Paying The Price For A Long And Seamy History
A reader suggested a topic on housing loans. “Will the home mortgage market ever go back to the way it was 20 years ago? Will econmic growth ever get above 2%? If not how will growing Goverment debt be paid back?”
The Washington Post. “The politics of housing finance reform are starting to get interesting. Wednesday, the Republican-controlled House Financial Services Committee passed the Protecting American Taxpayers and Homeowners (PATH) Act, which would wind down Fannie Mae and Freddie Mac and replace the busted entities with — well, nothing, pretty much. For the first time in decades, no ‘government-sponsored enterprise’ would be responsible for bundling most mortgages into marketable securities.”
“Under PATH, private investors would perform that function; Washington’s only role would be to supervise the quality of securitized mortgages. The Federal Housing Administration would remain as a source of government backing for mortgages to low-income first-time homebuyers, albeit to a more limited extent than present law allows. In short, Congress now has before it a fairly pure free-market alternative to the status quo, one that is likely to pass the House if and when the Republican leadership brings it to the floor.”
“The PATH Act opponents’ best economic argument is that reducing the supply of government-backed securities would reduce the overall depth of the U.S. financial markets, which is one of this country’s greatest advantages in the competition for the world’s supply of capital.”
“Still, politics is the least refutable objection to the PATH Act — quite simply, realtors, home builders, bankers and other housing interest groups would exercise their clout to defeat it, or anything like it. Bowing to that perceived inevitability, a bipartisan group of senators offered a bill last month that would also end Fannie and Freddie but keep government in the business of insuring mortgage securities against catastrophic losses, as long as private investors paid a fee and agreed to risk a substantial amount of their own capital.”
“Unlike the House’s PATH Act, the Senate bill has yet to make it through committee. But between the two proposals, the debate now shapes up as a contest between a nearly pure free market and a continuing role for government that is significantly smaller and more transparent than it was.”
From Barrons. “In part, Fannie and Freddie are now paying the price for their long and seamy history in Washington. No agencies of government operated in as meretricious fashion as Fannie and Freddie in the decade leading up to their demise. The companies lavished hundreds of millions of dollars in political donations and lobbying fees to literally all of K Street, and on high-paying executive appointments to leading Democratic and Republican operatives and former key congressional staffers.”
“Both companies got caught in the mid-2000s cooking their books in order to meet earnings targets that maximized executive bonuses. At the same time, they used their muscle in Congress to bully their regulators and keep their capital levels at risibly inadequate levels.”
“Their implied (now explicit) government backing of their debt allowed them to raise money at low, Treasury-like rates and then plunge those proceeds into higher-yielding risky instruments like, in the end, subprime and Alt-A securities for their investment portfolios. By the middle of the last decade, the value of these portfolios had soared to over $1.5 trillion. They were akin to internal hedge funds that supplied most of the agencies’ profits and the earnings growth so important to shareholders and bonus-hungry GSE executives. And the game worked like a charm until housing prices began their relentless decline in 2006.”
“Reform is inevitable with a reduced role for the government in housing finance. Fannie and Freddie will eventually disappear, to be replaced by the insurer FMIC and a public-financing platform open to all players. The U.S. taxpayer likewise will be far better protected than in the past. This won’t likely be good news to the proponents of a largely privatized mortgage market nor the hedge-fund managers looking to score big profits off the bailout of Fannie and Freddie.”
Investors Business Daily. “A pre-crisis bill written by Democratic Rep. Mel Watt — President Obama’s nod to run the Federal Housing Finance Agency — reveals that his ideas for regulating Fannie Mae and Freddie Mac are more radical than he lets on. On the eve of the financial crisis, Watt actually proposed the creation of the regulatory agency he now seeks to run — only, he designed it not to reform Fannie and Freddie but to pressure them to underwrite even more affordable housing, exposing them to even more risk.”
“The bill he co-sponsored with then-banking panel Chairman Barney Frank — the Federal Housing Finance Reform Act of 2007 — would have forced the federally backed mortgage giants to meet even tougher quotas for affordable lending, while contributing to an ‘Affordable Housing Fund’ to rebuild blighted urban areas. ‘The real benefit of this bill is that it will provide a big stimulus for more affordable housing,’ Watt said at the time, ignoring concerns the agencies already were overexposed to low-income loans.”
“In March 2007, Watt said he co-authored the bill to create a new regulatory apparatus that ‘will provide a means to achieve our ultimate goal of expanding the supply of affordable mortgage credit across the country.’ At the time, Watt was a senior member of the House Financial Services Committee and had just stepped down as chairman of the Congressional Black Caucus, where he’d pushed the government to boost minority homeownership.”
