Fannie Mae Was Felled by Flawed Business Model, Regulators Say

By Lorraine Woellert for Bloomberg.com, April 9, 2010

(Bloomberg) – Fannie Mae, the government-backed mortgage company under conservatorship, was toppled by conflict between its mission to foster homeownership and profit demand it faced as a publicly traded company, former regulators said.

Political support for Fannie Mae and Freddie Mac, the biggest sources of U.S. home-loan funding, helped thwart efforts to reform the two companies before losses forced the government takeover in September 2008, Armando Falcon Jr. and James Lockhart said in remarks prepared for a Financial Crisis Inquiry Commission hearing in Washington today.

Continue to full article 

The Fannie-Freddie Waiting Game

By Colin Barr for CNN Money, March 5, 2010

NEW YORK (Fortune) — Putting Fannie Mae's and Freddie Mac's
houses in order will have to wait.

A year and a half after Treasury took over Fannie Mae (FNM, Fortune
500) and its smaller brother Freddie Mac (FRE, Fortune 500), Washington is
just now prepping for a debate over their future. The discussion, relegated to
the back burner by Congress' struggles to overhaul bank regulation, could
stretch into next year and beyond before anything is decided.

"The soonest we might see some action is mid to late
2011," said Karen Petrou, managing partner at Washington-based financial
industry consultant Federal Financial Analytics. "The first priority had
to be restoring financial stability, so it's not surprising it is taking a
while."

The waiting won't sit well with the companies' many critics.
Treasury's takeover of Fannie and Freddie is shaping up as the costliest
bailout of all, as mounting loan losses and securities markdowns have
forced the companies to draw tens of billions of dollars of taxpayer support.

With the firms owning or guaranteeing trillions of dollars
worth of mortgages, there's a risk that the tab will mushroom, particularly if
the economy stalls again over the next year.

But it is much easier to revile the firms than to fix them.
Stabilizing the housing market has been the focus of the federal response to
the economic meltdown, and there is little incentive to tinker now with the
companies that are the main source of mortgage funds supporting a fragile
economic rebound.

"There is nothing forcing the issue right now,"
said Paul Miller, an analyst at FBR Capital Markets. "It could be years
before they figure it all out."

The House Financial Services Committee scheduled a hearing
March 23 "to begin the process of considering the future of housing
finance," Chairman Barney Frank's office said this week. Frank has invited
Treasury Secretary Tim Geithner to appear.

The event could give Geithner an opportunity to outline the
administration's view on how to reshape the giant mortgage companies. His
office hasn't said whether he'll testify.

Geithner told Congress last month that the White House would
announce "principles and broad objectives" for housing reform this
year and aim to produce legislation in 2011. The administration had earlier
said it would comment on housing reform in last month's budget proposal.

Geithner said administration officials "want to make
sure that we get it right," though Rep. Darrell Issa, R-Calif., accused
the White House of "punting."

Even before their bailout, Fannie and Freddie were magnets
for controversy, because of the conflict between their shareholder-owners and
their congressional charter to support housing.

The bailout temporarily resolved that tension in favor of
support for housing, though at the cost of putting taxpayers on the hook for
the giant tab attached to muddling through the housing bust.

As unpopular as the takeover was, it did succeed in buying
some time. Extensive government support for the companies and the mortgage
market has kept interest rates low — making houses more affordable, containing
the damage from the housing bust and helping to restore the health of big
banks. Freddie Mac said this week the 30-year mortgage commitment rate fell
below 5%.

But the Federal Reserve is scheduled to stop buying
mortgages this month, and economists expect rates to rise over the balance of
2010, which could push house prices lower again.

Analysts at Standard & Poor's say they believe the
dividends the companies pay Treasury on the aid they receive aren't
sustainable. Fannie is due to pay at least $7.6 billion this year and Freddie
$5 billion — at a time when both companies expect to continue to lose money.

A cash crunch could force the government to ease the terms,
as it did with other bailout recipients such as AIG (AIG, Fortune 500) and
GMAC.

