strength of the loan--is not to take on risk you didn't already have. Second, of course, this isn't bailing out banks or anyone else.

That is why I assumed--and will confirm as soon as I find the Announcement from Fannie Mae--that these are no-cash-out refis. It would, indeed, worsen the risk of an existing underwater loan to let the borrower take more cash out.

Finally, it is specifically limited to performing loans. These are borrowers who are not, generally, eligible for a "workout" because they're not delinquent. But if they have hybrid ARMs coming up on a reset, or fixed rates that are higher than current market rates, this gives them the opportunity to get into a lower rate and payment while other costs--gas, anyone?--are taking more out of their pocketbooks. It isn't clear to me why this would increase any incentive to default, or increase Fannie Mae's losses if the borrowers did subsequently default. The loans are already underwater; even putting them 5% more underwater by rolling in closing costs seems to me, under the circumstances, to be less frightening than letting performing underwater ARMs get to a reset that will be hard for the borrower to bear. Not every borrower who is upside down will default, but every borrower with an unaffordable payment will in the current environment.

So there's a whole lot wrong with a whole lot of pressure to make the GSEs bail out the problems of the mortgage and housing markets, but so far this one sounds to me like Fannie Mae "bailing out" Fannie Mae, and, well, they ought to do that if it makes sense. Fannie Mae certainly does need to get a press release out clarifying the cash-out issue right away, before more nothingburgers get supersized.

by Tanta on 4/02/2008 08:33:00 AM

I struggled over two possible titles for this post: "Fannie Mae: We're All Expanded Approval Now," and "Fannie Mae to Walk-Aways: Don't Walk Back To Us." This is all about Announcement 08-08, which I suspect may get some curious play in the press. (The WSJ has already picked up the story.) It will be curious because there really is a mix here of apparent "loosening" as well as "tightening" of some guidelines, particularly Expanded Approval. My reading is that it's really all tightening, if you know how to read these things.

First, "Expanded Approval" is Fannie-Speak for "near-prime" loans that are run through its AUS, Desktop Underwriter (DU). DU buckets EA loans into one of three categories based on comparative credit quality and risk characteristics of the loan, and each level is subject to a worsening price adjustment. This Announcement seems to suggest some loosening of eligibility requirements on EA, such as allowing loan types or products that were never before eligible for EA, like interest-only FRMs and 5/1 ARMs, 3 and 4 unit properties, and cash-outs on second homes.

Does this mean that Fannie is signalling a willingness to take on more risk in the EA program? I don't really think that's the way to look at it. My guess is that the "standard eligibility" engine in DU has just been programmed to kick a lot of those IOs, multi-units, and second-home cash-outs into EA, where they are identified as high-risk and priced for it. In other words, a lot of loans that once would have gotten the label "prime" are now getting the label "near-prime." (EA isn't really "subprime," although the bottom of the EA pile is probably quite close to the top of the non-agency subprime pile. You can call EA "subprime," if you like, but that does tend to erase the fact that conventional non-agency subprime gets a lot worse than EA.) So, in other words, we're all--or a lot more of us are--Expanded Approval now.

What is unambiguously a tightening comes in for the requirements for loans with a past foreclosure:

The presence of a prior foreclosure action in the borrower’s credit history is evidence of significant derogatory credit and increases the likelihood of future default. The lender should consider the presence of a foreclosure as an added risk element that represents a significantly higher level of default risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.

We currently require four years to elapse after a foreclosure before we will consider the borrower to have a re-established credit history. With this Announcement, we are increasing that time period to five years. We will continue to allow a lesser time period to elapse (three years in lieu of the current two-year requirement) for borrowers who can demonstrate documented extenuating circumstances that resulted in the foreclosure action.

These policy changes apply to all mortgage loans delivered in accordance with the Selling Guide, loan casefiles underwritten with DU Version 7.0, or pursuant to any variance contained in the lender’s Master Agreement.

Manually Underwritten Mortgage Loans

• Elapsed time is measured by comparing the application date of the new mortgage to the completion of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.

• After the requisite five year elapsed time period

-The borrower may obtain a new mortgage to purchase a principal residence with a minimum 10 percent down payment and a minimum credit score of 680.

-The borrower may obtain a limited cash-out refinance mortgage pursuant to our eligibility requirements in effect at that time.

-The borrower may not obtain a cash-out refinance or obtain a mortgage secured by a second home or investment property for seven years after the foreclosure action.

• If the foreclosure was the result of documented extenuating circumstances (as defined in the Selling Guide) and the requisite three year elapsed time period has passed

-The same requirements apply as outlined above, with the exception that the minimum credit score of 680 is not required.

If you can actually afford to pay your mortgage payment, you made no attempt to work with your servicer or accept any kind of repayment plan, and your basic reason for walking away from the property was that you just didn't want to be upside down, you will be unable to meet the "documented extenuating circumstances" requirements. Plus, if you are "dragging out" the FC in order to live rent-free as long as possible, you are only extending the time period in which you are not eligible for a Fannie Mae loan again, since this is measured from "completion" of the FC process. In other words, this is aimed at "walk aways."

Furthermore,

Loans with excessive prior mortgage delinquencies will not be eligible for delivery to Fannie Mae. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 60-, 90-, 120-, or 150-day delinquency reported within the 12 months prior to the credit report date.

It has never been any kind of easy to get a loan with recent serious mortgage lates through Fannie Mae, but they've never quite stated it this categorically.

There are a few other changes in FICOs and maximum financing that aren't exactly dramatic, but that are all heading in the direction of increased tightening. I read the whole Announcement as more of a certain message both GSEs have been putting out, of late: "Don't expect us to clean up all these messes for you, guys."

by Calculated Risk on 3/28/2008 09:15:00 AM

From Bloomberg: Fannie, Freddie May Raise $20 Billion, Regulator Says

Fannie Mae and Freddie Mac, the U.S. government-chartered mortgage companies, may raise as much as $20 billion in capital as part of an agreement that allows them to buy more debt securities, their regulator said.
...
``There's no specific number,'' [James Lockhart, director of the Office of Federal Housing Enterprise Oversight] said. ``There was a range of numbers. The best way is to say it's significant.'' The amount raised will be ``much more'' than the $5.9 billion of capital released by reducing the cushion, Lockhart said.
...
``The two enterprises have effectively become the mortgage market at this point,'' Lockhart said. ``Effectively they have become the lender of first, last and every resort.''