WASHINGTON, D.C. – Today, Congresswoman Maxine Waters, Ranking Member of the Financial Services Committee, released a comprehensive legislative proposal to reform the housing finance market. Known as the Housing Opportunities Move the Economy (HOME) Forward Act of 2014, the legislation ends Fannie Mae and Freddie
Mac, and creates a new, cooperative-owned securities issuer.
For months, Waters has been working with her Committee colleagues, outside stakeholders, and consumer and affordable housing advocates to craft a measure that ends the incentives created by the ownership structure of the government-sponsored enterprises’ (GSEs) while preserving the role of small financial institutions, providing a more flexible approach to placing credit risk in the markets, and ensuring access to affordable rental housing for low-income families.
“Reforming a 10 trillion dollar housing finance market is an immense undertaking that must be carefully considered,” said Congresswoman Waters.
“Fannie Mae and Freddie Mac’s return to profitability and repayment of taxpayer dollars has led some to rightly speculate whether the enterprises need any reform at all. I believe that we have an opportunity to address some of the fundamental flaws of the current system, by ending the perverse incentives created by Fannie Mae and Freddie Mac's ownership structure and providing an explicit government guarantee that is paid for by industry.”
The draft bill furthers a conversation started by legislation released by Senators Bob Corker (R-TN) and Mark Warner (D-VA) and, more recently, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID).
The foundation of the HOME Forward Act is a number of principles for housing finance reform, released by Committee Democrats in 2013. They include maintaining the 30-year fixed rate mortgage, protecting taxpayers, ensuring transparency, stability and liquidity within a new market, and preventing disruptions to the U.S. housing market during a transition to a new finance system. In addition, the legislation will maintain access for all qualified borrowers that can sustain homeownership and ensure continued affordable rental housing.
The HOME Forward Act establishes a new, lender-owned Mortgage Securities Cooperative that will be the single issuer of government-guaranteed securities and will be governed on a one-member, one-vote basis. The Act creates an explicit government guarantee, paid for by industry and used to capitalize a catastrophic insurance fund. It improves upon bipartisan proposals in the Senate by, for example, providing for credit risk sharing on a more flexible basis. Small financial institutions will have direct access to a "cash window" in order to preserve their access to the secondary market. And the legislation recognizes the important role of the National Affordable Housing Trust and Capital Magnet Funds, and fulsomely addresses the multi-family market.
The HOME Forward Act would empower the government to provide for liquidity in the secondary mortgage market and ensure access to sustainable homeownership for creditworthy borrowers of all backgrounds and in all regions of the country. At the same time, it would appropriately price for risk, protect taxpayers and level the playing field for large and small banks.
Waters added, “I am hopeful that this legislation will continue to move the conversation on housing finance reform forward. While there are differences, this legislation and the two bipartisan proposals in the Senate embrace a number of common themes. These include preserving the 30-year, fixed rate mortgage, protecting taxpayers from the costs of a housing downturn by establishing a strong new regulator, and ensuring that small and community financial institutions can participate in the new system.”
The executive branch has behaved duplicitously in its dealings with Fannie and Freddie’s private shareholders.
A federal judge on Wednesday granted Bruce Berkowitz’s Fairholme Funds Inc. a motion to conduct discovery in its lawsuit against the U.S. government that challenges changes that the Treasury Department made to its bailout of Fannie Mae and Freddie Mac.
The ruling marked an initial victory for shareholders in what figures to be a long-running battle with the U.S. government over its 2012 decision to require Fannie and Freddie to send all of their profits to the government as part of the mortgage companies’ 2008 bailouts.
Source: MoneyBeat - WSJ
Reuters article titled "How Ralph Nader learned to love Fannie and Freddie" by Bethany McLean.
Thanks for all your support. Let's continue the fight to restore fairness!
Source: Bill Maloni's Blog
Former Fannie CFO Tim Howard’s Book
The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream
Many months ago, I was fortunate to review early drafts of “The Mortgage Wars,” a book by my friend and former Fannie Mae colleague Tim Howard, coming out later next month.
Publisher McGraw-Hill has been touting it on Amazon and the book is accelerating up the pre-sale list of books in that genre.
Tim started writing this book long before federal judge Richard Leon, a year ago, threw out “securities fraud” charges against Fannie Mae CEO Frank Raines, Fannie Comptroller Leanne Spencer, and Howard, which were brought by some shareholders who relied on a totally bogus and politically motivated Bush Administration finding that top Fannie officials misapplied new mortgage backed securities accounting rules. Quite the opposite as history showed.