And Frank, who said in January he thought the companies
should be abolished without explaining exactly what he meant, introduced a new
bit of uncertainty Friday when he told the Washington Post the
government must keep open the option of making the companies' creditors share
in their losses.

None of those events would enhance the companies' low level
of popularity with lawmakers and the public, which gets an airing every time
the companies ask Treasury for more money after another quarter in the red.

"There has always been a high degree of political risk
with these companies," said Barry Zigas, a former Fannie Mae executive who
is director of housing policy for the Consumer Federation of America.
"There are certainly some possible irritants now."

Yet as unpopular as the companies are, it's still not clear
what might replace them. Some plans call for full nationalization, others for
turning the companies into public utilities, still others for splitting them
into pieces, a la AT&T and the Baby Bells. With banks still unwilling to
lend and investors still risk averse, even longtime critics concede change
could be years away.

"For Fannie and Freddie to be eliminated, a new
mortgage-financing system must take their place, but there is not even a hint
of a replacement on the horizon," Peter Wallison of the American
Enterprise Institute wrote in January.

But perhaps that's the good news. Congress has spent much of
the past year dealing with banking reform at a time when the press is rife with
stories about overpaid bankers and the heads-I-win, tails-you-lose culture of
Wall Street.

Yet the banks appear to have largely defeated efforts to
rein in derivatives trading and create a standalone consumer financial products
overseer.

"You look at all the work they have to do on regulatory
reform, and you wonder how anyone can say fixing Fannie and Freddie is
urgent," said Zigas. "What's the big rush?"

Fannie and Freddie – Let’s Be Frank, Barney

By Richard Suttmeier for Seekingalpha.com,  March 7, 2010

Barney Frank wants to guarantee Fannie & Freddie debt
and securities, but only those issued after Conservatorship. The Dow can rise,
but can strength be sustained? Don’t cheer the February employment picture.
Bank Failure Friday.

You Can’t Have a
Two-Tiered Guarantee for Fannie & Freddie

Barney Frank wants to “clarify” the Government Backing of
Fannie (FNM) & Freddie (FRE) under Conservatorship. He only wants to have
issuance since Conservatorship is to be backed by the United States of America.
What this means is that debt and mortgages with dated dates prior to September
7, 2008 would not have government backing, while those dated on September 7,
2008 and later would be backed by the full faith and credit of the US
Government.

You cannot have a two-tiered Fannie and Freddie guarantee. I
actively traded Fannie Mae and Freddie Mac debt and mortgage-backed securities
off and on throughout my career in the US Capital Markets since 1972. If Barney
gets his way, the market dislocations would be ridiculous. Investors who bought
pre-dated GSE securities and mortgages because of Conservatorship will get
screwed as spreads widen. GSE traders will have to check dated dates when
making markets. If this dumb idea is implemented, mortgage rates will likely
spike higher.

I have often pointed to the Fannie Mae website, citing that
their debt is not US backed under Conservatorship. Here’s the post as of March
3, 2010 –

Fannie Mae debt securities, together with interest thereon,
are not guaranteed by the United States and do not constitute a debt or
obligation of the United States or of any agency or instrumentality thereof
other than Fannie Mae.

Here’s what it states in a CRS Report for Congress dated
September 15, 2008 –

On September 7, 2008 the Federal Housing Finance Agency
(FHFA) placed Fannie Mae and Freddie Mac in Conservatorship. This means that
the US Taxpayer now stands behind $5 trillion of GSE debt.

So which is it, as you can’t have it both ways? If GSE debt
and mortgage securities are government backed they should be under our nation’s
debt ceiling, not off balance sheet. Barney Frank’s idea could create a cascade
of global selling of Fannie Mae and Freddie Mac debt and mortgages, which could
push the Housing Market and Banking System right back on the edge of the Abyss.

Wasn’t it about a month ago when Barney Frank wanted to
abolish Fannie and Freddie?

