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Fannie Mae Breaks Its 14 Quarter Bailout Streak

Posted on May 11, 2012, 12:02pm | Anthony Randazzo

Fannie Mae performed a magic trick this past quarter: they made a net profit including their dividend payment to Treasury for the first time since the fall of 2008 when they were taken into conservatorship. This week, Fannie Mae's 1Q 2012 earnings statement was actually an earnings statement. They posted a $2.7 billion profit, and were able to make a $2.8 billion payment to Treasury, covering the balance of the payment with a few hundred million built up in positive net worth, according to The Wall Street Journal. 

Last year, Fannie Mae lost a net of $16.4 billion. With the $0 loss figure through the first quarter of 2012, that means the updated complete taxpayer bailout total (3Q2008 to 1Q2012) for Fannie Mae remains:

$116.2 billion

So while a few kudos are in order for not having to go hat in hand to taxpayers for a 14th straight quarter, Fannie Mae is far from being out of the woods. Of that $116.2 billion bailout given to Fannie Mae, $22.6 billion has been paid back, leaving a remaining balance of $93.6 billion.  

There were a few different reasons that Fannie was able to turn a profit. The WSJ reports:

Part of the profit is due to gains that resulted from an upswing in interest rates earlier in the year, according to Jim Vogel of FTN Financial. He pegs the contribution to profit at around $1 billion. With rates having retreated recently, this could reverse in the current quarter.

Another factor was an improvement in credit quality leading Fannie to set aside less money to cover souring mortgages. That the company needed $2 billion in provisions for credit losses, compared with $10.5 billion a year earlier, is positive. It shows Fannie's losses are growing at a slower rate, while profit from more recent, better-quality loans should bolster results going forward.

Fannie also said the serious delinquency rate for single-family mortgages declined to 3.67% in the first quarter from 5.47% a year earlier. A slower rate of home-price declines has helped on this front. 

The challenge for the future is that the Fed is promising continued low interest rates for the coming years, and there are million of homes that will be foreclosed on in the coming years as well. Losses will likely slow, but continue to mount in coming quarters. 

Freddie Mac also had a relatively good quarter, asking for "just" $19 million to cover losses from the first three months of the year. The combined total taxpayer bailout from 3Q2008 to 1Q2012 for Fannie and Freddie is now:

$71.365 billion (Freddie) + $116.2 billion (Fannie) = $187.565 billion

Here is an updated list of Fannie Mae's quarter bailout needs:

• 1Q 2012 — $0B
• 4Q 2011 — $4.6B
• 3Q 2011 — $7.8B
• 2Q 2011 — $5.1B
• 1Q 2011 — $8.5B
• 4Q 2010 — $2.6B
• 3Q 2010 — $2.5B
• 2Q 2010 — $1.5B
• 1Q 2010 — $8.4B
• 4Q 2009 — $15.3B
• 3Q 2009 — $15B
• 2Q 2009 — $10.7B
• 1Q 2009 — $19B
• 4Q 2008 — $15.2B
• 3Q 2008 — $0B

See last quarter's post on Fannie Mae's losses here.

See full coverage of Fannie Mae and Freddie Mac here. 

(Video) Interview on Reason's New Mortgage Reform Study

Posted on May 10, 2012, 2:12pm | Anthony Randazzo

Earlier this week I appeared on Fox Business to discuss our recent Reason Foundation study "Restoring Trust in Mortgage Backed-Securities." We argue that to end the government housing monopoly and reduce the $5.8 trillion in mortgage debt liability taxpayers have as a result, that Congress should authorize MBS investors to have access to more information about the mortgages they are buying, and that the mortgage industry should create a group to create clear mortgage definitions that do not rely on federal regulations like the qualified residential mortgage.

Read the full study here

See our press release here.

Also, read our summary op-eds at RealClearMarkets and the DailyCaller.

Freddie Mac Takes $19 Million More from Taxpayers

Posted on May 8, 2012, 7:01pm | Anthony Randazzo

Freddie Mac reported last Thursday it needs $19 million from the U.S. taxpayers to remain solvent after making a dividend payment to the Treasury department following first quarter 2012 financial reporting. The government-sponsored enterprise made a net profit in the first quarter, but that was before factoring in the dividend payment they have to make to Treasury for the luxury of being bailed out of losses from previous quarters. Freddie asked for a total of $19 million from Treasury for for the first quarter of 2012. 

In total, Freddie Mac has received $71.365 billion in bailout money from the U.S. Treasury since FHFA took the GSE into conservatorship in late August 2008. Here is the most recent breakdown of taxpayer quarterly checks for Freddie Mac:

• 1Q 2012 — $0.019 billion
• 4Q 2011 — $0.146 billion
• 3Q 2011 — $6 billion
• 2Q 2011 — $1.5 billion
• 1Q 2011 — $0
• 4Q 2010 — $0.5 billion
• 3Q 2010 — $0.1 billion
• 2Q 2010 — $1.8 billion
• 1Q 2010 — $10.6 billion
• 4Q 2009 — $0
• 3Q 2009 — $0
• 2Q 2009 — $0
• 1Q 2009 — $6.1 billion
• 4Q 2008 — $30.8 billion
• 3Q 2008 — $13.8 billion

Last quarter Freddie asked for $146 million, so at least their asks have been declining since the third quarter of 2011. (See full details here.)

See our full coverage on Fannie Mae and Freddie Mac here.

New Study: Restoring Trust in Mortgage-Backed Securities

Posted on May 3, 2012, 11:29am

In a new study, released today, former Moody's Analytics senior director Marc Joffe and Reason Foundation director of economic research Anthony Randazzo find that the profound lack of confidence in the models used by credit rating agencies to assess residential mortgage-backed securities (RMBS) and in the rating agencies themselves is a substantial roadblock to housing recovery in America.

The new study shows that the mortgage finance market has leaned heavily on government support over the past few years. More than 90 percent of mortgages originated in 2011 were securitized by government entities using taxpayer funds to guarantee investors against default risk. The result is that U.S. taxpayers are liable for more than $5.8 trillion in mortgage credit risk. 

The fact that there are still millions of homes in the foreclosure pipeline and significant household debt in the system suggests that a housing recovery is not close in the near-term. However, a conversation needs to begin now about how the private sector will regain marketshare when recovery does start to take hold. Joffe and Randazzo's paper contributes to that discussion by identifying four leading roadblocks to reform and providing several solutions to overcoming these hurdles. 

Randazzo says, "The only way we will see a robust housing market in the future is with the private sector taking the lead. But that can't happen with price competition that exists in the system now or with the legal complexities surrounding mortgage-backed securities. Once those challenges are met, the question becomes how to encourage private sector investment in housing through more transparency and better risk analysis tools then are provided now by the credit rating agencies."

The Reason Foundation study and its proposed solutions are available at http://reason.org/news/show/trust-in-mortgage-backed-securities. A one-page summary is available as well as the full study.

Please contact Chris Mitchell (chris.mitchell@reason.org) or Lainie Frost (lainie.frost@reason.org) for any media inquires. 

A Few Quick Thoughts On Mortgage Rates

Posted on April 30, 2012, 8:48am | Anthony Randazzo

The primary source of the pressure for banks and the GSE to refinance mortgages is so that those with rates around 7 percent and 8 percent can reduce their payments with the historic rates of around 4 percent that the Federal Reserve has helped artificially engineer. 

• Some banks don't want to refinance mortgages because the loans are underwater.
• Other banks are just backed up on the paperwork.
• Still others are just bad at the job they are supposed to perform.

Whatever the case, there at least two things worth considering: even a 7 percent mortgage is a good thing in relative terms, and even without a massive, national refinance program, mortgage rates on outstanding debt have been falling.

Consider the below chart developed from recently released BEA data:

The average effective rate of interest on mortgage debt never fell below 8 percent from 1977 to 1996 (that is the farthest back the data goes). After the housing finance policy changes of the 1990s began to take effect in 1995 and 1996, we see the effective mortgage rate drop below that threshold. For the first quarter of 2012 the effective rate on all outstanding mortgage debt was 5.115 percent, and it has fallen every quarter for the last 24 quarters, or since the 2Q2006. 

There does not seem to be an immediate need for a massive refi program to push past the legal boundaries of mortgage law. Banks should become better at customer service, process decision faster, but still be allowed to make prudent calls on what would be the most profitable for their shareholders—many of whom are taxpaying Americans.