“His bill proposed enhancing existing federal goals boosting Fannie’s and Freddie’s low-income mortgage portfolios by adding ‘a new affordable housing sub-goal for re-financing transactions.’ The proposed regulator, dubbed ‘the Federal Housing Finance Agency,’ also would direct Fannie and Freddie to make contributions to an Affordable Housing Fund for ‘very and extremely low-income families’ in amounts equal to 1.2 basis points on each of their total outstanding mortgages — including those held in portfolio and those securitized.”
“The bill, which failed to become law, authorized the new agency to set ‘housing goals and an annual home purchase goal for’ Fannie and Freddie, and to ‘take enforcement action against an enterprise for failure to meet the housing goals.’ Proposed enforcement actions included issuing fines, cease and desist orders and even criminal penalties against Fannie and Freddie if they fell short of the social lending goals. ‘The agency,’ moreover, ‘has the authority to remove management.’”
From the Barron’s article:
‘Despite the recent observations that Fannie and Freddie’s combined dividends by late this year or early next will at least equal the $187 billion owed the government, it’s not a foregone conclusion that the taxpayer will be fully repaid. Of the $187 billion total, some $80 billion represent markups by both Fannie and Freddie of an accounting item called deferred-tax assets.’
‘These are intangible assets that will only be turned into actual cash in years to come if the companies generate sufficient income to realize tax savings from their past losses. In the interim, the two GSEs will have to boost their net debt by using cash and borrowings to write the dividend checks to the government covering the DTA markups. In reality, the government is no better off financially: It also backstops the net debt of Fannie and Freddie.’
‘Also, one can’t be sure that Fannie and Freddie can keep their current yearly run rate of profits of a combined $20 billion to $25 billion that so many of the junior-preferred shareholders are counting on. Under FHFA direction, the GSEs are continuing to pare their internal investment portfolios by about 15% a year. Already, these high-earning portfolios have dropped to $1.1 trillion from $1.5 trillion at their peak.’
‘Likewise, the GSEs’ operations figure to be squeezed under the various reform plans, as the caps on the size of the mortgages they buy and then guarantee drop from the current level of $625,000 to $417,000 over five years. Then, too, though positive house-price cycles tend to have some longevity, one can’t be sure what lies ahead for U.S. housing or the economy.’
“Then, too, though positive house-price cycles tend to have some longevity, one can’t be sure what lies ahead for U.S. housing or the economy.”
“… positive house-price cycles …”
Buy up all the houses offered for sale at higher-and-higher prices and - presto! - you will have before you a positive house-price cycle.
Keep the number of houses offered for sale at a scant minimum and you won’t have to buy all that many of them. Entice others to enter the market and you’ll have to buy even less.
“Entice others to enter the market and you’ll have to buy even less.”
Others = hedge funds plus all-cash Canadian and Chinese investors
Not only enticing others to buy but enticing buyers not to sell.
Keeping prices moving up offers much-needed hope to those who are underwater. Those who were ready to walk when prices were falling may do some re-thinking if prices begin going up. This re-thinking will act to furthur restrict supply.
Does the Fed’s $40 bn/month in MBS purchases have anything to do with the high earnings on the GSEs’ $1+ trillion portfolios?
“If not how will growing Goverment debt be paid back?”
Last time I checked, the Fed was supposedly snatching up $40 bn/month ($480 bn/year) in mortgage bonds (MBS) and $45 bn/month ($540 bn/year) in Treasury bond purchases. Does this $85 bn/month ($1+ trillion/year) in bond purchases by the Fed constitute debt repayment? Or to put it another way, is there any reason they ever really need to unwind their balance sheet (political statements aside)?
“(Reuters) - Japan on Sunday endorsed Myanmar’s reform program by writing off nearly $2 billion in debt and extending new aid, some of which will help support an industrial zone being developed by Japanese firms near the commercial capital, Yangon.”
http://www.reuters.com/article/2013/05/26/us-myanmar-japan-idUSBRE94P04M20130526
Easy peasy. Prices don’t rise, it’s all good. Right? But currency is a logical construct and a Fed willing to monetize any and all debt is not something which will encourage support of the common illusion.
“In short, Congress now has before it a fairly pure free-market alternative to the status quo, one that is likely to pass the House if and when the Republican leadership brings it to the floor.”
What creation of Congress for purposes of keeping the housing bubble inflated remains to be announced?