Back in May 2008 on Fox Business I favored the liquidation
of Fannie and Freddie months before the US Treasury took them over in
Conservatorship. I suggested beefing up the government-backed Ginnie Mae
mortgage program, while gradually liquidating Fannie and Freddie. Instead, US
taxpayers are on the hook for $126 billion and counting and will be covering
all losses through 2012, leaving a lifeline that could be double the current
$400 billion.

By expanding the role of Fannie and Freddie, the implicit
guarantee has become explicit, making all GSE mortgages and debt the
obligations of the US government and hence taxpayers. Wall Street and investors
would have been on the hook under liquidation, not taxpayers on Main Street. It
was Wall Street that sold GSE debt and mortgages to global investors stating
that they were government-back, when they were not. Exotic mortgage-backed
securities and related derivatives spread around the world was described and
endorsed by Fed Chair Alan Greenspan as the way to spread the risk.

Because of Wall Street Greed US citizens are backing $5.5
trillion in GSE mortgages, and around $1.5 to $2 trillion in GSE debt under
Conservatorship. This must be added to the more than $14.2 trillion US debt
ceiling.

The Dow on the rise,
but can strength be sustained

The Dow ended last week above my annual pivot at 10,379, so
this sets up a test of the January high of 10,730. The low end of the range was
the February low of 9.835. Keep in mind that the NASDAQ and Russell 2000 set
new year-to-date highs on Friday.

Chart Courtesy of Thomson / Reuters

Wouldn’t it be interestingly devilish if the high of 666 for
the Russell 2000 followed by one year the low of 666 for the S&P 500?

Chart Courtesy of Thomson / Reuters

Friday’s Employment
Report for February

Shedding 36,000 jobs and having an unemployment rate of 9.7%
is not bullish for stocks. The impact of the snowstorms during the survey was
likely not a factor as all an employee has to do is work one hour during that
week to be considered employed.

Without job creation and increases in payrolls by at least
150,000 per month are required just to stabilize the labor market. The jobs
picture is not brightening when discouraged Americans continue to leave the
labor force. The underemployment rate rose to 16.8% from 16.5%.

The key labor component to the market in my judgment is the
Construction Industry, which lost 64,000 jobs. How can that improve with those
troubled C&D and CRE loans on the books of our nation’s banks? Where are
those “shovel ready” projects? That’s where the jobs created or saved are
supposed to come from. The average workweek is a key component and it dropped
to 33.8 hours from 33.9 hours in February. Now that holiday shopping is over,
many stores are cutting back hours worked.

Bank Failure Friday

The FDIC closed four community banks on Friday with one
publicly-traded Sun American Bank, which is on the ValuEngine List of Problem
Banks.

The 26 bank failures so far in 2010 have cost the Deposit
Insurance Fund $4.7 billion bringing the DIF Deficit to $25.6 billion. The FDIC
has $46 billion in prepaid DIF fees for 2010 through 2012 that are earmarked
for the DIF when scheduled.

The FDIC is having a tougher time finding a bank to take
over a failed institution as one was set up as an FDIC Bridge Bank, and another
bank just had its deposits moved to Zions Bancorp (ZION).

Three of the four banks had heavy overexposures to C&D
and CRE loans with pipeline ratios between 87.9% and 100%, which was the case
for the bank within regulatory guidelines for C&D and CRE exposure

Fannie Mae’s Huge Loss Means $15 billion More in Rescue Cash

By Associated Press for The Washington Post, February 27,
2010

Fannie Mae needs another $15.3 billion in federal
assistance, bringing its total to more than $75 billion. And worse, the
mortgage finance company warned that its losses will continue this year.

The rescue of District-based Fannie Mae and sister company Freddie
Mac is turning out to be one of the most expensive after-effects of the
financial meltdown. The new request means the total bill for the duo will top
$126 billion.

And the pain isn't over. Fannie warned Friday that it will
need even more money from the Treasury, as unemployment remains high and
millions of Americans lose their homes through foreclosure.

Fannie Mae reported Friday that it lost $74.4 billion,
or $13.11 a share, last year, including $2.5 billion in dividends paid to the
government. That compares with a loss of $59.8 billion, or $24.04 a share, a
year earlier.