New at Reason: Review of Federal Privatization Issues in 2011 and Today

Posted on April 23, 2012, 11:59pm | Leonard Gilroy and Harris Kenny

The rollout of Reason Foundation's Annual Privatization Report 2011 begins today with the release of the Federal Government Privatization section, authored by Reason's Adam Summers and Anthony Randazzo. This section of Reason Foundation's Annual Privatization Report 2011 provides an overview of the latest federal insourcing, housing finance, private spaceflight and other news on privatization and public-private partnerships in the federal government. Topics include:

• The ongoing dispute over what constitutes “inherently governmental” functions continued in 2011, and new Obama administration regulations could undermine federal outsourcing policy standards dating back to 1955.
• Regulators implementing the Dodd-Frank Act are creating significant risk for both mortgage investors and securitizers and appear likely to undercut the private mortgage industry while benefitting government mortgage providers. 
• In 2011, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) combined to purchase or guarantee 95 percent of all new mortgages in America with some mortgages worth as much as $729,750. Every one of these mortgages is backed by taxpayer money.
• Federal agencies, under the encouragement of President Obama, are expected to generate nearly $13 billion in cost savings from asset divestiture, $9.8 billion of which comes form the Department of Defense’s Base Realignment and Closure (BRAC) efforts.
• The federal government owns approximately 1.2 million properties that cost $20 billion a year to maintain. Recent Congressional efforts to pass a Civil Property Realignment Act could save as much as $15 billion, according to the Office of Management and Budget.

» Annual Privatization Report 2011: Federal Government Privatization [pdf, 1.9 MB]

» Complete Annual Privatization Report 2011

FHFA, DeMarco, and the Politics of Mortgage Modifications

Posted on April 16, 2012, 12:05pm | Anthony Randazzo

Mortgage principal write downs are not a Republican v. Democrat issue. At least they should not be. But just as global warming apologists and deniers split down party lines without much to connect the deep roots of conservative ideology or progressive tradition, so too have mortgage modifications become a partisan issue.

In this context, the recent comments from FHFA Acting-Director Ed DeMarco are interesting for the responses that he has gotten. He has not, despite his favorable tone given to modifications last week that has not been heard in years, changed is tune. Nor has he given blank approval to modifications. Rather, he has always relied on FHFA analysis to determine what would involve the lowest possible losses for the taxpayers and has until now come up with a "no modification" strategy. Now the analysis is providing some room for modifications.

In the wake of the FHFA report, there has been a host of comments from both sides making political hay out of DeMarco's words. Few have argued that FHFA's analysis suggests reducing taxpayer losses at the GSEs by accessing a taxpayer funded incentive program called HAMP, in effect making a gimmicky accounting transfer (that is admitted in the FHFA report as a trade-off). Rather, the comments have been black and white views on principal write down as some kind of poison or healing potion, depending on the view. 

So lets clear a few things up: How do mortgage modifications, principal write-downs or refinances, fit into the democratic platform any different from a republican platform? Does one party prefer the housing market to suffer while the other not? No. Nothing inherent about modifications makes this a partisan issue.

To hear the democrats tell it, the republicans do want the housing market to suffer more for wanting to see housing prices bottom out. Ironically, while it would be a good thing for housing prices to bottom out, most republicans (at least in Congress) have shied away from the legislative options put in front of them that would actually have the housing market bottom (lowering the conforming loan limit, unwinding the GSEs, etc). And there have been few voices on the Hill crying out about the injustice of the mortgage settlement—at least in regards to the way it treats contracts and pension funds. 

To the the republicans tell it, the democrats want to just give free handouts to deadbeat borrowers who took on more than they can pay back. Ironically, while it is true that a wide spread principal write down program divorced from case-by-case economic consideration would involve free handouts to deadbeats, the GOP stands in favor of the mortgage interest deduction which gives free handouts to successful homeowners—and the point of the critic is the handout, not the deadbeat or the actual homeowner. More over principal write downs are not always bailouts.

The reality is that writing down the principal on a mortgage, which the investor or owner of the loan chooses to do so, can be the best way of recouping lent funds. Sometimes the losses will be higher without the write down. Sometimes the best guess at maximizing return is principal forbearance, rather than a straight up write off of the debt. And sometimes foreclosing on a home, fixing it up, and selling it, will yield the highest return.

Every case is different. Mortgages are individual products that, even if offered with the same dollar amount on the same terms, have different risk profiles based on the borrower (which has a wide number of variables) and the geographical location of the mortgage.

Even trying to estimate a mortgage's risk profile based on zip code can be inaccurate because the possibility of vastly different neighborhoods and development prospects with a sometimes wide geographical zone defined by zip code. (If investors had access to address level data due diligence would be much more reliable.)

So it is ridiculous to reject principal write downs universally—as the GOP has done. And it is ridiculous to accept them blindly—as the democrats have done.

What we have written time and again is that the evidence suggests that principal write downs are often times not the best way of getting money back for lenders. That means forced principal write down programs are a bad idea—no reason to force banks to take losses. It means that the GSEs should not start writing down mortgage principal in large chunks—no reason the taxpayers hould have to cover those losses too.

But all of that is in the abstract. I don't manage the GSE mortgage portfolio or the Wells Fargo portfolio of loans. Only those running the numbers can estimate on what the best option should be. I can point to the fact that more than half of the modifications under HAMP have failed. And we have done so in trying to push back on the idea that modifications are some how the panacea needed in the housing market. 

They are not. But they might be answer to some mortgages.

Enter Ed DeMarco last Tuesday, who noted that in "some circumstances" lowering the mortgage debt level of borrowers could reduce the possibility of default. Such a conclusion is not earth shattering. While a majority of the HAMP modified mortgages have failed, some have succeeded and theoretically staved off foreclosure. What has been missed in many stories about DeMarco's speech is that he was clear to point out that principal write downs are not a "magic bullet," and the benefits are "limited." 

He is right to say these things and the GOP is wrong to suggest that there should be no modifications (though modifying the principal on a mortgage the GSEs do not own would be a problem without authorization from the investor). Democrats are equally wrong to claim some sort of victory as if the debate over whether or not to go all in on principal write downs is won. This is ultimately a debate about servicing debt and managing the deleveraging process. It is a debate about what tools to use in preventing more taxpayer losses. DeMarco framed it this way:

"This is not about some huge difference-making program that will rescue the housing market. It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers."

I will offer this critique of FHFA's analysis though. FHFA suggests it can reduce losses to the taxpayers by $1.7 billion by taking advantage of incentive payments made by HAMP to those who write down mortgage principal. The challenge is that in order to do this, the taxpayers have to pay out those HAMP fees. So in this particular case, the FHFA "savings" to the taxpayers is little less than an accounting gimmick. It is possible that principal write downs would save taxpayers from higher losses, but if it is only because the losses are otherwise subsidized by the taxpayers then there is no net gain and moral hazard from the write downs wins the day.

Barry Ritholtz On Housing Pessimism

Posted on April 10, 2012, 2:15pm | Anthony Randazzo

Last Friday, Washington Post columnist Barry Ritholtz broke down the pessimist's view on the housing market. With spring comes a traditional uptick in housing data, inspiring memory challenged journalists to wax philosophical about the bottom of the housing market finally being upon us and blue skys forever to come. But here are some reasons why that view is misinformed (regular readers will note these are not new concepts to this blog).

First, the shadow inventory:

"What is shadow inventory? This is important, as lowering the total inventory of houses for sale is how prices stabilize and sales volume moves higher... It includes bank-owned real estate, distressed houses not yet for sale, short sales and delinquencies that have not yet defaulted. Foreclosure properties are also in the shadow inventory. These houses will eventually become part of the total supply for sale. Although there is no official count, estimates of potential shadow inventory run as high as 10 million.

"That’s not all. There’s also a huge overhang of underwater homeowners — whose houses are worth as much as 25 percent less than what is owed. The owners don’t qualify for a mortgage modification. They may be delinquent but aren’t in default. Two-thirds of all U.S. houses have mortgages. Of those, an estimated 21 to 29 percent of the mortgages are underwater, or up to 16 million houses. When prices finally do rise, we can expect many of these no-longer-underwater owners to put their houses up for sale. If only one in three do, that is another 5 million homes in inventory."

Second, home affordability:

"Are houses affordable? Here’s where every discussion of affordability seems to start: the National Association of Realtors Home Affordability Index. In my view, it’s worthless. Why did I come to such a harsh conclusion? The index offers little insight into how affordable housing actually is. In the biggest run up in housing prices in American history, the index never dipped into the level of unaffordable. Imagine that.

