navycmdr
2 시간 전
Kamikaze GSE Release?
(Hack Whalen ignores Facts: GSEs Superior LOANS - 750 avg credit score)
R. Christopher Whalen - December 2, 2024 -
In this edition of The Institutional Risk Analyst, we return to the world of mortgage finance and publish our checklist of what needs to happen before Fannie Mae and Freddie Mac emerge from 16 years of government control. A lot has changed in the secondary market for residential mortgages since September 7, 2008, when the United States seized the GSEs.
The Mortgage Bankers Association wants to see new legislation to facilitate early release, but our informal survey of DC housing mavens and Wall Street credit folk suggests that is not going to happen -- even with GOP control of Congress. We are reminded of the words of Professor Ed Kane from our 2021 discussion about COVID and monetary policy (“Ed Kane on Inflation & Disruption”):
“Many seem to be hoping that things will go back to the way things were, back to ‘normal.’ But I am always reminded of the concept of ‘hysteresis’ which basically says we may travel up one path in response to outside forces, but when these outside pressures subside, we should not expect that we will return to the same ways of doing things. We have to recognize that hysteresis is a general phenomenon. Investors, in particular, must ask what kind of paths will unfold if and when we establish herd immunity, and accept that the good old days cannot completely return.”
No less than Bill Kilmer, Head of Legislative and Political Affairs of the MBA, reportedly said last week: “I think for this to happen this time, it’s really got to be led by the Treasury and by FHFA building a framework for the Congress to act upon. That may not be achievable in any one administration — unless you've got the right people that are going to dedicate the time and energy and effort to it.” Ditto Bill, but we suspect that the new POTUS has a faster agenda in mind for the GSEs.
Below for subscribers to our Premium Service follows our checklist of what needs to happen if the Trump Administration really, really wants to release the GSEs without any new legislation. Can this be done? Yes, but be careful what you wish for. You may get it. We also suggest some significant business model changes for the GSEs that can reduce the regulatory capital requirements of Fannie and Freddie, and maybe even help the Treasury get par for its $200 billion equity investment.
At the outset, the GSEs will be majority owned by the United States once the Treasury exercises its preferred equity position. Using General Motors (GM), American International Group (AIG), and Citigroup (C) as models, Treasury is likely to seek an organized sale of some or all of voting stake in the enterprises upon release. The big question is whether the Treasury can get par value for its stock for the GSEs “as is” or perhaps in a new iteration, as discussed below. Yeah, the sweep and the equity investment are two different things folks. Live with it.
You may call release “as is” the kamikaze route to GSE privatization. Pre-2008, we pretended that the GSEs were private and holders gathered supra-normal returns for taking no risk, as shown in the chart above. Owning GSE shares and preferred was like carried interest in private equity, a free ride on the US taxpayer.
Now we are going to behave like the GSEs are really private, but with a credit line from the Treasury and a specific resolution path created by Congress in the event of default. Fannie Mae and Freddie Mac, you understand, have never actually been “private” in terms of the credit markets, but don’t let that fact make you think that release is not a priority for the Trump Administration.
Upon release, the GSEs likely will get at least a one category credit rating downgrade from Moody’s et al. Today the GSEs are "AAA" rated buyers of loans who compete with the Federal Home Loan Banks in the primary market for residential mortgages. As private issuers, the GSEs face future competition with customers such as JPMorgan (JPM), Mr. Cooper (COOP), PennyMac (PFSI), U.S. Bancorp (USB) and United Wholesale Mortgage (UWMC).
Remember GSE release is a trade, not a destination. The actual chances of release from government control remain less than one in five in our judgement. The odds of success for both of these entities post-release in direct competition with large banks and nonbank mortgage issuers is even more uncertain. But the changes to the GSEs and their business models that must occur to make release possible also open some interesting possibilities.
Out of the gate at release, the US Treasury will own more than 80% of the GSEs on a fully diluted basis. Each GSE also pays part of its income under the “sweep” to compensate the US for the full faith and credit wrap today that stands behind the issuers and their $8 trillion in MBS. As discussed below, we expect a new amendment to the sweep agreement with the US Treasury to continue government support for all residential and multifamily conventional MBS, but no explicit credit support for the issuers.
Once the GSEs exit government control, however, the issuers will for the first time be treated as private companies and, more important, rated by Moody’s et al as finance companies instead of sovereigns. No amount of private capital replaces the full faith and credit of the United States. And only a sovereign credit earns a “AAA” rating from Moody’s. Federal support for the GSEs, keep in mind, is why we have a 30-year fixed rate conventional residential mortgage.
In the event of release w/o legislation, the market for 30-year fixed rate mortgages will likely change. Post-exit, the conventional mortgage market is likely to shrink from the top down, leaving conventional issuers with smaller and more problematic loans in terms of probability of default, servicing cost and overall profitability. The bank/jumbo market, on the other hand, will grow as the now “private” GSEs compete with large banks and IMBs for bigger loans.
