Senior Preferred Stock Purchase Agreements (SPSPA)
"Under the SPSPAs, Treasury initially received from each GSE: (1) 1,000,000 shares of non-voting variable liquidation preference senior preferred stock with a liquidation preference value of $1,000 per share and (2) a non-transferable warrant for the purchase at a nominal cost of 79.9 percent of common stock on a fully-diluted basis. The warrants expire on September 7, 2028."
As part of its bailout agreements with Fannie and Freddie, the GSEs granted the government warrants to purchase just under 80% of the common shares of the two GSEs at a strike price of $0.00001 per share. The warrants were merely a backstop to pay back the taxpayers in case Fannie and Freddie could not pay back the Treasury. However, now that Fannie and Freddie are profitable, and paying back the loan to Treasury, the warrants cannot be exercised without violating the "Takings Clause" of the Fifth Amendment of the U.S. Constitution. In other words, the government, by law, is required to release Fannie and Freddie from conservatorship when the loan is repaid to Treasury and the businesses have enough liquidity/cash on the books ($150-$200 billion), as a backstop, to prevent another bailout from occurring.
We trust that President Obama is a fair and straight shooter. This Administration saved Chrysler, GM, AIG and the banking system, and resisted calls to nationalize a single private entity. So, in keeping with that management style: there is little reason to believe that the Obama Administration would be compelled to liquidate Fannie and Freddie. There is chatter about the Obama Administration spinning the GSEs off to the private sector; however, they will retain strong oversight of the loan originators and banks, perhaps with an appointed government entity, in a position of strong influence on the Board of Directors -- keeping F&F clear of non-chartered activity.
We have great confidence that Mr. Obama will respect the rights of all stakeholders, including those with positions in F&F common stock.
Franklin Delano Roosevelt (FDR): The man that led America to war against tyranny also led America in a war for financial integrity, something that Wall Street has always had a problem with, and something that when not policed, burns like dry tinder consumed in the wildfire of greed. Americans witnessed the big bank burn downs in the financial crash of 08; a fire fueled by the tinder of fraudulent loans; rated AAA by big banks and loan originators, and doused with the gasoline of fraudulent insurance policies; ignited by fraud claims consuming most of AIG, AMBAC, and MBI – destroying the housing industry and tanking the U.S. and world economy. And now brazen thieves, Lloyd, Jamie and tag-along-Brian are asking, through the Republicans, blind ideologue, congressional stooges of America, to hand over the rest of the wealth that they have not plundered, so that they can lever those assets to the maximum, as they did with MBS in foreign emerging markets. The money will be taken offshore and will never return. Only if a Democrat President allows the long-standing legacy of FDR to be torn down . . . Go to Hyde Park, Mr. President. Walk through its halls, sit in his chair – his wheelchair – by yourself, and ask yourself, what would FDR do with FNMA/FMCC today. Is this really a difficult decision? FDR led America out of The Great Depression. Will you lead America out of the big bank caused Great Recession – deliberately designed crash, intended to transfer wealth from Main Street to Wall Street and the major banks?
The big banks are our friends *wink *wink
You might take note that there have been no lawsuits filed against the GSEs, they are privately owned by shareholders, and have proven repeatedly to have far better performance than the banks. With a system that places the entire responsibility of both originating and securitizing loans on the banks, there is bound to be major abuse to mortgage consumers. The hybrid system worked for years until the fraudulent activity by banks, many listed below, brought our country to its knees! Just take a look at how the gap between low-income housing and available housing has widened from 2% to 12% since the GSEs were placed into conservatorship, and the government stopped programs that have helped families for decades.
Let's take a look at how the banks have "helped" us out as of late. The list below is by no means complete, but it lists some of the legal action against the banks following the subprime mortgage crisis.
By James O'Toole @jtotoole October 31, 2013: 7:00 PM ET
The suit comes less than a week after a settlement in which JPMorgan agreed to pay Fannie and its sister company, Freddie Mac, $4 billion to settle allegations that it misrepresented mortgage securities sold to the firms.
Fannie says the banks' alleged manipulation of Libor caused it approximately $800 million in losses.
By Evan Perez and James O'Toole @CNNMoneyInvest October 19, 2013: 5:50 PM ET
JPMorgan Chase and the Department of Justice have tentatively agreed to a $13 billion civil settlement to resolve several investigations into the bank's mortgage securities business, according to a U.S. official familiar with the negotiations.
