Thursday, October 27, 2011

FHLMC better than FNMA, but Both on Track For Full Recovery

Today's report from the Federal Housing Finance Agency (FHFA) shows FNMA and FHLMC's condition improving, on track to draw less from Treasury than originally predicted.  Click here to get report.

If you WANT a recovery - Net of the dividend repayments, the GSE's are on the fast track to return to solvency, even in a "worst case" scenario. 

Don't Confuse me With Facts

If you are a fan of the mortgage industry, FHFA head Edward DeMarco is not your friend.  Despite the improvement, his stated position is that he sees a future where there is no government involvement in the housing Market, according to an interview on National Public Radio.  "While there are many options for the future of Federal involvement, we think that it is private capital and the markets that should be taking the risks in the housing market." 

Take this in the context of the fact that both agencies appear well on their way to end their financial crisis and return to liquidity.  The big headwind, of course, is the fact that the government bailout came with a high price tag.  The agencies must pay a 10% dividend on the money to the government.

More Government Contradictions

This seems like an artifice - Congress and the Obama administration continue to add responsibilities on these corporations, tasking FNMA and FHLMC with rescuing American homeowners, yet the congress and the government want their (hefty) piece of the pie as well.  It's like debt management - much harder to dig out of the hole when there is a high interest rate involved.  It would be one thing if this were a carmaker, but these organizations are central to the recovery of the housing market.

The Treasury as Loan Shark - 10% Dividend Payment makes the future look a lot bleaker.
What we Need

The government needs to stop double-dipping - bashing the agency, then turning around and making a FAT  profit.  FNMA and FHLMC would be much closer to resolution if the government simply charged a dividend rate closer to the government's cost of borrowing.  Why not structure the deal as a 5/1 ARM?  If the dividend rate were 2.75% these companies might be out of the woods in 5 years.  Heck, I'll even throw in a free appraisal...

Tuesday, October 25, 2011

Rogue's Gallery of the Mortgage Meltdown - # 3: James Lockhart

Lockhart fanned the flames of the meltdown,
aware Fannie and Freddie were purchasing
subprime and no doc loans, but swearing
to their soundness.  He now oversees a Wall
Street mortgage vulture fund profiting from the crisis.
#Occupy Wall Street - want to put a face on the crisis? Try James Lockhart III.  

James Lockhart was the regulator of FNMA and FHLMC.  

Guilty of Gross Negligence - Allowed the housing finance system to collapse.

From 2003 to 2010 - in the run up to and collapse of the housing finance market,  he was the top regulator of Federal Housing related organizations.  He presided over the Federal Home Loan Banks, the Office of Federal Housing Enterprise Oversight, and its successor, the Federal Housing Finance Agency.  During his tenure, these organizations all strayed from their mission, and ultimately caused the recession and the cascade of over-regulation that we are now encountering.

Maybe you don't go to jail for being a bad manager.  But lying is a crime.  We only ask that James Lockhart serve the same sentence any street level loan originator would for the same crime.  15 Years in Federal Prison for each offense.  Plus, he would be barred from participation in the financial services industry.  Instead, he's the head of a billion dollar hedge fund that is capitalizing on the crisis he created.  AND he is being paid to sit on the board of directors of Federally regulated banks.

The Loan Quality Lie

In 2006, during the height of the NO-DOC lending craze, he continually stressed the quality of FHLMC and FNMA's portfolios, even though he knew that a large concentration of these loans departed substantially from the standard underwriting guidelines FNMA and FHLMC promulgated.   Beginning in 2006, the Federal Reserve was sending regulatory advisories - cautions to members - on making loans without documented ability to repay (NO DOC loans) and providing audit guidance for examiners.  Banks, effectively stopped making these loans for portfolios.  At the same time, the Federal Reserve was also issuing guidance on the suitability of "Non-Traditional Loan Types" (Option ARMS, Balloons, Interest Only) and cautioning members and providing examiners guidance in reviews.  

What was OFHEO doing - NOTHING!  In fact, Lockhart was busy perpetuating an even bigger myth. 

The Excess Capital Lie

Further, when congress questioned the safety of these organizations and expressed concern over their apparent lack of liquidity, he scoffed at the notion saying that they both had excess liquidity.

IN FACT, the balance sheets, when quickly examined, did not provide a mass of excess capital.  An accounting treatment - "Goodwill" - accounted for over 80% of each of these organizations' capital in 2007, before the crisis began in earnest.  This goodwill was a tax cost, based on their projected income, that the organizations were allowed to use towards capital.  However, that capital could not be drawn on because it was just a book keeping entry.  In reality, when the GSEs incurred their first penny of loss, that capital immediately evaporated, leaving the taxpayer holding the bag.

Where do Failed Executives Go?

To the corporate boardroom where they capitalize on their knowledge of the flaws in the system.  When he departed, James B. Lockhart III assumed the position of Vice Chairman of WL Ross & Co. LLC in September 2009. WL Ross manages $9 billion of private equity investments, a hedge fund and a Mortgage Recovery Fund. It is a subsidiary of Invesco, a Fortune 500 investment management firm.[1] As Vice Chairman, Lockhart coordinates WL Ross’ investments in financial services firms and mortgages.

He sits on the boards of several Federally regulated banks.