Fannie/Freddie Pricetag: $1 Trillion

This is what launched the Tea Party movement, when Rick Santelli ranted about being compelled to pay someone else's mortgage. How ironic that Steve Liesman, Rick's colleague and opponent that day, would write this. 

from CNBC:
For American taxpayers, now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans, that amount could be just the tip of the iceberg.

According to the Congressional Budget Office, the losses could balloon to $400 billion. And if housing prices fall further, some experts caution, the cost to the taxpayer could hit as much as $1 trillion. 

Two things are clear: Taxpayers don’t want to foot the bill, and Fannie and Freddie, taken over by the government in 2008 to stanch the financial bloodletting, need a major overhaul.

“Some of us who don’t even own homes are paying to support others and their home ownership, and they ask ‘why?’ said Robert J. Shiller, a Yale University economics professor and co-creator of the S&P/Case-Shiller Home Price Indices.

$1 Trillion Fannie, Freddie Price Tag

The black hole grows deeper.
from Bloomberg:
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.
“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.
The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.
If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.
Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.
“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.
Foreign governments, including China’s and Japan’s, hold $908 billion of [Fannie and Freddie] bonds, according to Fed data.
“Do we really want to go to the central bank of China and say, ‘Tough luck, boys’?
The terms of the 2008 Treasury bailout create further complications. Fannie and Freddie are required to pay a 10 percent annual dividend on the shares owned by taxpayers. So far, they owe $14.5 billion, more than the companies reported in income in their most profitable years.

“It’s like a debt trap,” said Qumber Hassan, a mortgage strategist at Credit Suisse Group AG in New York. “The more they draw, the more they have to pay.”

Proposed Banking Reform Doesn't Fix the Real Problem

from Fox Business:

President Barack Obama announced moves to limit the size and risk-taking ability of the largest banks because of the risk they pose to US taxpayers. Adviser and former Federal Chairman Paul Volcker, no longer marginalized in the administration, backs the changes.

Banks will no longer be allowed to own or operate hedge funds or private equity funds, among other things.

Missing here: Giving Fannie Mae and Freddie Mac an unlimited, uncapped credit line into the US Treasury on Christmas eve.

This, at a time when both disclosed in securities filings that the housing policies of the Administration and Congress will lead to additional taxpayer losses. Both have combined balance sheets equal to about 40% of US GDP, and combined both received the biggest taxpayer bailouts.

Which company really needs to be shrunk to protect taxpayers?

You should worry that the bank fixes don’t target the real causes of the crisis, as the administration attempts to re-affix a regulatory antenna to the roof of the government that was knocked off long ago.

Why They Revealed the Freddie/Fannie Unlimited Bailout on Christmas Eve

from the Market Ticker:

On Christmas Eve one would think you could have a nice evening with your family.  Little did I know what Timmy Geithner had up his sleeve:

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

I see.  But I thought housing was getting better?  That's what I heard on CNBS Tuesday when existing home sales came in "above expectations."
But then Wednesday came around and, well, new homes?  They're just not selling.

Purchases dropped 11 percent to an annual pace of 355,000, lower than the lowest estimate of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. The median sales price decreased 1.9 percent from November 2008.

Wait a second.  How come the disparity?

Two reasons, really.  The first, which the pumpers cite, is that "the tax credit was maybe going to expire."  Uh huh.

No, folks, that's not the reason.  The reason sales fell is that they're still falling everywhere.  What's happening in the "existing home" sales numbers is that foreclosure sharks are taking a bite here and there, in many cases generating double counts in the "existing home sale" category, never mind the alleged data source in the first place.  But even the NAR acknowledges that 33% of existing home sales were foreclosures, not actual organic "meeting of the minds" transactions!  Take those out and existing home sales didn't rise 7.4%, they instead did their best imitation of a cliff-dive, with organic sales being a mere 4.38 million units (annualized), which is a mid-to-late 1990s print (and then again around the 1978 time frame!)

The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

No, really?

Mark Hanson has been on this since the beginning: if you haven't read his stuff, here's a nice treatise of why we are nowhere near recovery in the housing market.  Read it and weep - Timmy has.

By the way, if you're wondering what sort of trash Fannie and Freddie are holding, here's what Mark says about their "underwriting quality" during the boom years:

Many lenders, especially the big banks, had in-house DU and LP underwriting ‘trainers’ that would go around to the various mortgage branches and teach underwriters how to ‘trip’ the systems in order to achieve automated loan approvals when a declination was certain, or simply get fewer approval conditions on a loan that was borderline. Getting a loan approval out of DU/LP on a borrower with a 100% DTI — with limited documentation required on the automated findings — was not uncommon.

