Friday, September 23, 2011

Good News! from Fannie & Freddie

We don't get much in the way of good news these days from the financial sector.  But in a report out today from the Federal Housing Finance Agency (FHFA) there are some definite glimmers of sunshine.  The report is entitled "Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2009 and 2010", and it reads like its title, wonkish and energy-depletingly bland. 

Before we look at the report a bit of background explanation is required.  

Loan quality is categorized according to key credit risk characteristics.  For decades Fannie and Freddie (GSEs) operated under "plain vanilla" underwriting guidelines.  That meant that from an investment / risk standpoint one GSE loan was pretty much akin to another.  Then in the late 1990s the GSEs transitioned to a Basking-Robbins'-31-flavors approach to underwriting as guidelines were expanded to define a greater variety of acceptable risks, which in turn led to a stratification of loans by product type and risk class.  Here the concept of risk-layering was employed to recognize multiple risk factors as may exist among the variety of loan flavors within the GSEs' loan portfolios.  

The good news today in the referenced report is not in the formulations, or how many basis points are being charged in guarantee fees.  It is to be found in the statistics the report analyzes. 

About 20 pages into the report are found tables listing statistics on the risk characteristics of new loans originated over the past four years.  First, a profile of loans by product type and risk class shows the following positives signs:
  • significant increase in 15 year mortgages;
  • dramatic improvement in credit score quality;
  • substantially higher equity position (lower LTV).  









Next is a chart profiling loans based on layered risk factors:

  • No Risk Layering originations are up;
  • Cash Out Refis are down;
  • Decrease in Subordinate Financing;
  • Low-doc and Interest-only loans all but eliminated;
  • Increase in HARP refinances.
The increase in HARP, Home Affordable Refinance Program, refinances is a positive in that those loans are replacing higher-cost loans for at-risk borrowers, greatly reducing the likelihood of a future default.

From a consumer standpoint these statistics describe borrowers who are better qualified and increasingly conservative.  Such a trend is good news for the housing market already overstocked with REO and distressed homeowners.  Though the economic challenges of high unemployment and limited business growth continue, perhaps we have were a sign that the overall landscape is leveling a bit from a default perspective.

From the investor perspective more good news.  There is consensus that the Baskin-Robbins-style underwriting of the prior decade played a significant role in the problems at Fannie and Freddie.  Hindsight is 20/20 and we now know that offering only "plain-vanilla" was key to the long-term stability of the GSEs.  

In the 1970s "foreign cars" became increasingly popular as the American car-buyer became increasingly dissatisfied with the poor quality of domestic cars.  Eventually US car-makers got the message, retooled and made improvements.  Now it looks as if a portion of the US financial sector is heeding a similar message.  The indicators contained in the referenced report point to an improvement in overall loan quality, with greater security and reduced risk.   So perhaps just like Ford with its 1980's slogan "Where quality is Job #1", Fannie and Freddie have retooled their production lines.  

Returning confidence to investment markets is badly needed. Let's hope that Fannie and Freddie can emulate Ford in this too, that they stabilizeg financially without further government bailout.  



Wednesday, September 21, 2011

Fannie / Freddie Wrap 3rd Year in Conservatorship

How time flies!  It's hard to believe three whole years have passed since the US Treasury stepped in and took over Fannie and Freddie.  Three years of insolvency, delinquent mortgages, trial mortgage modifications,  robo-signed foreclosure complaints, underwater homeowners and short sales.  Three years of Realtors navigating seismic shifts in the real estate landscape with falling home values, board-ups and growing inventories.  How time flies indeed.

Happy Anniversary!
So it's been three years - the traditional gift for a third anniversary is leather.  Seems like it would be easy to think of a few entities or individuals who deserve getting some good leather, perhaps not of the gift-wrapped variety, but rather in swift delivery across their respective backsides.  But in looking for culprits who really is at fault?  

How about Wall Street and the derivative guys selling toxic assets repackaged as private-label securities.  Or the top-dogs at Fannie and Freddie who orchestrated special insider accommodations and promoted Pollyannaish loan programs in countervention of the tenets of prudent lending.  Or public policy-makers in DC who sought to check off items on their social agenda to-do lists by exploiting influence over the GSEs and financial institutions.  Then there are the mortgage companies, loan originators, appraisers, sales people, builders, developers, all of us "in the loop" who feverishly pumped transaction volume at record pace through the bulging pipeline during the heady days of the late boom.  And oh yeah, lets not forget the borrowers who signed the loan applications and nodded their heads to all those qualification questions about income, source of funds, employment, occupancy and the like.  

That's a lot of leather.  But the fact is there is no single cause for the collapse we are now tunneling our way through.  Top to bottom, everybody donned rose-colored glasses and looked to ride the wave of a seemingly ever-expanding market as far as it would go.