Judge Leon Clears the Decks and the Air
The Leon decisions overtook Tim’s drafting and provided him with a very satisfactory result to the material he penned and story he began to tell, long before the legal victory was certain and unsealed.
Of course, coming eight years after the 2004 charges and lawsuit were lodged, the three principals couldn’t avoid the career setbacks, loss of prestige, diminished respect, and dislocation in their professional and personal lives.
“Lies have traveled around the world while the truth wakes up and brushes its teeth in the morning.”
And, as I’ve written before, the Bush Administration’s ideological decision to force out this top talent allowed new, less reliable execs to take command. (Heavy specifics of that are in Tim’s book, too.)
From 2005 until stopped, the “newbies” deviated heavily from Fannie’s historic conservative approach to mission, gorged and acquired billions of dollars of worthless Alt A mortgages and Wall Street private label securities (PLS)—seeking yield and market share -- which brought down Fannie (and Freddie, too, which played its own version of that strategy).
Serious followers of this matter will enjoy reading Tim's authentic details, which have never before appeared in public. If they pay close attention, they will realize how exacting was the detailed and serious financial services work and analysis conducted at Fannie by the pre-2005 management.
One of the most bizarre aspects of the current debate on mortgage finance reform is that the consensus objective for reform-- getting rid of the GSEs and providing a greater role for the private sector-- was the goal of the anti-Fannie Mae cabal in the late 1990s and early 2000s, and pursuing it is what led to the 2008 mortgage crisis! Why would anyone want to do the same thing again? We shouldn't, but the major proponents of today’s ideas for mortgage reform are the large banks and their supporters, and they're the ones who control the narrative about what happened during the crisis. The story they tell about the crisis is completely wrong, but before my book there has been no fact-based alternative view for anyone to consider instead. That's what "The Mortgage Wars" will offer. It makes clear how and why the crisis evolved-- using actual events and developments in the correct sequence in which they occurred-- and it's told from the perspective of an insider who lived through the events he's relating.
As I've noted before, the mortgage crisis was the result of a fight between the supporters and the opponents of the GSEs over who would control the largest credit market in the world. Fannie and Freddie always had been controversial, but the controversy got serious in the late 1990s, when two decades of banking deregulation produced giant financial services companies (mostly banks) with national ambitions who viewed Fannie and Freddie's dominant position in the mortgage market as a threat to those ambitions. They came to Washington to try to convince policymakers and regulators to replace a mortgage finance system based on the GSE with one based on private-market mechanisms and incentives, with very little government involvement or regulation. Fannie Mae fought back, and what I call "the mortgage wars" began. The banks and their supporters succeeded in getting control of the mortgage standard-setting process in 2004-- when private label mortgage-backed securities accounted for over half of all new MBS issues for the first time ever-- and that got the bubble going. Fannie Mae was pulled into it after OFHEO used allegations of accounting fraud-- subsequently shown by Federal District court judge Leon to have been completely invented-- to oust Fannie Mae's top leadership and force the company to change its risk management organization and practices. But even with that, five years after crisis ended it is clear that Fannie Mae's mortgages performed twice as well as the banks' and four times better than those put into private-label securities.
The GSE-based system was the best and safest in the country's history. The bank-based private-market system that replaced it in the mid-2000s-- with the support and assistance of the Treasury, the Fed and the Bush administration-- led to a catastrophic failure that ended up killing everybody, including the GSEs. Anyone with an accurate understanding of what happened during the mortgage crisis, and why it happened, would be highly unlikely to ever again fall for the siren song of basing an $11 trillion market essential to the country's economic health on free-market principles with no government oversight or regulation.
THE REAL STORY OF THE MELTDOWN THAT LED TO THE FINANCIAL CRISIS
Many books have been written about the financial crisis and its causes, but none of them has been written by one of the key figures intimately involved in the drama. At last, one of those top insiders tells the complete story of the mortgage wars that almost destroyed the global economy.
In this no-holds-barred account, Timothy Howard exposes the perfect storm of money, power, ideology, and politics that led to the crisis. Howard was the CFO of Fannie Mae until 2004. At its peak, Fannie Mae was responsible for more than one out of every four home loans in the United States. But by the mid-2000s, what seemed to be the most successful mortgage finance system in the world completely broke down. What happened?
Howard takes you behind the scenes to show the dramatic struggles between the corporations and the politicians that led to the meltdown. In The Mortgage Wars, you'll learn:
- How Fannie Mae was born and evolved into the largest mortgage lender in the world
- How Fannie Mae survived the fi nancial turmoil that killed the thrift industry
- How the subprime market grew, with very little oversight, and eventually exploded
- How political and fi nancial jockeying sparked the mortgage wars
- What we must do to prevent a similar financial crisis from ever happening again
At long last, this inside account tells the unvarnished truth about some of the most controversial subjects of our time, including the disturbing new norm of unsafe and unsound business practices in the finance world and the huge problems that arise when politicians try to pick winners in the global markets.