Fannie Mae, which was seized by federal regulators in
September 2008, has racked up losses totaling $136.8 billion over the past
three years.

Late last year, the Obama administration pledged to cover
unlimited losses through 2012 for Freddie and Fannie, lifting an earlier cap of
$400 billion.

Earlier in the week, McLean-based Freddie Mac reported
a loss of almost $26 billion for last year. The company didn't request any
more money but is expected to do so later this year.

Fannie Mae and Freddie Mac play a vital role in the mortgage
market by purchasing mortgages from lenders and selling them to investors.
Together the pair own or guarantee almost 31 million home loans worth about
$5.5 trillion. That's about half of all mortgages.

"Through this prolonged stress in the housing market,
we are helping homeowners across the country, supporting affordable housing,
and providing financing to keep the residential markets functioning," the
company's chief executive, Mike Williams, said in a statement.

The two companies, however, loosened their lending standards
for borrowers during the real estate boom and are reeling from the
consequences. At the end of last year, 5.4 percent of Fannie Mae's borrowers
had missed at least one payment — dramatically higher than historic levels.

During the most recent quarter, Fannie suffered $11.9
billion in credit losses and a $5 billion write-down for low-income tax-credit
investments.

That led to a fourth-quarter loss of $16.3 billion, or $2.87
a share, including $1.2 billion in dividends paid to the Treasury Department.
It compares with a loss of $25.2 billion, or $4.47 a share, in the year-ago
period.

Cloudy Future for Fannie and Freddie

Charles Duhigg, The New York Times, February 1, 2010

The Great Bailout is mostly over for the banks. But for
those troubled behemoths of the nation’s housing bust, Fannie Mae and Freddie
Mac, the lifeline from Washington just keeps getting longer.

Fifteen months after Fannie and Freddie were effectively nationalized,
neither the Obama administration nor Congressional leaders see a quick solution
to one of the thorniest problems in American finance: how to fix the twin
mortgage giants without choking the flow of credit to homeowners and dealing a
blow to a still-fragile housing market.

The administration had said for months that it would begin
charting a new course for Fannie and Freddie when it released its budget
proposal on Monday. The companies, crucial pillars of American housing, already
have consumed over $112 billion of taxpayer dollars.

Bankers, builders and homeowners stand to win or lose from
any plan for the two so-called government-sponsored enterprises, or G.S.E.’s.
But, on Monday, that plan amounted to a single, ambiguous sentence from the
White House:

“The administration continues to monitor the situation of
the G.S.E.’s closely and will continue to provide updates on considerations for
longer-term reform of Fannie Mae and Freddie Mac as appropriate.”

Treasury officials say more details may be forthcoming,
although they decline to say when. To many experts, however, the message is
that Fannie and Freddie are likely to remain wards of the state for years.

And, given the alarm in some quarters over the mounting
budget deficit, these two giants and their vast obligations are likely to
remain conveniently — and controversially — off the federal books. Fannie Mae
and Freddie Mac have obligations of $3.9 trillion to investors who bought
bundles of mortgages that the companies assembled.

Powerful and often competing interests are grappling over
the companies’ futures. Lawmakers on both sides of the aisle, eager to
demonstrate their scorn for the companies, have called for their eradication.
But few policy makers are willing to take aggressive steps that might weaken
the housing market. On Christmas Eve, the White House quietly disclosed that it
had, in effect, given the companies a blank check by making their federal
credit line unlimited; the ceiling had been $400 billion.

For decades, Fannie and Freddie have played a central role
in the housing market. But when the market began falling apart in 2008, so many
of the home loans that Fannie and Freddie had bought or guaranteed went bad
that the companies nearly went bankrupt. The government essentially took them
over.

Today, many financial companies are pushing to shrink or
even dismantle the two G.S.E.’s in hopes of expanding their own businesses into
the resulting vacuum. Financial executives contend that the government does not
belong in the housing market. Given the animosity directed at the financial
industry in general, however, few will criticize the government publicly.

