Guest blogger Bill Maloni returns with a partial re-post of his latest article. Like us here at Doom, Bill saw the importance of securitization pioneer Lew Ranieri’s discussion from last week on emerging risks to the mortgage market.
After he posted to his own blog yesterday he also happened to notice this interesting MSM hit, which he sent along to the Castle as a bonus:
NASDAQ (2/28): UPDATE: White House Projects Fannie, Freddie Costs To Sink
The White House, in its budget for the 2012 fiscal year starting in October, said keeping Fannie and Freddie afloat will cost a total of $73 billion through 2021. That reflects a total $236 billion in aid from the Treasury Department and $163 billion paid back in the form of dividends.
by Bill Maloni[see the original post for Bill’s thoughts on Libya, jm]
Fascinating GSE Market Developments
Lots of interesting news in the mortgage market this past week, including financial news about Fannie Mae and Freddie Mac.
It’s likely the two financially are healing faster than anyone thought; witness the losses they reported last week and the much lower requests from Treasury than even the former GSE regulator the Federal Housing Finance Agency (FHFA) predicted at the end of last year.
I hope Congress is watching and understands what is happening.
Rob Zimmer, a long time friend, who now represents several small banks and other mortgage lenders, said that the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie and the Federal Home Loan Bank System, just a few months ago over-estimated just how much federal support Fannie and Freddie would need, even applying the most optimistic of the agency’s three “likely business scenarios.”
- “Improvements from projections are coming faster than even the most crazed GSE could have foreseen,” Zimmer explained.
In fairness, some credit must go to FHFA–they are conserving assets, as is their defining mission currently. They seem to be doing a good job at it.
- “Both entities are now doing better than government predictions less than 6 months old, and are essentially profitable on a “current” basis were the punitive 10% dividend to be adjusted to the 5% rate that applied to big banks repaying Uncle Sam,” wrote Zimmer.
No Lost Money on the GSEs?
Stuart McFarland, a managing partner of Federal City Capital Advisors (FCCA) and an experienced industry veteran of large mortgage workouts, believes that the Fannie and Freddie’s combined trillion dollar plus mortgage portfolios—if carefully managed—can slowly be sold off with the federal government getting almost all of its investments in the two companions returned, with even the possibility of a taxpayer profit.
Ironically, McFarland told me that that Fannie [correction by author via e-mail, jm] just reported a last quarter profit before the 10% preferred payment to the Treasury, underscoring Zimmer’s point that the GSEs’ interest costs are both exorbitant and, ironically, puts them in a deeper financial hole from which they must borrow more from the Treasury!
As I often have written, if a 5% repayment rate was good enough for the big TARP fund recipient banks why not apply the same to the former GSEs?
Fear the Big Banks!
Zimmer points to another issue that most small lenders view with great concern, big banks –specifically Bank of America, Wells Fargo, JP Morgan and Citicorp—dominating the mortgage markets.
A lot of his clients, Zimmer states, believe that the Treasury is tilting the table toward these big four bank lenders, even to the extent of undermining the GSEs, to permit these behemoths to be the ultimate market survivors.
In Zimmer’s view these “lender GSEs”—large commercial banks with the implicit power of the former government sponsored enterprises–have been made “too big to fail,” have many advantages beyond just federal deposit insurance, including Treasury and Fed acquiescence on general regulatory questions, and often act as Washington policy agents.
Small lenders are the ocean’s food supply to the large lenders voracious game fish. The Fannie and Freddie mortgage function always meant that the small guys could sell directly to the GSEs without having to”pay a toll” by going through the large banks first. That’s likely to change if the Obama Administration and Tim Geithner have their way.
Given the near mythical role that the “small guys,” banks as well as mortgage lenders, play in the ideological heart of every Republican, Zimmer and the small mortgage lenders are hoping that Congress understands this big lender-small lender history and won’t force structural legislative actions which help the big guys at the expense of the small lenders.
Listening When Genius Speaks!
Lew Ranieri, often called the “father of mortgage backed securities,” on the Obama Administrations new mortgage plan:
- “We have to, especially if you look at the Treasury plan, the three alternatives to the Fannie and FHA [Federal Housing Administration] are bank portfolios, which is why we created the mortgage security in the first place, ’cause it can’t fund housing on a balance sheet because it requires too much equity—you can do some, but you can’t do most,” Ranieri said.
- He continued, “Covered bonds, which really don’t work for our type of mortgage in this country, 30-year loans. And the alternative is some form of a securitization, if not Fannie, Freddie, it’s got to be a RMBS, we just have to do it better this time.”
- “The housing market is very fragile and that is really a function of the overhang, Ranieri said, “We have something like 23 months inventory—that’s three times the normal and it continues to grow.”
- “I do not believe people realize how tight credit is from the banking system.”
From Robert Scheer, editor in chief of Truthdig, writing last week about the Admin’s mortgage plan:
- “A most dastardly deed occurred last Friday when the Obama administration issued a 29-page policy statement totally abandoning the federal government’s time-honored role in helping Americans achieve the goal of homeownership. Instead of punishing the banks that sabotaged the American ideal of a nation of stakeholders by ‘securitizing’ our homesteads into poker chips to be gambled away in the Wall Street casino, Barack Obama now proposes to turn over the entire mortgage industry to those same banks.”