Fannie and Freddie sustained massive losses on mortgage-backed securities as the housing market imploded, and required a bailout of over $187 billion. The firms, which have been overseen by the FHFA since their 2008 rescue, have since returned to profitability, paying $136 billion in dividends to the Treasury Department.
By MICHAEL VIRTANENPosted: 09/25/2013 2:08 pm EDT | Updated: 09/25/2013 4:21 pm EDT
An $11 billion national settlement is under discussion to resolve claims over JPMorgan's handling of mortgage-backed securities in the run-up to the recession, said a government official familiar with ongoing negotiations among bank, federal and state officials.
By Hugh Son & David McLaughlin - Jun 14, 2013 9:00 PM PT
We were regularly drilled that it was our job to maximize fees for the bank by fostering and extending delay of the HAMP modification process by any means we could,” Gordon said. Managers instructed staff to “delay modifications by telling homeowners who called in that their documents were ‘under review,’ when in fact, there had been no review,” she said.
Oct. 9, 2012 at 4:46 PM ET
Updated at 6:45 p.m. ET: The U.S. government has sued Wells Fargo Bank in New York, blaming the nation's largest originator of home mortgages for thousands of loan defaults over the past decade.
A civil fraud suit filed in U.S. District Court in Manhattan Tuesday seeks to recover hundreds of millions of dollars that the Federal Housing Administration, which insured the loans, had to pay out after borrowers defaulted.
The lawsuit charges San Francisco-based Wells Fargo with falsely certifying that its loans met the standards necessary to be eligible for government insurance. U.S. Attorney Preet Bharara says the bank's plan to reward employees for the number of loans they approved "was an accelerant to a fire already burning.
JUN 5, 2013 8:54am ET
HSBC Hit with Foreclosure Suit:Eric Schneiderman has struck again. This time it's at HSBC, which, on Tuesday, became the latest bank on the receiving end of a lawsuit from the New York Attorney General. This lawsuit accuses HSBC of ignoring a state law by failing to file forms that would have entitled homeowners facing foreclosure to loan modification negotiations. The Journal reports Schneiderman "may bring actions against other banks over the behavior he alleged against HSBC." He is also still "eyeing" lawsuits against Bank of America and Wells Fargo for violating terms of the national mortgage settlement.
Updated: 11/01/11 06:12 AM ET
WASHINGTON - The agency that oversees mortgage markets is preparing to file suit against more than a dozen big banks, accusing them of misrepresenting the quality of mortgages they packaged and sold during the housing bubble, The New York Times reported on Thursday.
The Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac, is expected to file suit against Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among other banks, the Times reported, citing three unidentified individuals briefed on the matter.
The banks pooled the mortgages and sold them as securities to investors, failed to perform due diligence required under securities law and missed evidence that borrowers' incomes were falsified or inflated, the Times reported.
Fannie Mae and Freddie Mac lost more than $30 billion, due partly to their purchases of mortgage-backed securities, when the housing bubble burst in late 2008. Those losses were covered mostly with taxpayers' money.
SAN FRANCISCO | Tue Jun 25, 2013 9:51pm EDT
They all colluded behind our backs and agreed with each other that they would lie and report a different rate," Nishimura said.
"Hard working taxpayers got cheated," Nishimura said. "If they were getting a lower interest rate, they were getting less money than they should have. If they were involved with an instrument where the interest rate was inflated then they could have been paying too much."
According to the UC Regents complaint, the financial institutions acted "in concert to knowingly overstate and understate their true borrowing costs," causing LIBOR to be calculated artificially and they "reaped hundreds of millions, if not billions, of dollars in illegitimate gains.
The two suits allege violations of U.S. and California antitrust laws and name the following institutions as defendants:
Bank of America Corp;
Bank of America NA;
Bank of Tokyo-Mitsubishi UFJ Ltd;
Barclays Bank Plc;
Cooperatieve Central Raiffseisen-Boerenleenbank BA;
Credit Suisse Group AG;
Deutsche Bank AG;
HSBC Bank Plc;
HSBC Holdings Plc;
JPMorgan Chase & Co;
JPMorgan Chase Bank NA;
Lloyds Banking Group Plc;
Royal Bank of Canada;
The Norinchukin Bank;
Societe Generale SA;
The Royal Bank of Scotland Group Plc;
WestDeutsche ImmobilienBank AG.