"As ridiculous as that sounds, it’s even more absurd when we look at the NAR methodology, which ignores factors such as family savings rates, cash assets, consumer credit, indebtedness, credit servicing obligations, inflation and income gains. The affordability index looks at the wrong things and ignores the important ones. The correct question is not whether the houses are affordable in theory. Rather, it’s whether potential buyers can afford to buy them."

Third, how cheap house prices are:

"Are the prices cheap? Few had forecast the steep drop in median house prices. Some regions that were excessively frothy during the boom — California, Las Vegas, South Florida and Arizona — have seen much greater price drops. Other areas had laws (Texas) or financial conventions (New York City) that mandated significant down payments and other prudent requirements and avoided much of the bloodshed. The conventional wisdom seems to be that prices have stabilized and are overdue to start rising. The data, however, suggest something else. The most recent Standard & Poor’s / Case-Shiller index of national prices (January) shows prices are still falling, about 4 percent year-over-year."

Fourth, asset prices follwing a bubble:

"How do asset prices behave following a bubble? Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap. That is the marvelous mechanism of markets. It is how assets are repriced, distressed holdings liquidated, capital markets stabilized, fools revealed, speculators punished — and money returned to its rightful owner, the prudent investor.

For a lasting recovery, we need to see houses cheap enough that they fall into “good hands” — long-term owners who can afford their mortgage payments. Until that happens, houses will stumble along the bottom of the price range. The nation could easily see another 10 percent to the downside — assuming nothing else goes wrong. This would actually be good news. The government interventions (first-time buyer tax credit, mortgage modifications and foreclosure abatements) have prevented prices from finding their own levels. If they did, houses would be much more affordable, and buyers would come out in droves.

That is how a true housing recovery begins.

Read the rest of the piece at Washington Post here.

A Financial Products Agency is a Bad Idea

Posted on April 3, 2012, 10:21am | Anthony Randazzo

Back in February Eric Posner and Glen Weyl, both of the University of Chicago and deservedly respected economic and legal minds, wrote a paper proposing a Financial Products Agency. The idea is relatively simple—just as the FDA must approve new food and drug products for consumption, an FPA should approve all new financial products with a test measuring for social benefit. 

This is a terrible idea for at least three reasons:

First, an FPA would not have stopped the financial crisis. Let us assume for a moment that this FPA existed in 1998. Back then, when subprime debt began to pick up its pace, there was little understanding of the risk that was building up in the system. We can't just assume that having an FPA would mean regulators have somehow gained hindsight. Regulators were aware of what was going on to the degree that they had the resources to manage and the expertise to understand and didn't do anything then. Let's assume again that the FPA existed in 2004. Around that time regulators like Greenspan and Bernanke were well aware of the housing bubble but either did not think the risks were that big or did not think it was appropriate to step in. With rising housing prices (that all the regulators never thought would go down) masking the risks of subprime debt by preventing defaults, it is very hard to believe that regulators at this FPA would have done much to stop the risky financial products Posner and Weyl blame for contributing to the financial crisis.

Second, the model of the FDA is not a great idea unless you want to stunt markets. While the public has come to depend on the FDA to keep them safe there are regular outbreaks of diseases and complications with medicine. Even approved products can be misused. Beyond this, there are numerous cases where the FDA has prevented positive health outcomes, such as slowing down cancer prevention drugs for political reasons or sheer incompetence. And given the bureaucratic nightmare that is the FDA, it is impossible to know what drugs have not been pursued simply to avoid the compliance and approval costs and headaches. What we do know is that there is a growing problem of drug shortages in the U.S. and it is in part because of the FDA.

Finally, the whole argument for an FPA is based on the premise that derivatives contracts were significant contributors to the financial crisis. But derivatives—even the most risky contracts—are innocuous vessels. Blaming them is like blaming money for the crisis or computers. Though an argument can be made that there was too much money via central banks and too much computing power pushing high frequency trades, it is not the money or the computers but how they are used in connection with the other factors that caused the crisis. Derivatives contracts became a problem because the underlying assets they were being created with were misunderstood and financial institutions did not properly hedge their risk. If AIG had set aside the necessary amount of capital relative to its risk exposure, there wouldn't be as much carping about derivatives. If lending standards had not fallen so low, the subprime debt levels that did exist would not have been there to generate such a massive amount of unhedged, misunderstood, risky derivatives for subprime debt in the first place.

Unfortunately, despite these problems, the FPA finds the approval of NY Times business columnist Gretchen Morgenson, who wrote over the weekend regarding this proposed idea:

It is a refreshing rejoinder to the mantra on Wall Street — and in some circles in Washington — that financial innovation is always good and regulation is always bad. Bankers often argue that complex financial products are among America’s great inventions. But given that exotic instruments played a central role in the credit crisis, it is worth questioning the costs and benefits of such financial innovations. 

I agree that it is always worth questioning and debating and wrestling with ideas. That is the best way to avoid getting tunnel vision on something. But in this case, the idea under consideration is not a very good one.

Ms. Morgenson makes the problematic assumption at the start of her column that regulators would somehow have behaved differently if there were an FPA before the crisis. "Imagine if there were a Wall Street version of the F.D.A.," she says, "How different our economy might look today, given the damage done by complex instruments during the financial crisis." But as we were just pointing out, there was lot of authority to limit Wall Street. Financial markets are and have been one of the most heavily regulated industries in the U.S. But the only thing that I can think of that would have actually changed regulator behavior prior to the crisis would be something that eliminated regulatory capture. An FPA, just like the SEC, would have been filled with bureaucrats more than willing to use a light hand on approval procedures to ensure they had a job with some firm after their civil minded spirit got drilled into the pavement of Manhattan with one to many luxury cars. 

Then, Ms. Morgenson begins to lay out the case for the FPA, noting that the Posner/Weyl paper argues we should be able to regulate financial markets because they are different from the real economy, where a more laissez faire approach is good. The two leading problems with this argument are that:

1. Financial markets are so interwoven with the real economy that you can't truly separate the two. Financial markets are the lifeblood of new businesses, which in turn are the lifeblood of the U.S. economy. So anything regulations that unnecessary restrict credit are actually hitting the real economy; and
2. The problem is not a lack of rules but the absence of the right rules. If we learned anything from the crisis shouldn't a key lesson be that a lot of rules without regulators smart enough or inspired enough to enforce them winds up with meaningless protections and a false sense of security. It is foolish to depend on this regulatory crutch again and again. It is literally insane.

The next piece of the Posner/Weyl argument is that derivatives that are risky bear limited social utility and can cause system risk. I counter by arguing that: 

1. Just because something has limited social utility does not mean it should be restricted. Fantasy baseball may actually reduce productivity at work places across America, for instance, and may not get past a social utility censor. But I'll join up with an Upper Peninsula anti-government militia if the government tries to stop me from competing for glory; and
2. Derivatives in a market that has too-big-to-fail banks may cause systemic risk—but the problem there is the bloated banks and the lack of handling failed institutions. If every bank had 75 percent capital requirements there would probably be very little derivative risk. Of course we'd also have a nonexistent banking system. The key here is to solve for moral hazard and improper incentives in the system, not try to limit financial activity on the other side of the equation.

Ms. Morgenson further carries the Posner/Weyl case forward by noting they also want the proposed FPA to measure financial instruments for "how they affect capital allocation, and whether they might add useful information to the marketplace." Again, a couple of points:

1. How could an FPA really understand where capital should be allocated? Every regulator under the sun thought that capital flowing to the housing industry was a good idea during the bubble era. Imagine the FPA arguing in 2002 that there was too much capital flowing to the housing industry. It never would have happened, and on the off chance that our revisionist history unearths a Mike Burry to have influence in this FPA, the counter political pressure would have been too strong to let them do anything. Everything politically during the bubble was pushing capital towards housing. The Bush "Ownership Society" mantra. The previous decade's changes at Fannie and Freddie and FHA. Basel rules favoring housing. Even a massive accounting scandal at the GSEs failed to really derail their political or financial activities, so strong were the pressures to increase home ownership rates.
2. And why should a financial product be disallowed if it doesn't provide useful information to the marketplace? If I want to structure a deal with my neighbor where we place a complicated bet on the outcomes of real estate values from the properties of people two streets over, with a few voluntary counter-parties financing the bet... why should anyone else care? Posner and Weyl may respond they would care if my personal failure on coming up short in the bet posed a risk to the financial markets. But I would again push back that the problem then would not be the derivative contract but the fact that the system was so poorly incentivized that I could become a systemic risk.

The Posner/Weyl paper says in the introduction that Dodd-Frank is an empty vessel and on this point we agree. My remarkes are not a defense of Wall Street today or the regulatory system. This FPA idea is just not the right response mechanism to that problem. 