We the People...
Since entering conservatorship in 2008 Fannie and Freddie have received over $153 Billion from the US Treasury.  What's that money buying us?  Wiggle room, I guess.  Allowing time to formulate an orderly dismount from the once-noble experiment in public-/private-sector lending, now become a bucking behemoth, officially in its death throes.   Closing short sales and turning over REO inventory we see the micro-deficits as Treasury dollars are doled out dollop by dollop one transaction at a time.    
The good news is that each sale is one unit closer to working our way through.  It's like the old joke - Q: How do you eat an elephant? A: One bit at a time.  My hat is off to everyone in the real estate community as you adapt and reinvent yourselves to serve the American homeowner. It is important to continue the struggle against a flood of challenges and persevere.  Because private property is foundational to a free society and real estate is its cornerstone.  

Thursday, September 15, 2011

New Foreclosures Hit Nine-month High

First-time default notices to US homeowners hit a a nine-month high in August with 78,880 filings, according to RealtyTrac as reported in the Wall Street Journal.  The August news is a disturbing indicator.
"The big increase in new foreclosure actions may be a signal that lenders are starting to push through some of the foreclosures delayed by robo-signing and other documentation problems," said RealtyTrac Chief Executive James Saccacio. (see prior blog: Foreclosure Freeze) "It also foreshadows more bank repossessions in the coming months as these new foreclosures make their way through the process."
But there's also some good news, or at least better news.  Total U.S. properties in foreclosure fell 33% in August from a year earlier, marking the 11th consecutive month of year-over-year declines.  



Tuesday, September 6, 2011

FHFA News Release: "$200 Billion in Recovery Excessive"

Washington, DC - The FHFA is seeking financial recovery from recently filed lawsuits according to its press release today.  It went on to say, "at this time, it would be premature and potentially misleading to estimate the size of any potential recoveries" and that "press reports that FHFA is seeking nearly $200 billion in damage are excessive." 


Full Press Release





Friday, September 2, 2011

Fed's Sue 17 Banks


Washington, DC -- The Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac (the GSEs), today filed lawsuits against 17 financial institutions, certain of their officers and various unaffiliated lead underwriters.  The suits allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities (PLS) to the Enterprises.  


Complaints have been filed against the following lead defendants, in alphabetical order: 
  1. Ally Financial Inc. f/k/a GMAC, LLC 
  2. Bank of America Corporation 
  3. Barclays Bank PLC 
  4. Citigroup, Inc. 
  5. Countrywide Financial Corporation
  6. Credit Suisse Holdings (USA), Inc. 
  7. Deutsche Bank AG
  8. First Horizon National Corporation 
  9. General Electric Company
  10. Goldman Sachs & Co.
  11. HSBC North America Holdings, Inc.  
  12. JPMorgan Chase & Co.
  13. Merrill Lynch & Co. / First Franklin Financial Corp.  
  14. Morgan Stanley
  15. Nomura Holding America Inc.
  16. The Royal Bank of Scotland Group PLC 
  17. Société Générale  
There are 17 separate suits all relating to mortgage origination and mortgage-backed securitization. Being separate actions the allegations vary from case to case.  Here's a sampling of allegations:
  • Loan-to-Value Data Was Materially False
  • Owner Occupancy Data Was Materially False
  • The Originators of the Underlying Mortgage Loans Systematically Disregarded Their Underwriting Guidelines
  • Failure To Conduct Proper Due Diligence
  • Defendants Incentivized to Fund Risky Residential Mortgage Loans
  • Material Misrepresentations and Omissions in the Offering Materials
  • Fraud


Fannie and Freddie want out of the bad deals.  Specifically FHFA is asking the courts for: 
  • Rescission and recovery of the consideration paid for the GSE Certificates, with interest thereon; 
  • Each the GSE's monetary losses, including any diminution in value of the GSE Certificates, as well as lost principal and lost interest payments thereon; 
  • Attorneys’ fees and costs; 
  • Prejudgment interest at the maximum legal rate; 
  • and in some cases Punitive damages. 
Plaintiffs' Counsel is Quinn Emmanuel Urquhart & Sullivan, LLP and Kasowitz Benson Torres & Friedman LLP


Follow this link to view legal filings: FHA Filings in PLS Cases, September 2, 2011

US / FHFA vs Big Banks


The New York Times reports today that the Federal Housing Finance Agency is poised to bring suit against a dozen major banks for misrepresenting the quality of mortgage securities the banks marketed through Fannie Mae and Freddie Mac

Banks included under the proposed suit include Bank of America, JP Morgan Chase, Goldman Sachs, Deutsche Bank, among others.

This potential federal action is in addition to suits previously brought by 50 states attorneys-general as litigation continues to swirl in the beleaguered mortgage sector.  

Read more: