Fannie & Freddie vs Other Institutions (Banks)

"Lets remind ourselves, this began with predatory lenders out there marketing products that borrowers could not afford. Fannie and Freddie were never bottom feeders. They had some Alt-A, they had some subprime, but nothing to the extent these other institutions had. That's where the problem lay."
Chris Dodd, former Senator from Connecticut

 

What is a Mortgage-Backed Security?

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage, or more commonly a collection ("pool") of sometimes hundreds of mortgages. The mortgages are sold to a financial institution (Fannie Mae or investment banks like Bank of America or Chase) that "securitizes" or packages the loans together into a security that can be sold to investors. 

The mortgages of a MBS may be residential or commercial, in the U.S. they may be issued by Government-sponsored enterprises like Fannie Mae or "private-label", issued by investment banks.

http://en.wikipedia.org/wiki/Mortgage-backed_security

 

Value of mortgage-backed security issuances in $USD trillions, 1990-2009.

Can you Spot the Bubble that PoPPed? FnF2.png

(source: sifma statistics, structured finance)

 

Apples-to-Apples Analysis

Data on the Risk Characteristics and Performance of Single- Family Mortgages Originated from 2001 through 2008 and Financed in the Secondary Market

September 13, 2010

There has been considerable public discussion of the roles Fannie Mae and Freddie Mac (the Enterprises) may have played in the financial crisis that began in the third quarter of 2007.1 This Federal Housing Finance Agency (FHFA) data release contributes to that discussion by summarizing information on the risk characteristics and performance of two sets of single-family mortgage loans originated from 2001 through 2008 and financed in the secondary mortgage market: those acquired by the Enterprises and those financed through the issuance of private-label mortgage-backed and asset- backed securities (collectively called private-label MBS). The period 2001 through 2008 encompasses the development and peak of the recent single- family mortgage lending and house price boom and the beginning of the ensuing bust. The release focuses on conventional loans—those without government insurance or a government guarantee.

 

1. Credit Scores

Lower credit scores are associated with greater mortgage credit risk. Borrower credit scores used here were calculated using models developed by Fair Isaac Corporation (FICO).

Fannie & Freddie:

Enterprise-acquired mortgages were predominantly made to borrowers with FICO scores above 660. Such loans comprised 84 percent of all Enterprise-acquired mortgages originated between 2001 and 2008 and ranged from 82 percent of 2001 originations to 91 percent of 2008 originations. Eleven percent of all Enterprise-acquired loans during the period were made to borrowers with FICO scores between 620 and 660. Only 5 percent of Enterprise-acquired loans were made to borrowers with FICO scores below 620. 

Banks:

Mortgages financed with private-label MBS originated between 2001 and 2008 were much more likely to be made to borrowers with lower FICO scores. Borrowers with FICO scores above 660 received 47 percent of mortgages financed with private-label MBS, while borrowers with FICO scores below 620 received close to 32 percent of those mortgages, and borrowers with FICO scores between 620 and 660 received just over 21 percent. 

2. Loan-to-Value Ratios

Loan-to-value ratios measure the relative use of borrower equity and mortgage debt to finance the purchase of a home. Loans with higher LTV ratios rely more heavily on borrowed funds and pose more credit risk. Second liens (including closed-end second mortgages and home equity lines of credit) further increase credit risk by reducing borrower equity in the property, but second liens, even if incurred simultaneously with the first mortgage, are not captured in the datasets used to prepare this release. 

Fannie & Freddie:

The vast majority of Enterprise-acquired loans had LTV ratios at origination of 80 percent or less. Such loans comprised 82 percent of all Enterprise-acquired mortgages originated between 2001 and 2008 and ranged from 75 percent of 2007 originations to 86 percent of 2003 and 2005 originations. Loans with LTV ratios above 80 percent but no greater than 90 percent and loans with LTV ratios above 90 percent each constituted 9 percent of Enterprise-acquired loans during the period, with loans in the latter category spiking to more than 15 percent of 2007 originations.

Banks:

About two-thirds of mortgages financed with private-label MBS had LTV ratios at or below 80 percent, with such loans increasing from 54 percent of 2001 originations to 81 percent of 2008 originations. Loans with LTV ratios above 80 percent but no greater than 90 percent constituted 20 percent of all mortgages financed with private-label MBS, while loans with LTV ratios above 90 percent constituted 11 percent. Loans in the latter two categories decreased significantly over time. 

The pattern of decreasing LTV ratios over time, most pronounced for loans financed with private-label MBS, is consistent with the greater use of second liens to avoid mortgage insurance on low- down payment mortgages, a practice that was increasingly common into 2007. In addition, loans with LTV ratios at origination of 80 percent or 90 percent tend to have higher delinquency rates than loans with slightly higher LTV ratios in several origination years. That observation is consistent with the existence of second liens that are not captured in the LTV ratio.

3. Loan Payment Type 

Adjustable-rate loans offer borrowers lower initial payments in return for less certainty about future payments. In the data analyzed here, adjustable-rate loans perform worse than fixed-rate loans in part because some originators of adjustable-rate loans evaluated borrower repayment capacity using artificially low rates, called “teaser rates.” 

Fannie & Freddie:

Enterprise-acquired mortgages were predominantly fixed-rate loans. Such loans comprised 88 percent of all Enterprise-acquired mortgages originated between 2001 and 2008 and ranged from 79 percent for 2004 originations to 96 percent for 2001 originations. 

Banks:

Mortgages financed with private-label MBS were predominantly adjustable-rate loans. Such loans comprised 70 percent of mortgages financed with private-label MBS originated between 2001 and 2008 and ranged from 53 percent of 2008 originations to 75 percent of 2004 originations.

4. Performance  

This data release measures performance as the percentage of loans in a given origination-year (as measured by their principal balance at origination) that have ever become 90-days delinquent, entered foreclosure processing, or entered real estate owned (REO) status through December 2009. We call such loans ever 90-days delinquent.

Fannie & Freddie:

Roughly 5 percent of Enterprise-acquired fixed-rate mortgages (FRMs) and 10 percent of Enterprise-acquired adjustable-rate mortgages (ARMs) were ever 90-days delinquent at some point before the end of 2009. 

Banks:

In contrast, roughly 20 percent of FRMs financed with private- label MBS and 30 percent of ARMs financed with private-label MBS were ever 90-days delinquent at some point before year- end 2009. The relatively worse performance of private-label MBS-financed mortgages was consistent across origination years and, within each year, across nearly all groups of loans with similar LTV ratios and FICO scores. 

Although higher FICO scores and lower LTV ratios are correlated with lower 90-day delinquency rates within an origination-year, that correlation varies significantly across origination years. Delinquency rates of all mortgages deteriorate over time from the 2003 through the 2007 origination years. That deterioration is worse for ARMs and for loans that combine low FICO scores and high LTV ratios. 

http://www.fhfa.gov/webfiles/16711/RiskChars9132010.pdf

Full Report can be found Here

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Many People Call It a Comeback

When the news hit the trading floors on the NYSE about Fannie and Freddie winning the lawsuit against B of A and other big banks, Ben Willis, Managing Director of Albert Fried, had some interesting things to say:

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Lawmakers Worry FHFA is Deviating from HERA

In the three and a half years since Edward J. DeMarco was designated Acting Director of FHFA, questions have persisted about his repeated failure to utilize the authorities available to FHFA to promote a healthy housing finance market. Specifically, the Members point to DeMarco’s failure to authorize a loan modification pilot program that would test whether a principal reduction program could save taxpayers money while helping borrowers keep their homes.

Today’s letter confirms the growing worries surrounding the current direction of FHFA, while emphasizing the immediate need for a strong leader at FHFA who is willing and able to tackle the critical challenges facing the housing sector.

The following Members signed the letter:

Reps. Ami Bera, Lois Capps, Tony Cárdenas, Matt Cartwright, Judy Chu, David Cicilline, Wm. Lacy Clay, Steve Cohen, John Conyers, Jr., Jim Costa, Elijah E. Cummings, Susan Davis, Keith Ellison, Anna G. Eshoo, Sam Farr, Marcia L. Fudge, John Garamendi, Joe Garcia, Al Green, Raúl M. Grijalva, Rubén Hinojosa, Mike Honda, Hank Johnson, Marcy Kaptur, Barbara Lee, Zoe Lofgren, Doris Matsui, James P. McGovern, Jerry McNerney, George Miller, Jerrold Nadler, Grace Napolitano, Eleanor Holmes Norton, Mark Pocan, Lucille Roybal-Allard, Linda T. Sánchez, Loretta Sanchez, Janice Schakowsky, Adam B. Schiff, Louise M. Slaughter, Jackie Speier, Eric Swalwell, Mike Thompson, John. F. Tierney, and Henry Waxman.