Regulators Making Moves to Force More Banks Into Mortgage Settlement

Posted on April 2, 2012, 10:49pm | Anthony Randazzo

A few weeks ago we warned that the mortgage settlement might not be limited to just the five banks that signed on, but that regulators would find a way to force others into the agreement, like PNC and US Bancorp. Well, today the NY Times reports:

Federal regulators are poised to crack down on eight financial firms that are not part of the recent government settlement over home foreclosure practices involving sloppy, inaccurate or forged documents. Last week, a senior Federal Reserve official recommended fines for these additional firms, raising questions about how deep foreclosure problems run through the banking industry.

The firms cited include, non surprisingly, SunTrust Bank, U.S. Bancorp, PNC Financial Services, plus five more: MetLife, EverBank, OneWest, Goldman Sachs, and HSBC’s United States bank division. The Times story continues:

The recommendation is the culmination of an investigation begun nearly two years ago over accusations that bank representatives had been churning through hundreds of documents a day in foreclosure proceedings without reviewing them for accuracy, a practice known as robo-signing. Some see the Fed’s recommendation as an attempt to push these firms to agree to the terms of the broader mortgage settlement involving the state attorneys general and federal officials. 

Count me as one of those seeing a push. More of a shove really. PNC, for example, believes that it is going to be required to sign on to the new national mortgage servicing standards and modify mortgages. But where Bank of America and JP Morgan Chase have plenty of investor mortgages to write down principal on—essentially using other people's money for their own fines—PNC does not. From their perspective this is unfair punishment, since they'll actually have to pay the fine.

In one sense, they are right. It isn't fair. But there really shouldn't be any write downs. There is a $1.5 billion settlement pool set up for the roboforeclosed and anyone whose home was wrongly seized can still bring legal suit. And if PNC and others committed the same failures they should pay into the settlement pool too. But modifying the mortgages of borrowers now, borrowers unrelated to the robosigning, is bad housing policy but extortion and not justice being served. 

FHA's Troubles Are No Myth, Despite What HUD Tries to Spin Away

Posted on March 30, 2012, 3:42pm | Anthony Randazzo

When we have a gala later this year for the Annual Unintended Consequences Awards, the Department of Housing and Urban Development is sure to be a leading nominee in the "Overall Body of Work for a Federal Department" category. Though I will give HUD a nod for at least recognizing the rising voices of opposition to its frequent missteps as they have developed a pattern of releasing "Myth vs. Fact" documents. Their myth memo for the mortgage settlement was a real strong effort towards securing the AUC Award, and now they have followed on with a recent release for comments on the Federal Housing Administration's struggles.

Former Fannie Mae chief credit officer Ed Pinto went through their 19-point "Myths and Facts Regarding the FHA Single Family Loan Guarantee Portfolio" document and pulled out a few of the most egregious comments. Here are some of his notes. (And bear in mind his four principles for FHA reform: 1) Utilize generally accepted accounting principles, and set rigorous disclosure standards; 2) Establish and maintain loan loss and unearned premium reserves; 3) Establish and maintain a minimum capital requirement of 4 percent of amortized risk in force; 4) Fund a countercyclical premium reserve.)

HUD Lables As Myth: FHA would be declared insolvent by state regulators were it a private mortgage insurance (MI) company.

HUD’s response does not deny the truthfulness of this statement.  Instead HUD points out FHA’s counter-cyclical role.  Yet during the boom HUD used FHA and other agencies and policies to lead a self-described “revolution in affordable housing”. The central policy of this revolution was the near elimination of downpayments, a pro-cyclical policy in the extreme.   HUD seems to espouse a policy of being pro-cyclical in booms and counter-cyclical in busts.

Elsewhere HUD points out that the FHA’s access to funding from the Treasury Department makes complying with private sector standards unnecessary.  This may be comforting to HUD, but the Congress and taxpayers deserve more than HUD’s assurances that all will be well. The FHA is the third largest financial guarantee entity in the United States, surpassed only by Fannie Mae and Freddie Mac (the GSEs). Yet it continues to operate under fiscal standards that can only be described as Byzantine.

 Consider the experience with the GSEs. In July 2008 the GSEs were given a clean bill of health by its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO, now FHFA).  In a statement, OFHEO Director James B. Lockhart opined: "OFHEO has been monitoring and continues to monitor closely Fannie Mae, Freddie Mac, and the mortgage and financial markets. As one would expect, we are carefully watching the Enterprises’ credit and capital positions.  As I have said before, they are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums.  They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets."

During the month of August 2008, the Department of Treasury hired Morgan Stanley to undertake an independent review of the GSEs. 

The taxpayers know all too sadly the outcome of this review—the very next month the GSEs were placed in conservatorship by FHFA with the bailout bill now approaching $200 billion.  

The questions relating to FHA’s current safety and soundness are substantive.  A review similar to the one undertaken with respect to the GSEs in 2008 is undoubtedly needed.  Under private accounting principles FHA likely has a current net worth of -$13.5 billion and an overall capital shortfall under its mandated 2 percent standard of over $32 billion.  This is clear evidence that FHA’s current capital is woefully inadequate today.   

There is hope that this critical review will take place.  On March 27, 2012 the Financial Services Committee of the U.S. House of Representatives without objection from a single Republican or Democrat agreed to H.R. 4264: “The FHA Emergency Fiscal Solvency Act of 2012.”     

Section 15 mandates that the Comptroller General of the United States provide for an independent third-party one-time safety and soundness review of the FHA “in accordance with generally accepted accounting principles applicable to the private sector.”

HUD Lables As Myth: FHA should hold capital levels like a private MI.

HUD bases its entire response on the erroneous statement that private MIs must “isolate their older’ weaker books of business from any recent and healthier year-by-year activity.”  This is not true.  Like the FHA, each MI consolidates all its annual books of business in computing a single capital position. Further, the private MI industry has raised or received over $10 billion in new capital since September 2007, none of which was segregated by book year.

FHA should not be allowed to operate is an unsafe and unsound condition, while it unfairly competes with a private sector that has invested and continues to invest real capital. As is noted below, FHA and other government guarantee agencies should credibly begin stepping back from markets that can be served by the private sector and return to a traditional 10 percent home purchase market share.  If this were done, more not less capital would enter the market.

HUD Lables As Myth:FHA masks expected losses by using overly optimistic assumptions regarding future home prices.

HUD appears to agree with this “myth,” but uses the excuse that the projections used in the November 2011 Actuarial Study date from July 2011.  No publicly traded company would be allowed to hide behind such an excuse. Again there is hope that HUD’s disclosures will be held to a similar standard as applies to the private sector.  Section 16 of the above referenced H.R. 4264 also sets disclosure standards for HUD with respect to FHA:

1. Disclosures must provide meaningful financial information and other information that is timely, comprehensive, and accurate;
2. Disclosures must not contain any material misstatements or misrepresentations;
3. Disclosures must make available all relevant information; and
4. Disclosure must not have material omissions that make the contents misleading.

The Congress and taxpayers deserve nothing less than timely, comprehensive and accurate disclosures from a trillion dollar financial entity. While HUD is to be commended for taking steps to increase premiums, eliminate incompetent lenders, and tighten some underwriting standards, it has done little to:

- Address the urgent need to move forward with housing finance privatization; and
- Credibly undertake a return to FHA’s core mission to provide sustainable lending to low- and moderate-income and minority borrowers. Today 90 percent of all mortgages are guaranteed by the Government Mortgage Complex (GMC), consisting of Fannie, Freddie, Ginnie/FHA. Ginnie/USDA, and Ginnie/VA.  Clear and credible steps must be taken to step back from the GMC’s market domination.  Yet even as FHA takes steps to reduce its share, much of the slack is merely taken up by Ginnie/USDA and Ginnie/VA.  

Follow Ed's regular FHA missives here.

Why a Judge Should Reject the Mortgage Settlement

Posted on March 23, 2012, 1:51pm | Anthony Randazzo

We've written a lot about the mortgage settlement's flaws over the past several weeks, but the one serious chance that exists for avoiding the mess it creates is for the U.S. District Court of DC to reject the settlement. In a piece for RealClearMarkets on Thursday I laid out the case that MBS investors could make in urging a judge to order the settlement renegotiated or at least prevent the banks from using investor money to pay for the settlement. Here is the heart of the matter:

The second complaint from MBS investors will be that they are innocent of any wrongdoing in this matter. There are eight counts in the complaint filed against the banks for the mortgage settlement including: unfair and deceptive loan servicing, foreclosure processing, and loan origination practices, violations of the False Claims Act and Servicemembers Civil Relief Act, and various misconduct relating to homeowners in bankruptcy.