“The PATH Act opponents’ best economic argument is that reducing the supply of government-backed securities would reduce the overall depth of the U.S. financial markets, which is one of this country’s greatest advantages in the competition for the world’s supply of capital.”
Eliminate GSE debt issuance and sell more Treasurys, and the overall debth of U.S. financial markets can be maintained while reducing the flow of loanable funds down the housing market rat hole: A twofer.
‘the game worked like a charm until housing prices began their relentless decline in 2006′
So much gets forgotten over time. These two organizations were broke by the end of 2004. In the fall of 2004, a criminal investigation was opened on Fannie Mae by the Justice Department, only to disappear. I don’t think you can even find a record of it on the internet; it was scrubbed. It’s interesting how much effort has gone into erasing the knowledge of how corrupt these giant corporations were (are?). The executives openly defied congressional committees. The CEO of Fannie bragged about diving deeper into subprime lending when the wheels were already coming off. Most of this while they weren’t even producing financial statements, which would have been the death of any other listed stock.
Keeping these companies around is even more outrageous than if Enron was still running California’s electric grid.
“Keeping these companies around is even more outrageous than if Enron was still running California’s electric grid.”
Unlike Enron, they ran their operations under the auspices of ‘government sponsorship.’
The level of corruption in the US is staggering. What’s worse, the mainstream media is completely useless now as investigative reporting has been replaced by canned propaganda delivered by grinning twenty-something know-nothings. It used to be said that you could always count on the US to get things right after exhausting every other option. I do not think we will get it right anymore. We are too far gone.
‘investigative reporting has been replaced by canned propaganda’
It doesn’t help that the government is going after reporters and whistle-blowers and their phone/email accounts.
About this:
‘they ran their operations under the auspices of ‘government sponsorship.’
The GSE’s got cheaper loans because of it. So even with all the advantages they had, they managed to bankrupt themselves 2 years before house prices started falling, during the biggest housing boom of all time! If you think about that, there had to be transactions occurring that didn’t have anything to do with housing loans. What could those transactions be? Since we’ve never had a serious audit, I’ll guess it was derivatives of some sort, probably interest rate derivatives. Were those derivatives arms length deals? Or were they simply shoveling money into the more than 1000 off-shore entities, or their counter-parties? We could be talking about over a trillion dollars, making this the biggest financial crime in history. Also interesting is that both GSE’s went down at about the same time. And no one went to jail.
“The GSE’s got cheaper loans because of it.”
Remember there was also that long-term debate about whether or not there was an unstated federal guarantee of GSE debt, which was resolved when Treasury Secretary Timothy Geithner made the GSE debt owners whole after the Fall 2008 carsh.
“We could be talking about over a trillion dollars, making this the biggest financial crime in history.”
I guess this would be a good reason to take away investigative reporters’ First Amendment rights.
“Or were they simply shoveling money into the more than 1000 off-shore entities, or their counter-parties? We could be talking about over a trillion dollars, making this the biggest financial crime in history. Also interesting is that both GSE’s went down at about the same time. And no one went to jail.”
I think you’re onto something. This isn’t about housing, but about massive theft, and rampant corruption which goes to the very core of US politics. The American people are being ripped off blind by their so-called “leaders.”
Lots of things don’t add up. For instance, we learned recently that 35-40% of these HARP/HAMP loans are defaulting in just a couple of years. That the loans in default are 700% more than what the GSE’s have foreclosed. So how can you be making this huge profit with results like this? Something is getting buried somewhere.
What I am having a hard time understanding is how this stuff is covered up so easily. It takes A LOT of people to orchestrate such a massive fraud. Where are the whistleblowers?
‘how this stuff is covered up so easily’
It may be a part of the receivership. It could be buried in the books. Remember when Fannie made a big deal out of hiring 1,000 accountants to sort out their financials? Or it could be that no one is looking. Do you recall how the Enron mess came to light? One financial reporter looked at their cash flow statement, and asked, if you are so profitable, where is the cash? Turned out the profit was all debits and credits, and it started unraveling from there.
One way you know things are bad is something I’ve mentioned before; if these two corporations have paid back $130 billion of the $190 billion the government gave them, why are they being folded up? The answer can only be that the losses are much higher than $190 billion and are unrecoverable.
“One financial reporter looked at their cash flow statement, and asked, if you are so profitable, where is the cash? Turned out the profit was all debits and credits, and it started unraveling from there.”