Below is the full letter:

February 7, 2013

 

The President

The White House

1600 Pennsylvania Avenue, NW

Washington, DC 20500

 

Dear Mr. President:

 

We are writing to urge you to nominate a permanent director of the Federal Housing Finance Agency (FHFA). We applauded your nomination of Joseph A. Smith Jr. to this position in 2010, and we were disappointed when his nomination was blocked in the Senate. However, it has been three and half years since Edward J. DeMarco was designated as the Acting Director of the agency. We believe your reelection is a prime opportunity to put forth a new candidate who is ready and willing to implement all of Congress’ directives to meet the critical challenges still facing our nation’s housing finance markets.

Although the housing sector is recovering slowly, Federal Reserve Chairman Ben Bernanke warned in a speech in November that “the housing revival still faces significant obstacles,” and that the “degree to which that challenge is met will help determine the strength and sustainability of the economic recovery.” As of last month, approximately 10.9 million residential borrowers still owe at least 25% more on their mortgages than the value of their homes. It is imperative that we have a strong leader at FHFA to take on these challenges, strengthen the housing market, and promote our nation’s continued economic recovery.

Under the Housing and Economic Recovery Act of 2008, Congress charged the Director of FHFA with overseeing Fannie Mae and Freddie Mac to ensure that their operations “foster liquid, efficient, competitive, and resilient national housing finance markets (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities).” In addition, as part of the Emergency Economic Stabilization Act of 2008, Congress directed FHFA to “maximize assistance for homeowners” and “to minimize foreclosures,” and it granted explicit authority to modify mortgage loans through the “reduction of loan principal.”

During Mr. DeMarco’s tenure, he has declined to fully and effectively implement these laws. When Mr. DeMarco testified before the Committee on Oversight and Government Reform in November 2011, he asserted that the “use of a principal reduction within the context of a loan modification is not going to be the least-cost approach by the taxpayer to allow this homeowner an opportunity to stay in their home.” His testimony has since been contradicted by FHFA’s own data, which indicate that principal reduction loan modifications could save U.S. taxpayers billions of dollars compared to allowing underwater homes to go into foreclosure, and that principal reduction loan modifications could save taxpayers hundreds of millions of dollars compared to Mr. DeMarco’s preferred alternative of principal forbearance.

More troubling, Mr. DeMarco refused to allow the implementation of a pilot programto examine whether a principal reduction program could reduce costs to taxpayers while helping borrowers stay in their homes. One such pilot program, which was developed byFannie Mae and Citibank after months of study and analysis, was terminated due to unspecified “operational” challenges. By not supporting this pilot program—even after the Department of Treasury offered funds to help cover its operational expenses—Mr. DeMarco demonstrated that he is not interested in obtaining real-world evidence that might contradict his pre-established views.

Finally, rather than taking steps to help homeowners facing foreclosure, FHFA recently proposed an action that appears to penalize borrowers arbitrarily. Specifically, FHFA proposed increasing state-level guarantee fees charged by Fannie Mae and Freddie Mac on new borrowers in the five states with the longest average foreclosure timelines. Yet, FHFA provided no analysis to support its recommendation. If implemented, this proposal may unfairly punish borrowers without identifying or addressing specific factors that lengthen foreclosure times, such as inadequate business practices by mortgage companies servicing loans under FHFA’s conservatorship.

Ensuring that FHFA implements Congressional directives to support the most liquid, efficient, competitive, and resilient housing finance markets is a matter of national urgency. For these reasons, we strongly urge you to nominate an FHFA Director who is ready to fulfill this mission and address the many challenges still facing the nation’s housing finance markets.

 

Sincerely,

http://democrats.oversight.house.gov/index.php?option=com_content&task=view&id=5861&Itemid=49

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Big Banks Win, Taxpayers Lose (Just in Case You Didn't Get the Memo)

"As the overseer of mortgage giants Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) has a duty to safeguard taxpayer dollars. But the regulator may have done just the opposite earlier this month (2/12/13).

On February 11, the FHFA held a conference call to inform a group of mortgage trade associations that it had vetoed a Fannie Mae proposal to buy force-placed insurance directly from underwriters. The news was greeted warmly by those listening in, given that Fannie's plan had threatened to cut mortgage banks from their profitable positions as middlemen."

See full article Here (1)

"Fannie's plan would have lowered the cost of some homeowners' insurance significantly and saved the government-sponsored enterprise at least $145 million annually, sources familiar with Fannie's plan and program documents state.