Got that?  A DTI - that is, debt-to-income - of one hundred percent - was quite possible, along with limited documentation as well!
Now let's remember that most people turn over their home about every seven years (that's the average "holding time"), so an awful lot of Fannie and Freddie's paper - quite possibly as much as half - is contaminated.
Still feeling good about a housing recovery?
If you're wondering how bad this is in the so-called "prime" loans the Mortgage Bankers Association lays it all out:
6.84% of prime loans are now delinquent (at least one payment behind but NOT in foreclosure) and 3.20% are in foreclosure.  This means that almost 1 in 10 PRIME LOANS are either late or in foreclosure.
FHA loans are running close to 20% between delinquent and foreclosure-in-process.  That's one in FIVE.
And of subprime loans, 41% are either delinquent or in foreclosure.  Forty one percent!
A mortgage that is at least two payments late almost never "cures" - that is, once you miss a second payment you're virtually assured to eventually be foreclosed.  (Some one-payment misses are legitimate errors or very temporary cash-flow disruptions.)
So let's ask a few questions here:

1. What's the bond market going to think about a literal $5 trillion guarantee (for three years anyway) on MBS?  Might some people have known about this in advance, with that being the reason for the bleed in the long end of the bond curve this last week or so?  One wonders - of course nobody would ever trade on inside information, right?
   
   
2. Why wait until the market closed on Christmas Eve for this?  Oh, that's to stop a sell-off in bonds, right?  Yeah, we're playing "American Idol is on, and you're too stupid to remember this for three days."  Got it.  We'll see how that works out.

Oh, and if that's not enough to make you vomit, get a load of this:

The government announced Thursday that it had approved Wall Street-style, multimillion-dollar compensation packages for top executives at Fannie Mae and Freddie Mac, the two mortgage companies that have become little more than arms of the federal government.

The two top executives at the companies, which have received $121 billion in federal aid since they were seized last year, could be paid up to $6 million each for their services this year. In total, the top 12 executives at the two firms are in line to receive up to $42 million in 2009 alone.

Cost the taxpayer an unlimited amount due to shoddy underwriting and lax (or absent) risk controls and not only do you get bailed out, you also get paid $6 million a year.

One final question: Does this force consolidation of Fannie and Freddie onto The Government's balance sheet?  I'd think so - what say you CBO?

Where's my pitchfork?

More Mortgage Outrage!

from WSJ:
The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday.
The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.
Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.
"The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed "to prevent the general public from taking note."
Treasury officials couldn't be reached for comment Friday.
So far, Treasury has provided $60 billion of capital to Fannie and $51 billion to Freddie. Mahesh Swaminathan, a senior mortgage analyst at Credit Suisse in New York, said he didn't believe Fannie and Freddie would need more than $200 billion apiece from the Treasury. But he and other analysts have said the market would find a larger commitment from the Treasury reassuring.
In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.
The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.
Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government's role in the companies.
The Treasury reiterated administration plans for a "preliminary report" on the government's future role in the mortgage market around the time the federal budget proposal is released in February.
The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies.
The FHFA said compensation for executive officers of the companies in 2009, on average, is down 40% from the pay levels before the conservatorship.
Under the conservatorship, top officers of Fannie and Freddie take their cues from the Treasury and regulators on all major decisions, current and former executives say. The government has made foreclosure-prevention efforts its top priority.
The pay packages for top officers are entirely in cash; company shares have been trading on the New York Stock Exchange at less than $2 apiece, and it isn't clear when the companies will to profitability or whether common shares will have any value in the long term.
For the CEOs, annual compensation consists of a base salary of $900,000, deferred base salary of $3.1 million and incentive pay of as much as $2 million.
When Mr. Haldeman was hired by Freddie in July, the company set his base pay at $900,000 and said his additional "incentive" pay would depend on a decision by the regulator.
At Fannie, Mr. Williams was chief operating officer until he was promoted in April to CEO. As COO, his base salary was $676,000. He also had annual deferred pay of $2.3 million and a long-term incentive award of as much as $1.5 million.
Under the new packages, Fannie will pay as much as about $3.6 million annually to David M. Johnson, chief financial officer; $2.4 million to Kenneth Bacon, who heads a unit that finances apartment buildings; $2.8 million to David Benson, capital markets chief; $2.2 million to David Hisey, deputy chief financial officer; $3 million to Timothy Mayopoulos, general counsel; and $2.8 million to Kenneth Phelan, chief risk officer.
At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.
The pay deals also drew fire. With unemployment near 10%, "to be handing out $6 million bonuses to essentially federal employees is unconscionable," said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie.
He also criticized the administration for approving the compensation without settling on a plan to remove taxpayer supports: "To be doing that with no plan in place is just unconscionable."
The FHFA said that Fannie and Freddie "must attract and retain the talent needed" for their vital role in the mortgage market.