Just before the turkey went into the oven last week, Jonathan Miller of Miller Samuel penned a provocative note in his must-read blog (“Fannie And Freddie’s Regulator Loves Moral Hazard Like I Love Cranberry Sauce”). He writes:
“It is clear from the chart that mortgage volume collapsed during the GFC but enjoyed a smaller spike during the pandemic. Note the spike in the conforming loan limit since the pandemic of 2020 – the spread widens substantially – but the gap has been widening for decades. The concept of lower loan limits, when prices fall, has never been entered into FHFA’s calculation. Certain markets a designated as high-cost, where the conforming loan limit exceeds 115% of the median sales price of the local county, the limit can be set up to 150%.”
Our question, inspired by the work of Laurie Goodman at Urban Institute and Ed Pinto at American Enterprise Institute, is why are we goosing consumer demand for housing in a supply constrained market? More financing means higher prices. But as we discuss below, if the GSEs come out of conservatorship, look for spreads on conventional loans and GSE unsecured exposures to rise ~ 25-50bp. We also expect the market for jumbo and private bank loans to grow at the expense of volumes for the GSEs.
Five years after the release of Fannie Mae and Freddie Mac, the big banks, Ginnie Mae, the GSEs and private label loans could each have roughly a quarter of total mortgage market. Remember, JPM and other banks will pay up for larger, higher quality loans and servicing, and leave the smaller, less profitable loans for the IMBs and bond investors. Upon release, large banks and IMBs will have a significant operating efficiency advantage over the private GSEs.
Last week at the IMN MSR event, we asked whether truly private GSEs will be tempted or even compelled to retain the mortgage servicing rights from conventional loans. The GSEs do not currently retain the MSR at the point of purchase of the loan in the primary market and allow the sellers to retain and finance the servicing asset.
Given that the conforming limit for high-priced markets has just been raised another 5% for 2025 to $1.2 million, that servicing strip from larger, high quality conventional loans looks mighty tasty. The MBA says it costs $176 per year to service a performing conventional loan vs $1,800 a year for a delinquent loan. That 25bp conventional servicing strip on an average $350,000 loan is worth $875 a year. The 25bp servicing strip on a $3.5 million condo loan is worth $8,750 per year, but the cost of servicing is the same.
Bank owned mortgages are larger than average and have much lower delinquency rates. Now you know why large banks want nothing to do with smaller, lower-FICO loans and avoid government-insured loans entirely. You also now understand why JPM CEO Jamie Dimon is the biggest mortgage servicer and jumbo MBS issuer in the US. JPM cares only about bigger jumbo and conventional loans.
If private GSEs must compete with JPM, which is rated “AA” at the bank, then why do the GSEs let Jamie Dimon have the conventional MSR strip for nothing? As we discuss below, we suspect that as part of release, Fannie Mae and Freddie Mac will exit providing insurance for conventional MBS. Yet the GSEs may need to retain the full MSR when they purchase loans, and also exert control over the related escrow balances.
Rodney5
3 시간 전
FFFacts. Mr. Calabria was obviously more than qualified to the appointment of FHFA Director. The man is highly intelligent no question about it. He knew the illegal commitment fee attached to the SPS violated Federal Statue, he wrote about that to. His authority as Director was given to him by Congress not the Treasury Secretary. The man caved in setting the capital requirements as bank like standards and attached a dollar-for-dollar liquidation preference on all retained earnings: by design to keep the companies in conservatorship.
This reminds me of the governor Pilate when he saw that he could prevail nothing, he took water, and washed his hands before the multitude, saying, I am innocent of this just person. His conscience was eating him up.
FFFacts said, Quote: “He may have helped write the statue but obviously the court ruled against him and his interpretation. Also, he was prevented because doj took the lead in the cases.”
Not may have helped, He did help write HERA, he said it.
No, the court did not rule against him. THE PLAINTIFFS BROUGHT THE WRONG LAWSUIT. BARRED FROM JUDICIAL REVIEW The Plaintiffs never mentioned Federal Statutes.
“We hold that the stockholders’ statutory claims are barred by the Recovery Act’s strict limitation on judicial review. See 12 U.S.C. § 4617(f).”
The FHFA Director doesn’t need the Treasury approval to pay down the Senior Preferred Stock the Director has the authority from Congress written in HERA:
HOUSING AND ECONOMIC RECOVERY ACT OF 2008
RESTRICTION ON CAPITAL DISTRIBUTIONS.— page 2731
‘‘(1) IN GENERAL.—A regulated entity shall make no capital distribution if, after making the distribution, the regulated entity would be undercapitalized. The exception.
Quote: “Page 2732
EXCEPTION.—Notwithstanding paragraph (1), the Director may permit a regulated entity, to the extent appropriate or applicable, to repurchase, redeem, retire, or otherwise acquire shares or ownership interests if the repurchase, redemption, retirement, or other acquisition— ‘‘(A) is made in connection with the issuance of additional shares or obligations of the regulated entity in at least an equivalent amount; and ‘‘(B) will reduce the financial obligations of the regulated entity or otherwise improve the financial condition of the entity.’’.
NOTE: REPURCHASE, REDEEM, RETIRE...
WILL REDUCE THE FINANCIAL OBLIGATIONS OF THE REGULATED ENTITY.
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