MBS investors have no authority over how foreclosures are processed or whether the right fees are being charged. The investors rely on the servicers to do their job as much as the homeowners. It is purely the banks at fault in this regard (even if the overall settlement fine doesn't fit the crime). Vincent Fiorillo, a portfolio manager at DoubleLine Capital and AMI's board president, says, "The banks are trying to pay [their] fines with our money."

If it is true that investors were not responsible for any of these process abuses or failures, then banks are shifting their liability on to an innocent party.

See here for the full column. If the courts don't invalidate the settlement then be on the look out for other banks being forced to join the settlement by their regulator. PNC, US Bancorp, SunTrust and others are being talked about as possible banks that would agree to the same servicing standards and pay into the fines and modifications. The thing to watch for will be whether these banks join willingly, or if their regulator strong arms them into joining. 

Finally, below is an interview I did on RT covering the MBS investor case against the settlement:

As a side note, if a judge rules that banks have to use all of their own money for principal writedowns, refinancies, and short-sales it does not change the fact that the settlement is political extortion and that the settlement has nothing to do with robosigning. For that reason it should be rejected entirely.

Mortgage Settlement's Servicing Standards are Codifying Theft

Posted on March 20, 2012, 1:51pm | Anthony Randazzo

In February 2011, I was testifying before the House Financial Services Subcommittee on Capital Markets. Ranking member Maxine Waters asked each of the panelists whether we thought national mortgage servicing standards were necessary in response to the robo-signing scandal. To the best of my memory I responded that while I am no expert on servicing standards, I did think that a national standard would be unwise because it would open the system up to corruption worse than what we are dealing with currently.

Now that we have the detailed documents from the national mortgage settlement, it is becoming clear that these concerns are valid. As I will cite below, there have been a number of critics railing against the new mortgage servicing standards that were included in the legal agreement between the top five banks and the state and federal regulators negotiating with them. While these standards only apply to the five banks that agreed to them, they will impact over 50 percent of mortgages in the country. And there are a number of provisions that basically codify theft. This is basically regulatory capture 101. Public choice professors should take note.

For a full run down of problems with the mortgage settlement's servicing standards, see Abigail Caplovitz Field's article over on HuffPo from yesterday. Here are a few of the dazzlers (all references are to Exhibit E that can be found in all five settlement documents; here is Wells Fargo's):

Let's start with the metric called "incorrect loan mod denial." (Top of page E-1-2.) This metric is supposed to ensure that when you qualify for a loan mod, you're given a loan mod. According to Column C, the loan level error tolerance for income errors in this metric is 5%. As a practical matter, here's what that means: Imagine your household income is $80,000. Imagine that at $80k the bank's formula says you get a modification and thus you can keep your house. But the bank doesn't use $80k in its math; it uses $77,000. So the computer rejects you, and you lose your home to foreclosure. Does law enforcement care about the bankers wrecking-your-life error? No, because the $3,000 error, while enough to deny you the mod, isn't 5% of your income. The error was too small to count. If that doesn't count, what incentive do the B.O.B.s have to eliminate errors, or at least fundamentally minimize them? Doesn't law enforcement understand that people whose homes depend on the banks' math need much, much better? [...]

Since most people don't pay more than what they owe each month, posting less than you paid would seem to make you delinquent when you're not. How can that be ok? What are the consequences? The servicing standards say the banks have to take your payment if you're within $50, (See page A-5 at 3.a) but if your mortgage payment is $2000/month, 3% is $60. What if you start facing fees? What if you were trying to bring your account current and the bank screws up the data entry and starts foreclosing? Why isn't that potentially devastating error reportable? [...]

take the very first metric in the table, page E-1-1, "Foreclosure sale in error". If it happens, that means the B.O.Bs sold your house when they weren't supposed to. On first glance, things look good: no loan level error is tolerated (Column C is N/A). Column D looks tough, but only if you don't think much about it: only a 1% error is tolerated... [And according to the settlement] it's not reportable error to sell your house even though you weren't in default, so long as you foolishly cured the default too close the sale date and the B.O.Bs tried to stop the sale of your home.

The thing is, if any one of these banks were to write up their servicing procedures like this on their own one of tow things would happen: either a regulator would say this is ridiculous and force them to change their process, or the servicer would be publicly shamed for their thieving system and see market share slip away as customers flock to alternative firms.

But these bogus standards are not just approved by the regulators, they are blessed by the regulators across state lines and instituted at the top five "alternatives". The regulators have been captured by the banks, and if the other main servicers come on board the agreement (as is being discussed) there will soon be almost nowhere to run.

Housing Starts Up, Problematic Short-term Perspectives on Housing Also Rise

Posted on March 20, 2012, 10:39am | Anthony Randazzo

It's time for our regular broken record feature where we highlight short-term thinking on housing. Today we have a March Commerce Department Housing Starts Edition.

The Commerce Department released data for March 2012 showing that in February, home builders broke ground on enough homes to maintain a 698,000 annual pace of building. "Housing starts in the U.S. hovered in February near a three-year high and building permits rose, adding to signs that the industry at the heart of the last financial crisis is stabilizing," according to a Bloomberg article.

That same article went on to cite a number of positive analyses of the data, including some of these classics:

“The housing market continues to recover at a very gradual rate,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, who forecast a 697,000 pace for housing starts. “The increase in permits likely flags further strength in the months ahead.” [...]

We have the wind at our back as the economy recovers and housing improves,” Sheree Bargabos, president of roofing and asphalt at the Toledo, Ohio-based company, said on a March 9 conference call. [...]

“Growth is anticipated as the housing market recovers, driven by home affordability, improving home values and home remodeling activity.”Paul Hylbert, chairman of Kodiak Building Partners in Denver, Colorado, a building materials supplier, said “business is definitely picking up. We are on the road to recovery.”

It continues to baffle me that these analysts feel the need to be so positive. Especially when the housing market has a collective pile of bricks hanging over its head. Here are four quick points to think about:

First, the Fed’s quantitative easing has led to today’s historic lows for mortgage rates, but now they pretty much can only go up, meaning the future will have increasingly hard downward pressure on housing prices as interest rate eventually increase from zero. 

Second, the shadow inventory of homes is still very high. A recent estimate put it at 9.8 million homes unsold or pending in foreclosure. That is more downward pressure on prices in the coming years as the homes reach the market.

Third, housing prices have finally fallen to where they should be based on a historical trend. But while this is a good thing, it does not mean we’ve reached the bottom of this price decline. In addition to eventually increasing mortgage rates and the shadow inventory, every housing bubble since WWII has seen prices dip below the historical trend line average for a few years before sweeping back up to prices that are more the norm. 

The final thing to consider is that household debt is still very high and savings are low. The dark side of interest rates at zero percent is that there is little point in saving, and higher incentives for keeping, adding, or refinancing debt. As a result, household debt, which is preventing a lot of consumption in the economy, has only deleveraged to 2007 levels—meaning there are years left of household debt deleveraging to get through.

All of this would suggest that we have at least a few years left before housing prices begin to climb again and there is recovery in the housing system.

Is Obama Making Home Ownership an Entitlement?

Posted on March 15, 2012, 8:59pm | Samuel Staley

Ever since the housing bust, restoring stability to the housing market has been a cornerstone of both the Bush and Obama presidential administrations. Most recently, President Obama introduced programs to reduce financing costs for mortgages originating or secured by the Federal Housing Administration and Ginnie Mae. This new initiative, however, is another step toward converting federal housing policy from one focused on housing opportunity to one guaranteeing homeownership as a new middle-class entitlement. I discuss this in more detail in a commentary published over at RealClearMarkets.com (March 15, 2012). I note in part:

"President Obama forcefully argued for "no bailouts, no handouts, and no copouts" in his State of the Union Speech in January, but it's hard to take those words seriously after examining his housing and homeownership policies over the last three years. In fact, the White House is well on its way to orchestrating a very large middle class bailout as it transitions its federal housing policy from one that strives to create housing opportunities, to one that establishes homeownership as an entitlement.

"This policy shift became much clearer this month when the Obama administration announced directives to lower financing fees at the Federal Housing Administration (FHA) and Veteran's Administration (VA). The fees will make it even easier for households to secure home mortgages, but will separate loan approval decisions from estimates of borrower risk. Since FHA is already dangerously close to becoming insolvent (it is currently leveraged higher than Lehman Brothers was when it declared bankruptcy), this puts taxpayers at a greater risk of having to offer another bailout down the road."