The FHFA's decision left plan supporters and others at a loss for an explanation save one -- that the FHFA buckled under pressure from insurers and bankers, protecting controversial business practices that have drawn the ire of state insurance officials and consumer advocates alike.

"Incompetence or corruption. It's got to be one or the other," said Robert Hunter, a consumer advocate and former Texas insurance commissioner whose opinions dovetail with those of people closer to Fannie."

http://www.americanbanker.com/issues/178_38/big-banks-win-taxpayers-lose-as-fhfa-spikes-fannie-insurance-overhaul-1057044-1.html

"State regulator, plaintiffs' attorneys and Fannie Mae have alleged over the past two years that the force-placed market is riddled with pay-to-play kickback schemes in which banks paid inflated prices for the insurance and then in return received lucrative commissions or sweetheart reinsurance deals from the underwriters. Such arrangements have been criticized for driving up the cost of force-placed coverage and sticking third parties with the bills.

Filings with the National Association of Insurance Commissioners show that a reinsurance affiliate Banc One, a subsidiary of JPMorgan Chase (JPM), earned more than $300 million reinsuring 75% of the premiums its borrowers paid last year, paying out only a fraction of that in claims. Such lucrative arrangements have created "reverse competition" by rewarding banks for buying the most expensive insurance possible, consumer advocates say.

"Over the 2010 to 2012 period, Assurant [one of the largest force-placed underwriters] passed almost $6 billion of premiums to captive reinsurance companies, but collected just $2 billion in claim payments," six consumer groups wrote in a letter to the FHFA."

http://www.americanbanker.com/issues/178_111/fhfa-to-hold-private-hearings-on-force-placed-insurance-1059744-1.html 

See Full Article Here (2)

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What Do They All Have In Common?

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Net Zero is Coming Fast

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Private Capital?

"Some advocate for the wind down of the guarantee businesses of Fannie and Freddie, either by stepping down loan limits or restricting their underwriting authority in some formulaic way. The theory is that private investors will fill the void in the market created by the enterprises’ forced withdrawal and that the transition will be seamless."

"My question to the advocates of this approach is: what if it isn’t seamless and substantial demand for mortgage credit goes unmet? If policymakers get the size or pace of a forced wind down wrong, we will suffer a credit contraction, house prices will fall and the U.S. economy will once again be at risk for a recession. When I ask the proponents of wind down “what then?”, the answer is that the FHFA will wind the enterprises back up. This is precisely the kind of start/stop government policymaking that prevents private investors from taking risk. Until Congress provides private investors with a credible transition plan from the government- dominated market that exists today to one with a better balance of private risk and public support, I predict that private risk taking in the mortgage markets will remain muted."

Statement by James E. Millstein former Chief Restructuring Officer of the United States Department of the Treasury before the Committee on Financial Services U.S. House of Representatives April 24, 2013

James E. Millstein's (architect of AIG's successful restructuring) GSE Reform Proposal
TransitionPlan.png

TransitionPlan1.png

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June 2013 U.S. Economic and Housing Market Outlook

What Happens When Interest Rates Rise?

Freddie Mac's Vice President and Chief Economist, Frank Nothaft, gives a video preview of the June 2013 U.S. Economic and Housing Market Outlook.

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Matthew McGill, Partner of Law Firm Dunn & Cruchtcher, Speaks the Truth

Matthew D. McGill is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He practices in the firm's Litigation Department and its Appellate and Constitutional Law and Intellectual Property practice groups.

"This lawsuit seeks to uphold the rule of law," said Theodore Olson, partner at Gibson, Dunn & Crutcher and former Solicitor General of the United States. "HERA established very specific rules about the government's limits and obligations under conservatorship. Investors had every right to expect these rules to be followed. If the government wanted to assume the powers of receivership, it could have chosen that course. Instead it chose conservatorship, and with the Sweep Amendment it overreached, exceeding the legal boundaries of the statute and failing to meet obligations of conservatorship mandated by Congress under HERA."

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Taking a Look Back

"Lets remind ourselves, this began with predatory lenders out there marketing products that borrowers could not afford. Fannie and Freddie were never bottom feeders. They had some Alt-A, they had some subprime, but nothing to the extent these other institutions had. That's where the problem lay."

Chris Dodd, former Senator from Connecticut @ 1:15:10

July 15, 2008 Senate Banking Committee Hearing on Preserving the viability of our Nation's Government Sponsored Enterprises with Hank Paulson, Ben Bernanke, and Christopher Cox                                       

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