It’s always good fun to get upset about something of the form “X bet against Y,” and the financial markets offer a whole range of opportunities to do so. Everything is a bet against something, and if that something is sympathetic and/or you, you can go get enjoyably pissed at whoever is doing the betting. Today ProPublica reports on a nasty-sounding Freddie Mac bet against America and freedom and the 30-year fixed-rate mortgage with no prepayment penalty:
Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.
Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.
Now, a “bet that pays off if homeowners stay trapped in expensive mortgages with interest rates well above current rates” is called a … what’s the word? … oh, right. A “mortgage.” A feature of our life here on earth is that banks make money when people stay in their fixed-rate mortgages when rates go down, and lose money when people refinance those mortgages.*
Okay but in fairness those aren’t Freddie’s “bets,” not exactly. Their bets against not only the housing market but also specifically a couple named the Silversteins, who “live in an unfinished development of cul-de-sacs and yellow stucco houses about 20 miles north of Philadelphia, in a house decorated with Bonnie’s orchids and their Rose Bowl parade pin collection,” look like this: 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.
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 »
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.
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