For more on the financial crisis, see the work by my colleagues Anthony Randazzo and James Groth on the Reason Foundation's Housing Policy page.

Mortgage Settlement BS: Banks Don't Have to Admit Guilt

Posted on March 14, 2012, 4:44pm | Anthony Randazzo

This should not come as a surprise, but it is very frustrating: in settling the robosigning case, all five banks are neither accepting nor denying guilt. It took more than a month from the data the settlement was announced, but the complaint and settlement agreements were finally filed this week. You only have to get through first page list of plaintiffs to find these early notes:

WHEREAS, Defendant, by entering into this Consent Judgment, does not admit the allegations of the Complaint other than those facts deemed necessary to the jurisdiction of this Court; WHEREAS, the intention of the United States and the States in effecting this settlement is to remediate harms allegedly resulting from the alleged unlawful conduct of the Defendant...

Oh joy. I pulled this quote from the Bank of America settlement, but you'll find the exact same language in the agreements with the other four banks. It is insulting. 

Now, to be clear—the banks have been largely extorted in this settlement. The crime they committed (and that they should admit to) are largely paperwork processing errors. As far as the evidence has been presented, that paperwork essentially just led to people being evicted from their homes faster than the back log of paper would have allowed, but not faster than they legally should have been. There have only been a handful of cases that have come to light where robosigning specifically led to a foreclosure that would not have otherwise happened.

As a result this settlement is the worst of all possibilities—it levies a fine on the banks that does not match the crime (how did they land on $2,000 a the restitution for early paperwork processing? and why do borrowers today get modified mortgages for robosigning of borrowers a few years ago?), it ignores going after the major crimes (some people did get kicked out of their houses, but this settlement doesn't address that), and it lets the banks slide on actually admitting robosigning guilt. 

The pattern of regulators settling with accused financial institutions but allowing them to neither admit nor deny guilt has come under some scrutiny lately. Last year, James Groth wrote a blog posts expressing frustration at the practice. And in November, a federal Judge ruled a deal reached between the SEC and Citigroup was "neither fair, nor reasonable, nor adequate, nor in the public interest." However, that ruling was recently chastised by an appeals court, leaving open the question of whether Judges will take a stronger stance against these types of settlements.

The "neither admit nor deny" portion of the mortgage settlement is hardly its gravest error. In fact, the mortgage settlement is so bad that this probably wouldn't even crack top 10 list of problems. But it will be interesting to see if the US District Court of DC judge highlights this aspect of the settlement and suggests that the banks be forced to admit robosigning guilt. 

Freddie Mac Takes Another $146 Million

Posted on March 12, 2012, 9:09am | Anthony Randazzo

Freddie Mac reported Friday it needs $146 million from the U.S. taxpayers to remain solvent going into 2012. The government-sponsored enterprise realized a net loss of $5.3 billion for 2011, and asked for a total of $7.656 billion from the Treasury Department to cover those losses. Like its sister mortgage failure Fannie Mae, were Freddie Mac a normal American company it would be declared bankrupt and either shut down or split up and sold off (with the notable exception of GM, Chrysler, AIG, commercial banks, and investment banks). 

In total, Freddie Mac has received $71.346 billion in bailout money from the U.S. Treasury since FHFA took the GSE into conservatorship in late August 2008. Here is the most recent breakdown of taxpayer quarterly checks for Freddie Mac:

• 4Q 2011 — $0.146 billion
• 3Q 2011 — $6 billion
• 2Q 2011 — $1.5 billion
• 1Q 2011 — $0
• 4Q 2010 — $0.5 billion
• 3Q 2010 — $0.1 billion
• 2Q 2010 — $1.8 billion
• 1Q 2010 — $10.6 billion
• 4Q 2009 — $0
• 3Q 2009 — $0
• 2Q 2009 — $0
• 1Q 2009 — $6.1 billion
• 4Q 2008 — $30.8 billion
• 3Q 2008 — $13.8 billion

Late last month, Fannie Mae announced it wanted $4.6 billion more from the taxpayers, putting its total losses at $116.2 billion. (See full details here.)

That means the combined bailout for Fannie and Freddie has reached $187.5 billion.

See our comments on Freddie Mac's third quarter 2011 earning statement.

See our full coverage on Fannie Mae and Freddie Mac here.

Shaun Donovan Spins the Mortgage Settlement on The Daily Show

Posted on March 7, 2012, 11:39am | Anthony Randazzo

HUD Secretary Shaun Donovan was on The Daily Show on Monday to chit chat with Jon Stewart about a grab bag of housing topics, the most recent cabinet official to swing through TDS's studio. Most of their conversation focused on homelessness, and Donovan's clear unfamiliarity with Stewart by asking the frequently-in-mourning Met's fan if he liked the Yankees. But in the last minute of the interview it shifted to the mortgage settlement, and that is when Shaun "The Spin Doctorvan" Donovan came out to play (video below). Donovan said:

You remember when we heard these stories about people losing their homes because the banks weren't even looking at the paperwork... You (Stewart) did a story about an elderly woman who was locked into her home because they thought they were locking her out of her home. The changed the locks. We went and looked, we found as high as 60 percent of foreclosures were being done wrong. And we went after the banks for it. And we got $25 billion dollars a few weeks ago. And it is the single biggest settlement in the history of the country between states and Feds. And what we are gonna get is actually writing down people's mortgages, to keep them in their homes.

Stewart is normally able to spot BS from his political guests, whether they are Mike Huckabee, Bill O'Reilly, or Nancy Pelosi, and push back politely. But he didn't even step up to the plate on this interview, giving The Spin Doctorvan a free pass to mix and match his facts and figures. Let's break down the logical sequence of what Donovan said:

• "You did a story about an elderly woman who was locked into her home because they thought they were locking her out of her home. They changed the locks. So we went and looked, we found as high as 60 percent of foreclosures were being done wrong." 

Okay, here is the first misdirection. They way Donovan sets it up, 60 percent of foreclosures were locking grandma out of her home. He makes it seem like "as much as" 60 percent of foreclosures were on homes that were fine, that were making payments. In reality, most of the robo-signing was on homes that needed to be foreclosed on anyway. It just mean the paperwork was processed faster. Only a handful of homes were actually seized without cause. We are still waiting for the court filing to see if the administration has anymore evidence on this.

• "And we went after the banks for it. And we got $25 billion dollars a few weeks ago."

I guess it is a bit unprofessional for a cabinet secretary to say he "went after" any private sector institution, but the servicers royally screwed up and that was what needed to happen to get them in line for breaking the law. Anyway, from this we can assume that Donovan helped secure $25 billion for those people wrongly foreclosed on. But just 60 seconds of reviewing the settlement overview shows that to be wildly misleading, as everyone foreclosed on by the banks in the settlement is eligible for a check. And only 6 percent of the money is actually going to people remotely related to robo-signing.

• "And what we are gonna get is actually writing down people's mortgages, to keep them in their homes."

So, the money in this settlement is going to keep people who were wrongly foreclosed on in their homes? That is what would be natural to take away from this. But that is not what is happening. The money is going to come from MBS investors, taking a hit on the principal owed to them for loans they gave to homeowners who have not yet been foreclosed on nor are related to the robo-signing debacle in any way. 

The Spin Doctorvan's story is that the banks began taking people's homes who were as innocent as grandma, and then the states and Feds came to the rescue, pried $25 billion from the banks, and wrong down the principal of those people the banks hurt so help them avoid foreclosure. That is easily the message that could be taken away by this appearance.

The real story is barely a reflection of that though: The mortgage settlement is going to give a $2,000 check to those foreclosed on from 2008 to 2011, and is going to write down mortgage principal for homes that might be foreclosed on in 2012 and 2013. But all of the robo-signing happened back in 2009 and 2010.

So if you're confused about what the hell this whole mortgage settlement was really about then you are not alone. See full details on the settlement here and the argument for having a court reject the settlement here.

And see The Spin Doctorvan in action below: 

Fannie Mae Takes Another $4.6 Billion from Taxpayers

Posted on February 29, 2012, 10:23am | Anthony Randazzo

It's that time of the year, when winter starts fading, college basketball becomes relevant, and the GSEs release their annual earning loss statements. First up, Fannie Mae. 

In the fourth quarter of 2011, Fannie Mae lost $2.4 billion, and is asking the Treasury Department (aka the taxpayer all-you-can-take bailout buffet) for $4.6 billion to stay solvent. Without this money Fannie Mae would be bankrupt, but the Treasury Department has already committed to cover any losses (as we have since late 2008). 