I guess any reporter conducting a similar investigation of Fannie Mae and Freddie Mac would be subject to intense NSA scrutiny?
U2 are on fire. (Bj and Moral hazard)
“…delivered by grinning twenty-something know-nothings…”
Looking on the bright side, at least they are employed and serving a useful purpose.
“On the eve of the financial crisis, Watt actually proposed the creation of the regulatory agency he now seeks to run — only, he designed it not to reform Fannie and Freddie but to pressure them to underwrite even more affordable housing, exposing them to even more risk.”
Sounds like this nomination should easily get through Congressional Republicans.
I’d love to know how much the NAR, NAHB and other housing constituencies have to bribe Congressional Republicans to get them to support Watt’s nomination; it has to be ALOT!
fre/fan employees get pension w hc at 55
how about you?
Stockton-scranton-detroit
the government workers will get paid and the taxpayers will pay BIG !
next question
Didn’t those workers toil throughout their working careers under the promise they would be paid pensions?
How would you like it if Big Brother stopped by your bank and stole away all the wealth you had saved up to pay for your declining years? Not much, I assume.
Pay them in promises, not cash; It’s cheaper.
If they complain then show them the egress.
What’s neat about this is you select out people who are weak in math in that people who can’t figure out that the numbers won’t work out as promised will apply for these jobs while the smarter ones will move on. This leaves a weak-in-math workforce in place when the sh1t hits the fan. And since they are weak in math they can be easily persuaded that something other than bad decisions driven by bad math is behind all their woes.
“Pay them in promises, not cash; It’s cheaper.”
It will get much cheaper, once pension theft is legalized.
The FED has stopped by my bank and stole all the income wealth I was expecting from my life savings, and nobody audits the FED….
I’ve taken about a 85% haircut on my retirement income based on the FED’s actions. Shouldn’t the lucky few with a “traditional” pension take a 85% haircut too?
“His bill proposed enhancing existing federal goals boosting Fannie’s and Freddie’s low-income mortgage portfolios by adding ‘a new affordable housing sub-goal for re-financing transactions.’ The proposed regulator, dubbed ‘the Federal Housing Finance Agency,’ also would direct Fannie and Freddie to make contributions to an Affordable Housing Fund for ‘very and extremely low-income families’ in amounts equal to 1.2 basis points on each of their total outstanding mortgages — including those held in portfolio and those securitized.”
1. I note that the main effect of U.S. federal government ‘affordable housing’ programs has been to make housing less affordable.
2. Aren’t there other agencies (e.g. HUD, FHA) which already focus on low-income housing? What would be the public interest to redefine the GSE mission along those lines, rather than shutting them down?
If people could afford housing without government help they would not need to vote democrat
The free sh*t army demands more
“1. I note that the main effect of U.S. federal government ‘affordable housing’ programs has been to make housing less affordable.”
It’s the same as Section 8 inflating rents. Section 8 makes it much more difficult for hard-working folks to afford and pay the rent.
“Section 8 makes it much more difficult for hard-working folks to afford and pay the rent.”
Agreed.
In principle, this should work to the benefit of Section 8 landlords, but it seems like the tenants these programs attract may not be the best at taking care of the properties they rent.
“Reform is inevitable with a reduced role for the government in housing finance. Fannie and Freddie will eventually disappear, to be replaced by the insurer FMIC and a public-financing platform open to all players. The U.S. taxpayer likewise will be far better protected than in the past. This won’t likely be good news to the proponents of a largely privatized mortgage market nor the hedge-fund managers looking to score big profits off the bailout of Fannie and Freddie.”
This paragraph suggests the most likely way forward is for F&F to get wound down, wiping out the speculators who have recently purchased their stock at fire sale prices. But a federally subsidized insurance company startup will continue to provide federal mortgage guarantees. I would guess the guarantees will be offered at taxpayer-subsidized rates which effectively crowd out private competition, an obvious contradiction to the claim that ‘the taxpayer will be better protected.’
Chart: Housing Affordability Set to Fall Off a Cliff
The National Association of Realtors will always be the first ones to tell you that housing is either highly affordable, still affordable (!), or that buying a home remains a great move even if housing affordability is low.
After all, they represent real estate agents, or rather, Realtors®, whose livelihood depends on selling homes, lots of homes.
http://www.thetruthaboutmortgage.com/chart-housing-affordability-set-to-fall-off-a-cliff/
no problem, the NAR will take a page out of the CAR playbook and change the affordbility forumula. In California it was some teaser adjustable rate mortgage with 10% down (maybe less actually I can’t recall).