Freddie Mac Makes Sound Investment…Against Itself and A Housing Recovery

Tuesday, January 31st, 2012 | Uncategorized | No Comments

In the interest of full disclosure, I have to admit that part of me was impressed upon hearing the latest debacle underway at Freddie Mac. Imagine if you had access to an investment vehicle allowing you to bet that Freddie Mac’s efforts to refinance its toxic portfolio would fail? The only investment opportunity that would equal this in the past 20 years would be those that allowed investors to bet against Freddie Mac before the housing crisis.

Well, such a product does exist. Shockingly, this genius product is the brainchild of Freddie Mac’s business unit, the authors of the 2008 housing crisis. Known as “inverse floaters”, the business unit has invested billions that its loan refinances will fail. Even more surprising is the source of this information. Not some right-wing blog or anti-government publication with an ax to grind. The source is none other than National Public Radio.

The immediate conclusion that must be drawn from this revelation is clear and undeniable: the Obama Administration and Congressional leadership can no longer argue that government solutions to the housing crisis are viable. More bluntly, they are laughable. We now know that the very institution these programs are designed to resurrect have bet billions that they would fail. Those bets are the smoking gun evidence that government solutions are a waste of time.

Our coalition’s brawl with Freddie Mac is well-documented, but worth revisiting given this new information. Freddie Mac has attempted to criminalize private homebuyers who purchase distressed properties, repair them, and resell them on the retail market. Freddie Mac CEO Robert Haldeman has made false claims that the resale of distressed properties constitutes mortgage fraud. Freddie Mac has provided false information to the Federal Bureau of Investigation to bolster its fight against the private market.

When Freddie Mac lawyers conceded to me that their claims of mortgage fraud were not “legal opinions”, it tried a new tactic. Freddie Mac forced banks to adopt affidavits for buyers preventing resale of its distressed assets, thus delaying its unwinding and concealing the real value of its properties. DPC brought its case to Congressional oversight committees in the hopes of an investigation or at least a hearing into how Freddie Mac is treating the private market.

Despite numerous hearings, Congress failed to ask any probing questions into the practices at Freddie Mac. Two monumental moments do stand out from these hearings, which largely focused on how much Freddie Mac spent on dinners and public relations campaigns used to smear the private market. When Mr. Haldeman, who earns $6 million annually to oversee Freddie Mac, was asked about Freddie Mac’s current portfolio of adjustable-rate mortgages, he stated that he had no idea. Six million per year, and he has no idea of the ongoing threat to taxpayers his institution posed. Apparently, no one in Congress finds this particularly surprising or problematic.

Second was the heartfelt apology offered by House Financial Services Committee Chairman Spencer Bachus to Mr. Haldeman and his counterparts at Fannie Mae and FHFA. Why was this apology monumental? We know Fannie and Freddie have provided false information to Congress when it estimated total taxpayer liability at $2 billion (the real number was at least $200 billion). The Securities and Exchange Commission is currently handling the investigation. Furthermore, the proven incompetence at Freddie Mac evident in its perpetual need for taxpayer funds merits serious oversight, not an apology.

The position of DPC over the past year has never wavered: private market solutions are the road that must be travelled to achieve a real housing recovery. Once housing recovers, the overall economy will follow. Despite meaningless rhetoric, Congressional leadership has so far stood by Freddie Mac and allowed it to engage in likely illegal conduct by interfering with what homebuyers can do with the homes it purchases from the failed institution.

Now that we know Freddie Mac is actively betting against the solutions offered by the government, Congress has no choice but to allow the private market back into the process of unwinding Freddie Mac. The question for Congressional leadership is simple: how much humiliation are they willing to endure by an entity which has absolutely no idea what it is doing and exists only to serve itself? When will Congress decide to get back into the business of housing policy and serve its constituents by allowing a private market unwinding of Freddie Mac?

In the final analysis, this decision comes down to credibility. Private distressed property buyers never lied to Congress and never took a taxpayer bailout. Yet they have been shut out and shut down by Freddie Mac, which continues to waste taxpayer dollars, continues to conceal information from Congress, and can apparently only succeed if the market crashes. So far, Congress has sided with Freddie Mac. Let’s hope this new revelation is the last straw.

The author, John Grant, represents residential real estate investors in Washington, D.C. Mr. Grant also works with hedge funds, investment banks and insurers. Mr. Grant is a graduate of The Johns Hopkins University in Baltimore, MD.

What Recently Happened In Washington DC

Friday, January 13th, 2012 | Uncategorized | 3 Comments

Tuesday, January 10, 2012, I had the opportunity to join the DPC lobbyist and other members of the Distressed Properties Coalition and brief the staff members of four separate Republican members of the Congressional House Financial Services Subcommittee. Each briefing focused on two points.
The first point that we raised in each briefing had to do with the recent development of arbitrary short-sale restrictions presented either in the form of Short Sale Affidavits or stipulations in Short Sale Approval letters that were emanating from the GSE’s, particularly from Freddie Mac. We touched upon the fundamental questions regarding the overall legality of these requirements, as well as the propriety of them, to wit, housing policy being created by a failed institution that is dependent upon government assistance that believes it still has the right to dictate housing policy and usurp that authority from the Congress.
The second point that we briefed each office on had to do with provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that make seller financing even more challenging than had been established through the Safe Act.
In each instance, the representative for each member of Congress was very receptive to our ideas and understood our position. In fact, one of them said, “You mean to tell me that if my grandmother wants to try to sell, via owner financing, the farm she just inherited from my granddad, she won’t be able to do it without complying with all of these extra rules and regulations?” Another staff member inquired as to how the GSE actions were going to impact the rental market and affect the strong rental market that was going on in his Representative’s Congressional district. A third staff member quickly acknowledged that the fact that because short sales were no longer going through, it was creating an even bigger log jam of foreclosures, placing an even greater burden on HOA’s and COA’s in her Representative’s district.
The message that we presented is one asking for less regulation coming from failed institutions that have demonstrated a track record of squandering billions of taxpayer dollars and have been charged with the deliberate misleading of the public and Congress regarding the extent of their financial holdings. We are advocating that these defacto regulations are not only illegal, crippling the economy, and killing jobs, but they are also delaying and stifling any type of housing recovery that could begin if the free market system was allowed to adequately and completely address, without restraint and restrictions, the distressed property environment.
We also pointed out the inherent contradictions in the defacto GSE short-sale regulations, as their efforts to limit flipping were directly contrary to the recently re-extended FHA waiver of the anti-flipping rule.
All of the above points were well-articulated by members of the DPC which included representatives from Clear Title America and Noteworthy Publications.