Overall In 2011, Fannie Mae lost a net of $16.4 billion, after losing a net of $10.6 billion in 2010. And combining bailout request for all four quarters, Fannie Mae is going to take in $26 billion in bailouts for 2011, after getting $15 billion in bailouts for 2010. 

So the new complete taxpayer bailout total for Fannie Mae (3Q2008 through 4Q2011):

$116.2 billion

To put this in perspective, Bank of America and Citigroup each received $45 billion in bailout funds (through TARP capital injections), but have since paid them all back. J.P. Morgan Chase and Wells Fargo each received $25 billion in bailouts but have also paid back their funds. General Motors got $51 billion in bailouts, but has paid back more than half of it as of this writing.

The only close comparison is AIG—which has received loans and capital injections of $140 billion, which is slowly being repaid. 

Once you combine Fannie's losses with Freddie Mac ($71.2 billion as of 3Q2011), you get current total bailout expenses of $187.4 billion. And we haven't even seen Freddie's 2011 loss statement yet. 

HousingWire further reports: "The problem loans continue to rise from the books of business originated between 2005 and 2008. These loans cost Fannie $140 billion since 2009. Its becoming a smaller portion of the entire portfolio, though, shrinking to 31% at the end of 2011 from 39% the year before."

We do not have to continue bailing out these enterprises. We can put them into receivership and begin the process of winding down their activities over a five year period. 

Here is an updated list of Fannie Mae's quarter bailout needs:

• 4Q 2011 — $4.6B
• 3Q 2011 — $7.8B
• 2Q 2011 — $5.1B
• 1Q 2011 — $8.5B
• 4Q 2010 — $2.6B
• 3Q 2010 — $2.5B
• 2Q 2010 — $1.5B
• 1Q 2010 — $8.4B
• 4Q 2009 — $15.3B
• 3Q 2009 — $15B
• 2Q 2009 — $10.7B
• 1Q 2009 — $19B
• 4Q 2008 — $15.2B
• 3Q 2008 — $0B

See last quarter's post on Fannie Mae's losses here.

See full coverage of Fannie Mae and Freddie Mac here. 

(Video) Piling on the Unjust Mortgage Settlement

Posted on February 28, 2012, 8:23am | Anthony Randazzo

We are 19 days past when the great and mighty national mortgage settlement still hasn't been released in detail form to the public—neither has it been filed in court. So maybe there really, really is a devil lurking in the details. But we're not going to let this go.

This deal has almost nothing to do with robo-signing.

This deal is political extortion and highly unjust.

And on Fox Business yesterday afternoon we continued to push the argument that this settlement is something that a judge should reject whenever the details are filed in a court. 

FHFA Puts the U.S. Rental Market in Crosshairs

Posted on February 27, 2012, 3:13pm | Anthony Randazzo

The Federal Housing Finance Agency has decided to go forward with a pilot program for turning government owned homes into rental properties. The program announced today was widely anticipated, but is limited in size and scope. There are no new arguments for or against a federal rental program—the same message that the program will be fundamentally unfair, will yield itself to cronyism, will pick winners and losers, and will likely be poorly managed all still apply. But since FHFA is going ahead with the REO-to-rental plan, at least we'll have some measurable outcomes to discuss and critique before a full blown project is launched.

Some background on the issue:

Why launch a pilot program—Since the government took over Fannie Mae and Freddie Mac, Uncle Sam has accumulated a large number of properties. Fannie and Freddie have foreclosed on thousands of properties (since the borrowers stopped paying their mortgages), and since the housing market is not exactly sell properties at warp speed, the GSEs have 122,000 properties that they now own. Since they can't sell the homes fast (and it costs money to upkeep those vacant homes), the GSE regulator FHFA has decided to rent 

What is the pilot program—FHFA will take 2,490 properties located in Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and a handful of cities in Florida and put them up for bid to pre-qualified rental managers. If you have money, experience, and a good plan for renting the units, you can buy a bulk of homes them from the government's selected pool and rent the homes out. Individuals will not qualify under this program to buy one or two properties, since they want to sell large batches of homes. And the price for the home will be distorted since only the select few will be able to bid on the properties.

What is the trade off—If you measure this pilot program against just the status quo, it does not sound like a terrible idea. Yes, only insider cronies are going to be able to bid on the properties and the process will thus be unfair. But the properties can not be unloaded to just anyone, since the taxpayer would be liable for any re-foreclosure costs. And at least the government is not trying to set up a landlord agency. So the net benefit of getting these properties off the government books could seem like a positive.

BUT, we are not measuring against the status quo if we are being honest evaluators. We'd want to measure this idea against alternatives. Really, this rental program is a trade off from letting housing prices fall to where homeowners are willing to buy them. FHFA could be lowering conforming loan limits and raising the G-fee to increase the cost of a mortgage and put downward pressure on home prices. FHFA could publicly encourage the Fed to let interest rates rise to their natural market level (also putting downward pressure on home prices). FHFA could have urged HUD to reject the mortgage settlement that just keeps the foreclosure process clogged up. All of that would allow for the GSEs to sell their properties to homebuyers looking for the real market price. That is the trade off that this rental program should be measured against

Also see what we wrote back in August 2011 when this idea was first being floated.

More Details on Bank's Limited Contribution to the $26 Billion Settlement

Posted on February 27, 2012, 7:21am | Anthony Randazzo

It has been more than two weeks since the robo-signing settlement was reached and there still is no detailed document of the agreement available for review or any paperwork filed with a court. That has not stopped us from pointing out the political nature of the document or the fact that it is highly unjust. But we don’t need the detailed document to be able to analyze the response from banks.

One of the reasons we argued the mortgage settlement is unjust is because it is forcing mortgage investors who had NOTHING to do with the robo-foreclosing scandal to take tens of billions in losses. The biggest political win in the settlement was the $12 billion in mortgage modifications, $5 billion in short-sale and similar sales, and $3 billion in refinances that the banks committed to doing. But most of those costs are not going to hit the banks, but rather the investors in the mortgages being modified. A majority of losses at the banks are for the settlement’s other provisions—cash for foreclosed borrowers and the AGs slush fund. 

Just look at the bank’s responses to the settlement. From American Banker: 

Overall, the settlement agreement will have no material impact on the top five banks' profitability or on their financial results in the future, each of the banks says, and their stock prices were little changed in afternoon trading.

A $26 billion bottom line is not that much relative to the trillions on these banks balance sheets. At the end of 2011, the five banks had a combined $7.8 trillion in assets. So we are talking about 0.003 percent of their assets. But still, if $26 billion were hitting the banks in a single quarter that would have at least some material impact on the banks. The reason that it won't have much of an effect is three fold: (1) they were prepared for this and already set aside the money or wrote off the losses, (2) the relief to homeowners is spread out over a number of years, and (3) most of the relief will not come from the banks themselves. Consider the following:

Bank of America, which is taking the biggest hit on this settlement, owes cash payments of up to $3.24 billion to state and federal sources under the agreement, and has committed to $8.58 billion in relief payments (including an up to $1 billion settlement with FHA attached to this deal.) But their press release about the agreement says: 

The financial impact of the settlements is not expected to cause any additional reserves to be taken over those made during 2011, based on the company’s understanding of the terms of the agreements in principle. The refinancing assistance is expected to be recognized as lower interest income in future periods as qualified borrowers pay reduced interest rates on loans refinanced. Although the company may incur additional operating costs (e.g., servicing costs) to implement parts of the global settlement in future periods, it is expected that those costs will not be material.

Having to take a loss of over $8 billion in a quarter would be significant relative to their recent earnings statements. But if MBS investors are taking those refi and mod hits, then there are no worries.

How do the other banks in the deal stack up?

JPMorgan Chase owes $1.08 billion in cash payments and has committed to $4.21 billion in relief for borrowers. However, the bank has already put money aside over the past five quarters of negotiation to cover the cash payments. And American Banker reports:

The bank also will incur some additional operating costs to implement the new servicing standards required by the deal, but the financial impact "will not be material," says Kristin Lemkau, a JPMorgan Chase spokeswoman.

Wells Fargo has $1.01 billion in cash payments required by the agreement and $4.34 billion in relief payments. But they issued a press release stating:

As of December 31, 2011, the company had fully accrued for the Foreclosure Assistance Payment [the cash payment]. Similarly, as of December 31, 2011, the expected impact of the Consumer Relief Program was covered in our allowance for credit losses and in the non-accretable difference relating to our purchased credit-impaired residential mortgage portfolio. The Refinance Program will not result in any current-period charge as the impact of this program will be recognized over a period of years in the form of lower interest income as qualified borrowers benefit from reduced interest rates on loans refinanced under the program. 