(Reuters) - The United States filed a fraud lawsuit against Bank of America Corp, accusing it of causing taxpayers more than $1 billion of losses by selling thousands of toxic mortgage loans to Fannie Maeand Freddie Mac.
“Operating under the motto "Loans Move Forward, Never Backward," mortgage executives tried to eliminate "toll gates" designed to ensure that loans were sound and not tainted by fraud, the government said. This led to "defect rates" that approached 40 percent, roughly nine times the industry norm, but Countrywide concealed this from Fannie Mae and Freddie Mac, and even awarded bonuses to staff to "rebut" the problems being found, it added.”
Bank of America has reached a $10.3 billion settlement with Fannie Mae to deal with questionable home loans it sold to the government-backed mortgage financer during the housing bubble.
BofA (BAC, Fortune 500) will pay $3.55 billion in cash to Fannie as part of the deal. It will also repurchase 30,000 questionable mortgages that are likely to produce losses, paying Fannie $6.75 billion for the loans. The loans had been bundled into mortgage-backed securities, and then were bought and guaranteed by Fannie Mae.
The purchase of bad home loans by Fannie Mae led to massive losses, a government takeover in 2008 and a $116 billion bailout to keep it functioning as a major source of home loans.
The loans were originated between 2000 and 2008 by Countrywide Financial, a leading mortgage and subprime home loan lender that BofA purchased for $4 billion in 2008. The loans covered by the settlement had an original value of $1.4 trillion.
7/03/2013 @ 1:30AM
If you feel like you already paid for the financial crisis once or twice, you might have that same old feeling. With failing institutions, lost investments, foreclosed properties and taxpayer funded bailouts, taxpayers got it every which way. And now they could be getting it again.
Citigroup C +0.58% says it will pay $968 million to Fannie Mae to resolve claims it breached representations and warranties on 3.7 million residential mortgages. Citi says the sum is covered by its existing reserves for mortgage repurchases. See Citi To Pay Almost $1B In Fannie Mae Mortgage Settlement. How are taxpayers hurt?
Published: May 23, 2011
Bank of America would pay $410 million to settle its piece of a broad lawsuit involving excessive overdraft fees on debit cards in a deal tentatively approved by a federal judge in Miami on Monday.
The legal action against Bank of America is part of a class-action lawsuit on behalf of consumers. It accuses the nation’s banks of manipulating debit transactions to maximize the fees they could charge customers who exceeded the balance in their accounts.
Bank of America was the first defendant to settle in the case, said Robert Gilbert, one of the plaintiff lawyers. There are roughly 30 remaining defendants, including JPMorgan Chase, Wells Fargo, U.S. Bank, and Citibank, he said.
Now, after all of those lawsuits against the banks (private sector companies), don’t you feel much better about House Republicans legislation to eliminate the, historically better performing, GSEs role in providing liquidity? Good, didn't think so! Really – the banks just want to be our friends! *wink *wink
Let's have a quick look at some of the banks that Fannie Mae has a lawsuit filed against for mortgage fraud:
Ally Financial (ex-GMAC), $6 billion
Bank of America Corp., $6 billion
Barclays Bank, $4.9 billion
Citigroup, $3.5 billion
Countrywide, $26.6 billion
Credit Suisse Holdings USA, $14.1 billion
Deutsche Bank, $14.2 billion
First Horizon National, $883 million
General Electric, $549 million
Goldman Sachs, $11.1 billion
HSBC North America, $6.2 billion
J.P. Morgan Chase, $33 billion
Merrill Lynch/First Franklin Financial, $24.853 billion
Morgan Stanley, $10.58 billion
Nomura Holding America Inc., $2 billion
Royal Bank of Scotland Group, $30.4 billion
Societe Generale, $1.3 billion
This post underscores the frustration felt by Fannie and Freddie investors. This is the average American investor, angry about the government's lack of respect for the same contracts that they draft, and ask Americans to support, each day:
"Before Hank Paulson bailed [Fannie and Freddie] he said everything was fine, told shareholders not to panic, and that F&F was in good health. The bailout was a broad side slap to the shareholders. Many held on because their investments dropped to nothing and Paulson led them to believe that the situation was temporary. The government did what they implied they would do – backstop F&F. Why else do you have a guarantor but to guaranty your investment. These two companies did exactly what they were designed to do. Work as a net. And it worked. Now the companies are still alive, solvent and still publicly traded. I bought my shares five years ago honestly and in good faith. I am not a scavenger or a scam artist. I am an American taxpaying citizen that invested in an American financial institution. The company is making money and the books will soon balance on their loan. My Freddie Mac shares were a strong part of my retirement. YOU TELL ME I DO NOT DESERVE IT, THAT I AM A VULTURE – *Expletive you!