“Almost no other country has companies like Fannie and
Freddie, where the government essentially competes with private banks,” said
one executive who was not authorized to speak to the media or willing to
publicly criticize any government decisions.

“People still manage to buy houses in France and England,”
the executive continued. “One of the attractions of abolishing Fannie and
Freddie is that a source of competition is gone. But, by the same token, if
Fannie and Freddie hadn’t existed, maybe things wouldn’t have gotten so out of
hand in the first place.”

Others disagree — often also for reasons of self-interest.
The construction and real estate industries, two powerful political
constituencies, essentially want to preserve the status quo so that their
customers, homebuyers, can continue buying homes.

“If the government isn’t involved, you run the risk of the
secondary mortgage market drying up at exactly the wrong time,” said Jerry
Giovaniello, the chief lobbyist for the National Association of Realtors.
“Private companies get tighter with money when things get bad. The government
is the only one who can make sure capital continues flowing.”

Shading all of this is election-year politics. In a
polarized Washington, Democrats and Republicans seem to agree that flogging
Fannie and Freddie might play well to an electorate weary of costly bailouts
and anxious about the rising national debt.

The Treasury secretary, Timothy F. Geithner, has
pledged to propose “detailed reforms” this year. Democrats and Republicans in
Congress are scheduling hearings. Politicians from both parties have demanded
the eradication of Fannie Mae and Freddie Mac.

But for now, the only real consensus is that no one quite
knows what to do with the companies. Whatever happens is almost certain to
determine which Americans can — and cannot — get mortgages, and how much those
loans will cost. That, in turn, will most likely influence home values for
decades.

And so, despite talk of dislodging political gridlock in
Washington, many policy makers seem happy to put off making any real decisions.
Many policy makers concede that there are no easy options. Trying to reinvent
Fannie Mae and Freddie Mac, they say, could push the housing market into even
more dire straits.

“I’ve said we should abolish Fannie Mae and Freddie Mac in
their current form and come up with a whole new system of housing finance,”
said Representative Barney Frank, a Massachusetts Democrat and the
chairman of the House Financial Services Committee. “I can’t say when. And I
don’t have any idea what that new system will look like. No one, I believe,
knows. All we really know is that we need something new.”

Indeed, most of the recent enthusiasm for public discussions
about Fannie and Freddie have been attempts by both parties to gain political
advantage. Aides to high-ranking Republican and Democratic lawmakers say that
opinion polls suggest that independent voters are unlikely to support
candidates who defend Fannie and Freddie.

Republicans are trying to emphasize the companies’ longtime
Democratic ties. They attacked the Treasury Department in December when the
government announced multimillion-dollar pay packages for the companies’ top
executives.

“Awarding millions of dollars in bonuses on the taxpayers’
dime is unconscionable,” Representative Jeb Hensarling, Republican of Texas,
wrote to the Treasury secretary in a letter signed by 70 Republicans.

On Monday, after the White House announced it did not yet
have a firm plan for the companies, Representative Spencer Bachus, Republican
of Alabama, said, “It is irresponsible for the administration to give Fannie
and Freddie a blank check and offer no strategy for reforming the G.S.E.’s.”

To counter such salvos, Democratic lawmakers are now
searching for opportunities to publicly distance themselves from Fannie and
Freddie.

“We’re going to provide a lot of chances for Democrats to
vote against Fannie and Freddie and to openly criticize them,” said a
Congressional staff member working for a high-ranking Democrat. “Everyone is
going to get a chance to say something bad about the companies if they want to,
and we’re going to make sure the volume is up on the microphone.”

The White House, already under attack for mounting debts,
has so far disregarded advice from the Congressional Budget Office to
fold the costs associated with Fannie and Freddie into the budget. In Monday’s
statement, the administration emphasized that because Fannie and Freddie may
one day come out from under government control, they should stay off the books.

Meantime, everyone is waiting for the big fix.