The Mortgage Wars tells the real story for the first time, showing how an $11 trillion dollar industry really fights its battles, for better or worse. Timothy Howard also shares his insights on how to keep the mortgage fi nance system safe, offering invaluable, prescriptive advice for all of us as we move forward into an uncertain future.
Reads like a tug of war, but seem that we are passing the tipping point. Crony Capitalism is being exposed step by step.
Ralph Nader at a roundtable discussing shareholder values. There is also a petition, you may find it by clicking the "Take Action" tab above the video on the green ribbon.
See here for a copy of the letter from Ralph Nader to Mel Watt regarding shareholders.
On September 6, 2008, the Government imposed conservatorships on Fannie Mae and Freddie Mac (collectively “the Companies,” and sometimes individually, “Company”). However, the “conservatorships” defied the very nature of conservatorship itself. Unlike when the Government acts as conservator of a bank in order to preserve the bank’s assets and protect its creditors, the Government used the conservatorships to stabilize the economy by warehousing on the Companies’ books bad mortgage debt from financial institutions the Government deemed “too big to fail.” In addition, via Stock Agreements forced on the Companies, the Government funneled billions of dollars to Treasury as “dividend payments” in exchange for capital infusions that the Companies never requested or needed. Eventually, the Government used the so-called conservatorships to deny the Companies their own profits, instead siphoning them directly to the federal treasury. While the Government called the Federal Housing Finance Agency (“FHFA”) “conservator,” it was such in name only. In reality, it has been a shill for using the Companies to accomplish whatever the Government wanted.
The Government’s unprecedented seizure of the Companies to further its own ends resulted in near total destruction of shareholder value. Almost immediately after the conservatorships were imposed, the value of the Companies’ shares plummeted, causing preferred and common shareholders of the two Companies to lose more than $41 billion. FHFA agreed, purportedly as conservator of the Companies, to accept from Treasury $100 billion in capital infusions for each Company, but in exchange granted from each Company $1 billion in preferred stock with preferential rights that placed the Government ahead of all other stockholders. FHFA further gave the Government warrants for 79.9% of the Companies’ common shares at a bargain-basement price of one-thousandth of one cent per share. The Government’s actions virtually handed majority control in the Companies to the Government for a miniscule fraction of their value. Once the conservatorships were imposed, shareholders also lost the right to vote their shares. And though shareholders have the right to receive a portion of the Companies’ assets in the event of dissolution, the Government’s newly-acquired preferred stock ensured that, if the Companies are dissolved, the Government will receive $189.5 billion from liquidation preferences while shareholders will get nothing. Even though conservatorships are by definition temporary, the Government’s seizure of the Companies has lasted over five years and there is no plan in sight for them to be returned to the shareholders who own them, and thus no avenue by which shareholders will be able to recover the loss of the value in their shares.
Under the Fifth Amendment to the United States Constitution, the Government cannot take private property without just compensation. Despite the extraordinary facts alleged in the Complaint, there is no doubt that the Government’s actions in imposing the conservatorships constituted a taking. In the alternative, they constituted an illegal exaction in violation of the Due Process Clause of the Constitution. Under either theory, whether done in the guise of “conservatorships” or otherwise, the Government cannot seize control of privately-held corporations, force them to serve the whim of the Government’s objectives and, in the process, wipe out the interests of millions of shareholders. And if the Government does so, it must compensate the shareholders for what it has taken.
Thus, while the Government’s Motion asks this Court to immunize the Government from its own conduct, nearly every one of the Government’s legal arguments ignores the facts of the Complaint and misrepresents the actions that led to and have constituted the alleged “conservatorships.” First, even though the Companies were subjected to conservatorship to serve the Government’s objectives, the Government argues that FHFA was not, in fact, the Government. Not only is this argument premised on the fiction that FHFA acted as a “conservator” but, even assuming the existence of true conservatorships, it improperly asks this Court to find, as a matter of law, that FHFA ceased acting as a regulator once it became the Companies’ conservator. It likewise ignores the Complaint’s allegations, which the Court must accept as true, that FHFA conspired with Treasury in imposing the conservatorships. Indeed, during the conservatorships there has been no meaningful distinction between the roles of Treasury and FHFA, as the conservatorships were designed not to preserve the Companies’ assets, but rather to further Treasury’s directives and goals.