Outside Editorial: Fannie and Freddie were at heart of crisis

Sunday, January 1st, 2012 | Uncategorized | No Comments

The following editorial appeared in the Kansas City Star:

Much of the analysis of the housing crash and ensuing credit panic has focused on the manic activities of Wall Street, where most of the headlines of the debacle were made.
That’s a critical part of the story, but the recent lawsuit against six former top executives of Fannie Mae and Freddie Mac rightly moves the spotlight toward the government’s role in generating the crisis.
In the suit, the Securities and Exchange Commission accuses the executives — including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron — of misleading the markets about their companies’ exposure to high-risk loans. As SEC Enforcement Director Robert Khuzami put it, “Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” giving analysts and rating agencies a skewed picture of the level of risk in the market.
Fannie and Freddie, odd hybrids, were at the heart of the crisis. Supposedly, they were private, stock-issuing corporations. But their government charter let them borrow at rates lower than competitors because markets assumed, rightly as it turned out, that if they failed the taxpayers would back them up. The “subprime exposure” mentioned by Khuzami was also taxpayer risk.
A bailout is exactly what happened in 2008. The government seized control of Fannie and Freddie and bailed them out at a cost, so far, of $150 billion.
Fannie and Freddie don’t make loans. They buy loans from those who do, and then keep them on their books or package them into bonds for sale to investors.
This was a great way to raise money to finance housing, but politicians pushed it too far. As Gretchen Morgenson of The New York Times and Joshua Rosner wrote in “Reckless Endangerment,” the Fannie-and-Freddie debacle shows what happens “when Washington decides, in its infinite wisdom, that every living breathing citizen should own a home.”
Beginning in 1992, the government began pushing for more allocation of credit to lower-income borrowers. To meet affordable-housing goals set by Congress, the two mortgage giants steadily lowered their credit standards and began buying subprime loans or no-document mortgages — those for which verification of key data like income was absent. Subprime originators seized the opportunity to reap profits with dubious mortgages while shifting the risk to Fannie and Freddie — and the Treasury.
Whenever concern was raised about the increased risk, reforms would be blocked by powerful Fannie-and-Freddie backers in Congress, like Massachusetts Rep. Barney Frank. “I want to roll the dice a little bit more in this situation toward subsidized housing,” Frank said in 2003. He argued that the same “safety and soundness” standards for banks shouldn’t apply to Fannie and Freddie. In Washington, he was hardly alone. Fannie and Freddie rewarded their friends well.
The SEC allegations against the former executives of Fannie and Freddie may well be tough to prove because of the lack of an agreed-upon legal definition of “subprime.” But it’s appropriate that more light shines on the role of the two mortgage giants, which did so much to encourage the subprime mania. As Charles W. Calomiris of the Columbia Business School wrote, “The decisions by Fannie and Freddie to embrace no-doc lending in 2004 opened the floodgates of bad credit.”
After that, loans to people with lousy credit or those offering little documentation exploded, rising to more than $1 trillion in 2006.
In some ways, Washington still hasn’t absorbed the lessons. The massive Dodd-Frank financial-reform bill did little to resolve the status of Fannie and Freddie — an issue that remains for the future.

Statement of FHFA Acting Director Edward J. DeMarco

Sunday, January 1st, 2012 | Uncategorized | No Comments

Regarding Implementation of Guarantee Fee Increase

“On Dec. 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011. Among its provisions, this new law directs the Federal Housing Finance Agency (FHFA) to increase guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises) by no less than 10 basis points from the average guarantee fees charged by these companies in 2011 on single-family mortgage-backed securities.
This requirement is effective immediately, meaning that the average guarantee fees charged in 2012 need be at least 10 basis points greater than the average guarantee fees charged in 2011 and that this increase be remitted to the U.S. Treasury, rather than retained as reserves by the Enterprises. The law also requires FHFA to determine a schedule for guarantee fee increases over a two-year period that must satisfy other requirements of the law.
To begin implementation of these requirements, today I am directing Fannie Mae and Freddie Mac to announce before year-end to their seller-servicers that, effective April 1, 2012, the guarantee fee on all single-family residential mortgages shall increase by 10 basis points.
In early 2012, FHFA will further analyze whether additional guarantee fee increases are appropriate to ensure the new requirements are being met. FHFA will announce plans for further guarantee fee increases or other fee adjustments that will then be implemented gradually over the two-year implementation window, taking into consideration risk levels and conditions in financial markets. FHFA will monitor closely the increased guarantee fees imposed as a result of the new law throughout its effective period, which ends Oct. 1, 2021.”