“No one has come up with a new model that can both maintain
liquidity and eliminate all the bad or conflicting incentives that caused the
crisis in the first place,” said Thomas A. Lawler, an economist who worked at
Fannie Mae for more than two decades before leaving in 2006 to become a
consultant. “And the longer the government relies on entities like Fannie and
Freddie to implement the recovery, the harder it is to get rid of them. This is
a really, really hard problem, and it’s going to take a long time to figure out
the right solution.”

Paulson: Crazy Putin Pushed China To Dump Fannie Bonds And Crush The U.S. Financial System

By Vincent Fernando for Business Insider, Jan. 29, 2010

Some scary details have emerged from Hank Paulson's memoirs.

Allegedly, it appears Russia may have tried to conspire with
China in a bid to collapse the U.S. financial system. They were hoping to sell
Fannie and Freddie bonds during a time when the U.S. economy was on the ropes.

This happened back around the Beijing Olympics, when the
U.S. was supporting Georgia against Russia in the conflict over Ossetia:

Bloomberg: The Russians made a “top-level approach” to
the Chinese “that together they might sell big chunks of their GSE holdings to
force the U.S. to use its emergency authorities to prop up these companies,”
Paulson said, referring to the acronym for government sponsored entities. The
Chinese declined, he said.

Russia’s five-day war with U.S. ally Georgia started on Aug.
8, the same day as the opening ceremonies of the Beijing Games. Prime Minister
Vladimir Putin told U.S. President George W. Bush during those ceremonies that
“war has started,” according to Dmitry Peskov, Putin’s spokesman.

“The report was deeply troubling — heavy selling could
create a sudden loss of confidence in the GSEs and shake the capital markets,”
Paulson wrote. “I waited till I was back home and in a secure environment to
inform the president.”

Russia never approached China about dumping U.S. bonds,
Peskov said today. “This is not the case,” he said by phone.

 

Republicans hit Geithner over Fannie Mae, Freddie Mac

By Mark Felsenthal for Reuters, January 13, 2010

Republican lawmakers slammed Treasury Secretary Timothy
Geithner on Wednesday over multi-million dollar pay packages for executives at
mortgage-finance firms Fannie Mae (FNM.N) and Freddie Mac (FRE.N), which the
government took over during the financial crisis.

"Awarding millions of dollars in bonuses on the
taxpayers' dime is unconscionable," Rep. Jeb Hensarling wrote Geithner in
a letter signed by 70 Republicans.

Hensarling, a persistent critic of the two
government-supported mortgage finance agencies, also said he was troubled at
the Treasury's announcement that it would allow unlimited losses at the two
firms. Their losses had been capped earlier at $200 billion.

Treasury announced both the pay packages and the lifting of
the loss cap on Dec. 24.

Hensarling and others have criticized President Barack Obama
for not offering any proposals about how to structure the companies in the
future.

"The Treasury Department has given them a blank check,
without presenting any proposals for their reform," Hensarling wrote.

The White House has promised to make suggestions about the
future of the companies — which were chartered by Congress to help boost
homeownership — in its budget proposal, expected in early February.

The top Republican on the House Financial Services
Committee, Rep. Spencer Bachus, urged Committee Chairman Barney Frank to take
up the pay packages at a Jan. 22 hearing on executive compensation, which Frank
has said will focus on bankers' pay.

"It is inconceivable to me that, after these
institutions have been given access to unlimited taxpayer funds to cover losses
they have incurred as a result of their reckless behavior, their top executives
would each be awarded multi-million dollar compensation packages," Bachus
said in a statement. Bachus also signed Hensarling's letter.

The Treasury Department declined to comment.

Fannie Mae and Freddie Mac have Congressional charters to
support mortgage finance by buying mortgages from lenders and repackaging them
as securities for investors.

Because they held lines of credit with the U.S. Treasury,
many investors considered their debt second only in quality to government debt,
and the companies enjoyed a funding advantage over purely private-sector
competitors.

Their quasi-public mission earned them strong support from
politicians of both political parties, and the companies grew to wield
out-sized political and financial clout.

The Bush administration seized the two companies and placed
them in a government conservatorship as the financial storm reached its climax
in September 2008, saying that failure of either firm could cause unacceptable
turmoil in U.S. housing markets.