Articles about the Fannie & Freddie preferred trade have been burbling around for a while and I’ve never understood it. The Journal has two good articles on it today, with this being a particularly clear explanation, and … I still don’t get it? Basically the thing is:
- the government seized Fannie and Freddie in 2008 and turned off the (non-cumulative!) preferred stock dividends,
- it recently swore that it would reduce their shareholders’ equity to zero, salt the earth on which they grew, and never ever ever ever unseize them or turn back on the pref dividends, so
- those prefs look like a screaming buy.
Or something? Per the Journal, “Paulson & Co. and Perry Capital LLC are among a handful of hedge-fund firms that have bought so-called preferred shares in Fannie and Freddie.” They’re selling at ~18-20 cents on the dollar, which I suppose reflects a, what, 30% implied probability that they get turned back on in the imaginable future?1 Does that sound like, um, this? Read more »
Ninety percent of what happens in the typical lawsuit is (1) a lawyer for one side sends a letter to the other side asking for some information to prepare for a trial that will never happen, (2) the lawyer for the other side sends back a passive-aggressive letter refusing to provide that information, and (3) the lawyer for the first side sends a passive-aggressive letter to the judge saying “NO FAIR.” Seriously, that’s what happens. It’s called “discovery,” and it goes on until the lawyers’ bills have gotten big enough that everyone decides to settle the case.
In that milieu, someone sending an aggressive-by-passive-aggressive letter qualifies as huge news, and so there is a lot of excitement over this rather tart mandamus motion that fifteen big banks filed to overturn some discovery rulings that Judge Denise Cote made in a mortgage-backed-securities lawsuit. I will not attempt to convince you that its tartness is all that interesting; I just want you to have context for why some people think it is.
The case is interesting though. The FHFA, the regulator that oversees Fannie and Freddie, is suing the fifteen banks1 for selling crappy subprime residential mortgage-backed securities to Fannie and Freddie. Being a securities-fraud lawsuit, the basic claim is “you lied to us in the offering documents for these RMBS, and we relied on those lies, so we bought your RMBS, and then we lost money because of your lies.” And the lies in the offering documents are not “these mortgages will never default!,” but rather lies to the effect of “we bought these loans from originators, and reviewed those originators’ underwriting practices, and we believe that the originators underwrote them carefully and didn’t just stuff them full of fraud.”
The banks make a pretty good point, though, in this motion: Fannie and Freddie, who were being deceived by the big underwriter banks into buying all these RMBSes stuffed with crappy mortgages from crappy originators, were also separately buying similar mortgages directly from the same originators. And, presumably, doing whatever due diligence they expected the underwriter banks to be doing: Read more »
Who won the Bank of America / Fannie feud? I want the answer to be “all of us,” but I guess it isn’t. Unlike Bank of America’s multi-front battle of deviousness with MBIA, which has spawned some genuine entertainment, BofA’s battle with Fannie has been conducted almost entirely in the boring trenches of actually flinging mortgages at each other. The story so far: back in the bad old days of “January 1, 2000 to December 31, 2008,” BofA/Countrywide sold approximately $1.4 trillion of mortgages to Fannie; in recent years Fannie has been figuring out that lots of those mortgages were badly underwritten, came with false reps and warranties, etc., and so it can demand that BofA repurchase them at par. It’s tried to do so on around $11bn of loans, and BofA’s reaction has been along the lines of (1) no and (2) “we’re so mad we’re going to stop selling you more mortgages,” which somewhat surprisingly to the casual observer actually seems to have been interpreted by both sides as a threat rather than a reward.
But today Fannie and BofA announced a settlement that would resolve all of those claims, as well as almost all future claims on the $297 billion of unpaid principal that remains on those $1.4 trillion of ’00-to-’08 mortgages.
The math here is a little funny. Let’s try to parse it: Read more »
I try to be honest when telling you that a court complaint or SEC filing or research paper is a fun read, just in case you might go read it, though of course there’s no accounting for tastes and I may enjoy many things that you don’t.* And that’s okay. In any case I doubt anyone will find the SEC’s fraud complaints against Fannie Mae and Freddie Mac filed today all that fun to read. “Very, very boring” would be more like it. The only bits that I enjoyed were the names of some of the loan programs, including Freddie’s “Touch More Loans” and the Fannie/Countrywide joint effort “Fast and Easy” which, boy, different times.
But there are some fascinating things about the case. A small one: I was kidding when I said “complaints against Fannie Mae and Freddie Mac.” They’re complaints against former Fannie CEO Daniel Mudd, former Freddie CEO Richard Syron, and a handful of their executives. The SEC signed weird neither-admit nonprosecution agreements with Fannie and Freddie themselves, in which the GSEs agree to help the SEC make its case against their former bosses.