The Government also claims that Plaintiffs are precluded from pursuing this action by virtue of a purportedly exclusive remedy in the Housing and Economic Recovery Act of 2008 (“HERA”). However, the provision cited by the Government (12 U.S.C. § 4617(a)(5)) only addresses claims for declaratory and injunctive relief, not the claims for damages Plaintiffs make here. When Congress intends to preclude judicial review of constitutional claims its intent to do so must be clear, and the Government has pointed to no such legislative declaration in HERA.
The Government next claims Plaintiffs lack “standing” to bring this action because, under HERA, it suggests, FHFA assumed all rights of the Companies’ shareholders, including the ability to bring suit. But this argument ignores a well-recognized exception applicable when a conservator has a conflict of interest because of its entanglement with “closely related” government entities. As described above, the Complaint alleges the existence of such an entanglement here. The Government further claims that Plaintiffs lack standing to recover the Companies’ lost profits. But Plaintiffs are not seeking to recover profits that belong to the Companies themselves: they are seeking to recover for the destruction of the value of their shares. Moreover, Plaintiffs can directly recover based on the Companies’ overpayment to the Government for access to Treasury funds, which caused Plaintiffs to lose the economic value and voting power of their shares.
Plaintiffs have sufficiently alleged that the conservatorships constituted an unconstitutional taking. As an initial matter, Plaintiffs’ claims are ripe for review. Indeed, the Government would force Plaintiffs to wait until their claims were barred by the statute of limitations before this Court could find them sufficiently “ripe.” More substantively, this Court has recently reiterated in Starr International Co. v. United States that Plaintiffs have a cognizable property interest in their shares. The Government’s actions clearly affected the value of those shares and Plaintiffs’ other ownership interests. Plaintiffs had reasonable-investment backed expectations that the Government would not take over the Companies for its own purposes, thereby destroying the value of their shares and their rights as shareholders. As much as the Government would like the Court to believe otherwise, the Companies were not engaged in banking and thus were not part of the “highly regulated” banking industry, where regulatory takeovers are more common. Thus, there is no basis for suggesting that Plaintiffs should have reasonably anticipated the Government’s actions here, particularly where, just months before the conservatorships were imposed, the Government repeatedly represented that there was no need to impose them because the Companies were financially sound. The Government was not “rescuing” the Companies as would be done in a traditional conservatorship. At best, it was cleaning up its own mess after directing the Companies to make high-risk investments.
Finally, Plaintiffs have stated an exaction claim. The Government’s actions were not lawful under HERA. If the Government’s argument is true, the Government could have imposed the conservatorships to do whatever it wished with the Companies. Instead, HERA established FHFA’s duty to preserve the Companies’ assets, and that duty creates a money mandating obligation. FHFA has done precisely the opposite by giving away the Companies’ assets virtually for free to Treasury. Finally, Plaintiffs’ claims are not “indirect,” because there is no intervening party more injured by the Government’s actions.
The Government’s Motion ignores defining facts of the takeover and instead simply characterizes its actions as ordinary. But the Government’s attempt to reinvent history shows the very reason this Court should not grant its Motion. Accepting Plaintiffs’ account as true, as the Court must, and considering the novel application of constitutional principles implicated by this case, dismissal is inappropriate at this stage. The Motion should be denied and Plaintiffs’ claims decided on their merits after discovery.
Source: OpEd News
A review of hundred of thousands of loan files shows how fraud in private label mortgage securities was ubiquitous and how most investors got shafted.
Investors won't finance underwater mortgages. Just look at the 122 residential mortgage-backed securitizations referenced in the lawsuit filed by the Federal Housing Finance Agency against JPMorgan. Every one of those deals was sold with the claim that the pool had zero mortgages with a loan-to-value in excess of 100%. But the opposite was true. At the time of closing, all 122 deals held a material number of mortgages that exceeded the value of the property.
The uniformity is striking, as can be seen on Table 8 in the J.P. Morgan complaint (page 130), or Table 7 of the Goldman Sachs complaint (page 52), or Table 9 of the Merrill Lynch complaint ( page 63), or Table 7 in the Royal Bank of Scotland complaint (page 52), or tables in a dozen other lawsuits filed by FHFA on behalf of Fannie Mae and Freddie Mac.
It's hard to summarize the damning evidence set forth all 18 lawsuits, but a quick glimpse at those tables gives you a sense of a widespread disregard for accuracy in S.E.C. filings.
Those numbers understate the magnitude of the problem. They reflect, for the most part, only first lien LTVs, and not simultaneous 2nd lien debt, which also encumbered the collateral. (Many of these deals had small percentages, usually 5% or less, of 2nd lien loans, for which the combined LTV was used in the complaints' calculations.)