It seems fitting to begin with a quote from a class on Economics and the Fifth Amendment at Harvard:
"A judicial decision denying compensation in defiance of a popular perception that it should be forthcoming risks undermining people's faith that, by the large, the law comports with their sense of justice. Erosion of that faith, in turn, would reduce people's willingness to make decisions -- the rationality of which depends upon the content of the pertinent legal rules -- without taking the time to "look up" the rules. . . . Generally speaking, our willingness to act in this fashion is efficient; as long as the rules are in fact consistent with our senses of justice, it is desirable, from an economic standpoint, that we trust our intuitions. Any material diminution in that willingness would give rise to deadweight losses that merit the attention of a conscientious economist."
In other words, if investors are to have any faith in the markets as a whole, they must have confidence that the government will not overreach in their powers by taking private property to support its political agenda. These are the values at the core of our great nation, and a basis for the declaration of independence.
Some people question whether the investors today would share any concern for the GSEs if they were not profitable. It happens that this question itself raises a philosophical debate regarding the importance of material things with respect to distributive justice. Ironically, the majority of people that ask this question are involved in the markets; after all, the question remains, how should profits be allowed to flow equally to taxpayers and shareholders. At first glance, this question might seem to have an open ended answer. However, the original deal set by the government, provided terms by which a contractual agreement was made between investors and the government. The fact is, today, the companies are both profitable, and capable of returning to the market, repaying taxpayers, ramping up securitization (with government oversight), and providing the guarantee, as well as the necessary structure for a solid mortgage finance system. The problem remains to be a political one at this point, and not the typical variety of Washington politics, since these political issues tend to cross into the realm of business strategies, as they relate to the future of an already successful business. Indeed, rather than focusing on the original deal setup to conserve Fannie and Freddie, the government is behaving as an ominous political organization, with key stakeholders focused on the divide between those with a contractual agreement, and others in government focused on their own debt issues.
Another factor that should be considered was the reality at the time of the conservatorship, and the initial circumstances, which provided certain interested parties an advantage over others. For example, Hank Paulson notified his colleagues at Goldman Sachs about the oncoming conservatorship, while at the same time telling the American people, and investors in the GSEs, that there was almost no probability of any government intervention. To make matters worse, the people he lied to were taxpaying citizens, retirees, and small business owners. In other words, Hank Paulson's actions, releasing inside information, constitutes an unfair start, and is against the core principles of justice in our nation. Moreover, as the Perry Capital lawsuit outlines in its filing with the courts, the initial estimate on the GSE losses were exaggerated by over $100B. One might question the real motives of releasing such skewed numbers at a time when the government's budgetary needs are at an all time high.
Fast forward to 2012, and the government doubles down on injustice, when the Treasury and the FHFA declare a third amendment to the terms of the conservatorship, overreaching, and declaring that it has the right to sweep all profits from a private, shareholder owned business. Yet, a quick glance at the government's financial situation reveals another crisis looming; the debt ceiling just around the corner. When the American government begins taking private companies hostage for its own political agenda, it is very troubling indeed. In conclusion, then, as suggested earlier, defenders of the government's overreach can't have it both ways. Their assertion that the Treasury has the right to wind down the GSEs is contradicted by the their own lack of adherence to the law as defined by the conservatorship of Fannie and Freddie.
Get ready to help us restore Fannie Mae from conservatorship! We are working to push out a new site very soon. We want to make sure that we provide the best possible information, facts, and state our goals clearly before asking you to help us promote the cause through this site. But please check back very soon -- we need your support!
The rebound in the real estate market has breathed some life back into Fannie Mae and Freddie Mac, the giant mortgage financiers that have been wards of the state since their near-collapse in 2008. The government should seize the opportunity to put them on a path to recovery, rather than killing institutions that, properly managed, could help stabilize U.S. housing finance for generations to come.