Citigroup only has to make $415 million in cash payments and $1.79 billion in relief commitments. They will wind up adjusting their 2011 financial results to reflect $84 million in additional losses since they had not saved up completely for the cash payment, plus $125 million in losses for the same statement on litigation related payments. But similar to other press releases they said:

Citi expects that existing reserves will be sufficient to cover customer relief payments... The impact of the refinancing concessions will be recognized over a period of years in the form of lower interest income.

Ally Financial Inc., the smallest of the banks involved but the one first revealed to be robo-foreclosing, has $110 million in cash payments required and $200 million in relief payments committed under the deal. But as American Banker writes, they already have this money set aside:

Ally Financial Inc. says it has set aside reserves to cover its $110 million cash payment and $200 million in borrower relief. The company says in a press release that "the financial impact of the agreement will not be material on financial results for the first quarter of 2012 and future periods."

So I count cash payments of $5.855 billion. It is yet unclear how much of the refi, principal mod, and other mortgage relief commitments will hit balance sheets, but since the banks do not really appear worried it is safe to say that investors should prepare for the blow.

How Justice Broke Down in the Mortgage Settlement

Posted on February 23, 2012, 5:06pm | Anthony Randazzo

Following on the commentary we published last week calling out the politically oriented nature of the mortgage settlement between state attorneys general and the top five mortgage servicers, I had an op-ed published by RealClearMarkets this morning that highlights the unjust nature of the settlement. And any judicial agreement that doesn't pass the "justice" test should be seriously reconsidered:

...rather than helping the housing market, all the attorneys general wound up accomplishing was pushing aside justice in lieu of political grandstanding.

The mortgage settlement lacked what should have been basic procedure for investigating claims of misconduct at financial firms. There should have been evidence collected, executives deposed, the facts presented, and restitution paid to those who were wronged.

But this did not happen in any meaningful sense - only a "small number" of cases were found where robo-signed foreclosure notices were served on households making their payments. And had the attorneys generals' case against mortgage services been taken to court, there would have been little evidence to persuade a judge or jury that $26 billion payout was due. [...]

Since the settlement has yet to be approved by a judge, it is still possible this "landmark" deal could be dismissed. The arbitrary $2.5 billion slush fund state attorneys general got in the deal should be grounds enough for a judge to reject this (ala Jed "Dread" Rakoff). The unjust treatment of mortgage investors being linked to a non-germane robo-signing case is even more substantial grounds for refusal.

See the whole commentary here.

How Does HUD Secretary Donovan Misunderstand So Much About Housing?

Posted on February 21, 2012, 7:09pm | Anthony Randazzo

“Does this $26 billion deal move the needle on the struggling U.S. housing market at all?” This was the question asked by Ali Velshi to HUD Secretary Shaun Donovan last week in an interview last week on CNN. He was referring to the huge mortgage servicing settlement signed between the states, feds, and top five mortgage servicers announced February 9. Donovan gave a very political answer, yes it moves the needle, but there are challenges that remain. 

That is barely true, as there is almost nothing in the settlement that moves the housing market towards recovery. But what was more interesting is what Donovan suggested we should do to keep the momentum going towards shifting the needle further. Donovan suggests we refinance every underwater mortgage in America and save homeowners an average of $3,000 a year and pay construction workers to rebuild vacant homes.

Huh? 

The biggest problem plaguing the housing market right now is that prices are not at their bottom, household debt has not been deleveraged, and the foreclosure process is jammed up. Let prices fall to their natural bottom and people will buy the vacant homes and pay to fix them up themselves—taxpayers don’t need to foot the bill to keep the price of that home unaffordable. Meanwhile, since you have to be current on your mortgage payments to refinance, doing a forcible nationwide refinance program isn’t going to prevent borrowers who have fallen behind because they can’t afford their current payments avoid foreclosure. 

Velshi, recognizing this argument puts it to Donovan, asking why we should not just let the housing market fall to the bottom. Donovan spins the answer:

From an economic view most people look at the market say house prices are where they should be at equilibrium, it’s what folks can afford.  Folks who are saying let it hit bottom, the real consequences of that to families and neighborhoods are enormous. A home is the single biggest investment that a family makes. It is how they often send kids to colleges through the equity in their home, they start businesses. It’s like saying if somebody’s house is burning down we should just let nature take its courses even if it might make the entire neighborhood go up in flames. I and the president don’t believe that we should let families and neighborhoods bear the brunt of this crisis like that. We are going to keep fighting, taking additional steps like this settlement to make sure the encouraging signs in the economy continue.

Okay, four things. Well, five. Pretty much every sentence in there is wrong. It is stunning—especially for someone who is supposed to be the top adviser on housing for the president. 

First, housing prices are not where they should be or at what people can afford today. If they were, then we wouldn’t have 3 million homes on the market and another 7 million or so in the shadow inventory. Sure, price-to-rent ratios are down to rates last seen in the 1990s. And real housing prices are about where they should be given the historical norms of growth for inflation adjusted housing prices. But every burst housing bubble since WWII has seen real prices fall below the trendline for several years before bouncing back to equilibrium—and there is no reason to think this price decline will be different. 

Second, yes, foreclosures suck. And lower housing prices will mean more underwater debt. But the consequences of dragging the housing collapse out for five years and counting, when we could have been in recovery last year are also “enormous.” 

Third, and this is nothing new on this blog: Homes. Are. Not. Investments. Or at least, they are not good investments. They are savings accounts at best. 

Fourth, using home equity to pay for tuition is an admirable story, but turning homes from a retirement nest egg into an ATM is one of the things that got us into this mess. 

And fifth, letting housing prices fall to where they are affordable is not like saying “let the house burn down.” It is more saying that we should not keep adding support beams to keep a crumbling home that was built on a faulty foundation from collapsing because it is always going to be unstable. It would cost less in the long run to just build a better house. 

Mortgage Settlement Misses All the Points

Posted on February 17, 2012, 9:01am | Anthony Randazzo

Last week's landmark mortgage settlement signed last week is being framed as restitution for homeowners victimized by "robo-signing" bankers who contributed to the 2008 financial crisis. There are a number of critics who say the deal was too small, and that it should have included more mortgage modification money, but as I point out in a new commentary for Reason Foundation, where the deal is small is on the actual money for individuals that were robo-foreclosed: out of the $26 billion settlement, only $1.5 billion-a mere 6 percent of the agreement-has anything to do with robo-signing. So what was the point of the settlement? From the commentary:

If the point was to provide restitution for those homeowners who were foreclosed on by banks who didn't own the note on the mortgage or acted before 120 days had passed, that could have been done with a few million dollars.

If the point was to punish the mortgage servicers who violated procedural foreclosure laws, that was achieved with $1.5 billion of this settlement-which will be paid out in checks of up to $2,000 per foreclosed home while the funds last.

If the point was to leverage this investigation into a backdoor means of forcibly reducing mortgage debt, the settlement barely touches the $700 billion the nation is collectively underwater on residential mortgages.

If the point was to extract a pound of flesh from the banks, the settlement's focus on modifications means that most of this agreement will wind up being paid by mortgage-backed security investors-i.e. pension funds, insurers, and 401(k)s. The principal write-downs and refinanced mortgages represent $20 billion of the $26 billion settlement (77 percent) and they will almost all come from securitized loans -meaning the majority of the costs won't be borne by the banks themselves (unless they were the investor in the security, which they are likely to avoid modifying).

If the point was to clear up all legal uncertainties surrounding mortgage fraud claims so that banks could feel free to start lending again, the deal also missed that mark by only releasing the servicers from robo-signing related liabilities. That leaves the banks open for other civil and criminal lawsuits from the Feds and attorneys general.

This does not address whether forced principal modifications are a good thing. Or whether the focus of the investigation assumed the very nature of foreclosing was a crime. Or whether the limited liability removal is positive or negative. Rather, it highlights that whatever the point of this deal, it ultimately missed the mark and was unjust.

Unless the point of the agreement was to win political points.

Most of those households that were robo-foreclosed were ultimately justified—the homeowners were 4 months or later on their payments and unlikely to ever get current again. But there is still a letter of the law that needs to be followed. Mortgage servicers that broke the law should pay fines related to the crimes committeed. But the witch hunt stemming from widespread negative opinion towards the banks sent attonerys general and federal regulators after more than justice—they wanted to a burning. 

Strange thing is, they didn't really even get a burning, since most of the money being paid out in this settlement is coming from MBS investors. 

Read the whole commentary here.