For instance, the prospectus for J.P. Morgan Mortgage Acquisition Corp. 2006-CH2 , which financed only first-lien mortgages, stated there were zero mortgages with an LTV in excess of 100%. In fact, a subsequent review showed that 20% had mortgages that exceeded the value of the collateral. Allstate Insurance conducted another review of the JPMAC 2006-CH2 loan files, and found that 44% of the mortgages had CLTVs that exceeded the property values. As you would expect, underwater mortgages perform poorly when home prices start sliding.
That's not the half of it. FHFA also presented an abundance of evidence that the underwriting banks seriously overstated the percentages of owner occupancy in each mortgage pool. And, the plaintiffs allege, there was an abundance of other evidence that banks simply disregarded their stated credit standards.
To test the veracity of the banks' statements, the FHFA had reviews conducted for 1,000 files in each loan group. So, for instance, the JPMorgan complaint involved reviews of about 122,000 loan files. No easy, or inexpensive, task. The total review, of hundreds of thousands of different loan files, may be the most comprehensive study of RMBS collateral anywhere. FHFA's lawyers should donate their work product to the National Archives.
In addition to evaluating the documentation, the reviewers scanned tax records and lien filings to confirm whether the borrower actually resided at the mortgaged property as he claimed. And with each file, the reviewer compared the lien loan amount with the values shown by a well-recognized automated valuation model, or AVM. As CoreLogic states, retrospective AVMs tend to be more accurate than original AVMs.
The specifics of these complaints are important, because they dispel the false media narrative being pushed by certain lawyers and commentators. These cases are not about the government sponsored enterprises and their knowledge of mortgage risk. These cases are about lying. Moreover, these lies were not made to Fannie and Freddie, but to anyone who bought in to those deals.
The lies began with the origination of mortgages, which were not adequately vetted by the bond underwriters, who, under the Securities Act of 1933, are legally liable for the accuracy and completeness of public filings. All sophisticated investors know that the 1933 Act holds the underwriters accountable for the accuracy of the information. Which is why any argument insinuating that the GSEs "knew what they were buying" is spurious.
Bloomberg BNA estimates that GSEs could recover up to $28 billion in settlements for bond purchases that totaled $200 billion. But this is the tip of the iceberg.
Because the GSEs almost always purchased the most senior triple-A tranche in a deal, they were supposed to recover all principal before subordinate tranches recovered a nickel. So, to the extent that a GSE suffered a loss on any deal, the subordinate tranches got wiped out.
Consider J.P. Morgan Mortgage Acquisition Corp. 2006-CH1, a $600 million deal comprised entirely of 1st lien loans. At the time of closing, about 17% of the Group 1 mortgages had an LTV higher than 100%. Moody's estimates that the entire deal will suffer $191 million in losses. But the GSE investment, a $150 million triple-A tranche, will be paid back in full.
So why didn't Allstate and the other aggrieved investors try to piggyback on to the FHFA lawsuits, in various class actions? Because the Housing and Economic Recovery Act of 2008 allowed Fannie and Freddie to overcome the barriers that limit the ability of ordinary investors to seek redress under Federal securities laws.
Well before the government takeover in September 2008, the GSEs, like many other investors, sought access to the loan file data in these various deals. Fannie and Freddie wanted to find out if investors' rights--for loan putbacks and other remedies--were being adequately enforced by servicers and trustees. These efforts to access information went nowhere.
So finally, in July 2010, the FHFA started issuing subpoenas, as authorized by the 2008 Act . Other investors, who were subjected to the same stonewalling, had no comparable subpoena power. Also, the FHFA had more time to develop the cases. Under the 2008 Act, the three-year statute of limitations for Fannie and Freddie began running on September 8, 2008, the day of the government takeover. For most everyone else, the statute of limitations began running on the dates that the bonds were issued in 2005 through 2007. Almost all of the FHFA lawsuits were filed just under the wire, on September 2, 2011.
Nonetheless, buyers of subordinate tranches of private label RMBS owe Fannie and Freddie a debt of gratitude. Because someone went to the trouble to fully document the basis for their legal damages, ordinary investors have some certainty as to what they would have recovered, but for the barriers that limit enforcement of their legal protections. You have to wonder if major banks would have remained solvent if the rule of law were applied equally to everyone.
For over 20 years, David has been a banker covering the energy industry for several global banks in New York. Currently, he is working on several journalism projects dealing with corporate and political corruption that, so far, have escaped serious scrutiny by mainstream media. He is trained as a lawyer.