This week, Fannie Mae reported net income of $17.2 billion for 2012, the largest annual profit in company history. Freddie Mac earned $11 billion over the same period. Oddly, not a dime of that money will go toward paying back the $188 billion the federal government has lent the two companies over the past several years. Instead, at the government’s behest, about $11 billion will go toward sky-high interest payments on the debt, which the Treasury holds in the form of preferred shares. The onerous payments will leave the mortgage giants thinly capitalized and undermine the investment of U.S. taxpayers, who hold 80 percent of the companies’ stock.
How did we reach this absurd state of affairs? For perspective, turn the clock back to 1937, when Fannie Mae was founded. Mortgages were harder to get and more vulnerable to busts. One bad year and families could get booted from their homes and wake up in the poor house. Fannie Mae and later Freddie Mac made the mortgage market more resilient, engineering 30-year loans with predictable payments, pooling risk and attracting a wide range of investors. For almost five decades, they helped establish a culture of middle-class home ownership that was regarded as a bedrock of American values.
The system worked so well that politicians couldn’t leave it alone. Steady demands for greater home ownership, lower mortgage fees and, that Beltway delight, special treatment gradually gutted what risk acumen Fannie Mae and Freddie Mac could muster. By 2006, both companies were barely profitable. Rather than maintain credit standards in the face of a housing bubble, they blindly repackaged billions of dollars in risky mortgages that by September 2008 forced them into government conservatorship.
The government bailout placed an unusually heavy burden on Fannie Mae and Freddie Mac. Under terms negotiated by the Federal Housing Finance Agency, the Treasury received a 10 percent interest rate on the preferred shares it received in return for injecting enough money to cover the companies’ losses. That’s double the 5 percent rate initially paid by Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, AIG and other financial institutions that received Treasury funding.
For Fannie Mae and Freddie Mac, the deal worked like the worst of the negative-amortization loans made in the run-up to the crisis. When they couldn’t afford to pay the interest, the Treasury lent them more money to make up the difference. The result is a debt of $188 billion. As conservator, the FHFA did nothing to offer a debt restructuring, a workout or any other relief along the same lines that Fannie Mae and Freddie Mac themselves were doing for tens of thousands of homeowners who owed more than they could pay.
Now the times have changed. As evidenced by the record profits at Fannie Mae and Freddie Mac, the mortgage market is once again lucrative, and big U.S. banks have taken notice. The combined 2012 net interest income at Fannie Mae and Freddie Mac represents over 70 percent of that of JPMorgan, the largest U.S. bank by assets. With such mouthwatering returns on display, what self-respecting banker wouldn’t want to kick Fannie Mae and Freddie Mac out of the securitization market and eat their lunch? The question is whether the government is helping them do so.
So far, the government’s approach has been highly inequitable. It has encouraged the banks to pay back their bailout money, and most have done so. At the same time, the FHFA is forcing Fannie Mae and Freddie Mac to pay usurious rates, and plans to ratchet up the payments sharply from 2013. Instead of using their profits to rebuild their capital and prepare for the next housing downturn, Fannie Mae and Freddie Mac will send all the money back to the Treasury, without paying down their debt. With a conservator like the FHFA, Fannie Mae and Freddie Mac will eventually need an undertaker.
The demise of Fannie Mae and Freddie Mac would mean a drastically different marketplace for mortgage securities. It would be dominated by large banks that already have far more sway over the Washington bureaucracy than Fannie Mae and Freddie Mac ever did. Many are the same financial institutions that misbehaved so egregiously during the housing boom that Fannie Mae and Freddie Mac successfully sued them for tens of billions of dollars in damages. If they ran into trouble, the potential repercussions would be so threatening to the economy that taxpayers would have little choice but to bail them out again.
A better option would be to give Fannie Mae and Freddie Mac a chance to get out from under their debt burden. If the government reduced the rate of interest, it’s possible that the two companies could redeem the $188 billion in preferred shares in four to five years. The Treasury would receive the same amount of money whether it comes in payment of dividends or principle. If the companies’ market values then recovered to just half the historic peak, the U.S. government’s stake would be worth more than $70 billion.
How the government acts will be a crucial test of its loyalties. Whose interests is it serving, those of the country’s biggest banks, or those of American taxpayers and homeowners?
(James Fenkner is a certified financial analyst living in Santa Barbara, California. He was a Moscow-based managing partner at Red Star Asset Management LP from 2005 to 2009. The opinions expressed are his own.)
To contact the writer of this article: James Fenkner at firstname.lastname@example.org.
To contact the editor responsible for this article: Mark Whitehouse email@example.com.