This all seems like very good PR. You are learning, SEC. The neither-admit-nor-deny thing might be awkies, but slapping a big fine on the taxpayer-funded GSEs wouldn’t make a whole lot of sense. And the people who are upset that the SEC are not going after big names connected to the financial crisis have to be happy about the fact that the SEC here is going after the CEOs of big entities that in most people’s minds are intimately connected to the cause of the financial crisis. Suing them is not quite as good as throwing them in jail, but the SEC can’t do that, and this is a start anyway.
The bad news is that the SEC’s case sounds just absolutely terrible. Here it is: Read more »
Like many people, I like to believe that I prefer the government policies that I prefer because they’re a Good Thing for the world, not because they advance my self-interest. But as a relatively new homeowner, I break down a little on mortgages. Sure the mortgage interest deduction is a crazy and inefficient boondoggle, but it’s my crazy and inefficient boondoggle, and I don’t really want my apartment to lose (more) value if the deduction goes away.
Similarly, I’m pretty psyched about the plan that’s been kicking around, and that made it in vague form into the president’s jobs proposal, to allow people to refinance mortgages even if their houses are underwater or their income wouldn’t support the new payments. When I took out my mortgage I had a bit over one turn of leverage, as it were, which had my mortgage bankers congratulating me and asking if maybe I wanted to take a little more money just in case. Whereas now I make TXU look like a strong credit. Because um blogging pays less than banking you see. So I like the idea of being able to reduce my mortgage payment without actually having to try to convince a banker that it’s a good idea for me to keep this much debt. Even though I’m not entirely convinced that it’s good for the world.
Others are also skeptical. Read more »
As Wall Street bonuses bulged and housing prices were peaking in 2005, Daniel Mudd found himself dreading his top job at Fannie Mae. Going to work felt like “a choice between poking my eye out and cutting off a finger,” Fannie’s former chief executive officer recalls in Bethany McLean and Joe Nocera’s new tome, “All the Devils Are Here.” [Bloomberg]
Fannie Mae is asking for another $8.4 billion from the government to cover losses on bad mortgages after reporting a dismal first-quarter loss of $13 billion.
If fulfilled, the new request will bring Fannie’s total bailout package to $83.6 billion, nearly double the size of what the Treasury injected into Citigroup and Bank of America from the TARP program in Sept. 2008. Read more »
Fannie Mae is seeking an additional $10.7 billion in government aid after posting another massive quarterly loss as the taxpayer bill from the housing market bust keeps growing.
Fannie Mae seeks $10.7B in US aid after 2Q loss [Associated Press]
Unsurprisingly the GSE is still a sink hole that cash is proving difficult to fill. Instead of growing out of the training wheels, the increased burden of debt has bent the brackets, cracked the frame and flattened both tires:
Fannie Mae’s first-quarter loss ballooned on surging credit losses as the company and the Treasury Department reached agreement on a deal that doubled the government’s support level to $200 billion.
The deal, which Fannie said in a filing with the Securities and Exchange Commission was reached Wednesday, has been keeping the company afloat while under conservatorship as credit losses exploded.
Fannie requested another $19 billion Wednesday, which if approved through a preferred-stock purchase would put the total given by the government at $35.2 billion. The stock pays a 10% yield.
This is amusing considering the GSEs are being used as a tool to spike lending and, one is expected to believe, reflate the economy. Expect another large and splashy collapse into a muddy puddle and more than skinned knees this time.
Fannie’s Loss Swells; Treasury to Bolster Support [The Wall Street Journal]
Well, someone over there is thinking. The motherland believes it has seen quite enough of agency shenanigans, thank you very much. There will be no more of that nonsense on Putin’s watch. Now let’s have no more of this so we can get back to imprisoning oligarchs and lacing reporters’ tea with lethal doses of radioactive material.
Russia banned investment of its $83.7 billion National Wealth Fund in bonds issued by foreign government agencies such as Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the Finance Ministry said on Thursday.
The ministry said earlier on Thursday it had also banned investment of its $136.3 billion Reserve Fund in foreign government agencies’ bonds.
Russia bans Nat’l Wealth Fund investment in agencies [Reuters]
We had to check the date on this Bloomberg post very, very carefully to make sure it wasn’t off by a year. It is not:
Fannie Mae, the mortgage-finance company under U.S. government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing.
Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site. The changes apply to loans that the company owns or guarantees. (Emphasis ours).
The interesting thing about waking up every morning in a different Kafka piece is trying to guess which morning you are in Der Gruftwächter. This seals it. It is today.
Fannie Mae to Loosen Rules for Home-Loan Refinancing [Bloomberg]