Mortgage Industry News

by Mary Kladde

Fannie Mae and Freddie Mac recently took to Capitol Hill to defend enormous executive bonuses after Congress voted to subject GSE employees to the federal pay scale.  Seriously?  The price tag for the GSE bailout is estimated to be $169 billion and counting, as losses continue to mount.

In the real world, at least among small to mid-size companies which represents the backbone of the US economy, if your company isn’t making a profit, you don’t get paid, much less are you rewarded with bonuses.   You tighten your belt or go out of business!  I’m not sure why the GSEs and Wall Street don’t work this way.

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Every day it seems there is a new volley of posturing and positioning around the fate of the GSEs.  Personally, I find the back peddling by previously outspoken critics of the government-sponsored entities irritating and hypocritical. By back peddling, I mean proposals for the reconstitution of a government-insuring role in the mortgage industry at the same time the current players are being wound down.

Just a month ago, they were flagellating on the Left and on the Right about Fannie and Freddie’s “dirty deeds,” now they are wont to pass judgment. Get a spine, I say.

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It still amazes me the number of lenders trying to skirt quality control requirements considering the debacle of the last 3 years.  FNMA is absolutely doing the right thing and I would argue should check a few more data points.

The LQI being put in place by FNMA applies to direct sellers/servicers.  The additional checks should not tax the resources of purchasing investors that will then sell the loans directly to FNMA because they should be making these very checks prior to purchase anyway.

Read more:  American Banker: “Lenders Call Fannie’s Push on Loan Quality Redundant”

Our congratulations to First California Mortgage for receiving $50 Million in Warehouse Funding from the Fannie Mae/Natty Mac initiative, as announced this morning in a news release picked up by MBA NewsLink.  It is worth noting, we believe, the underlying message in First Cal president Christopher Hart’s remarks, which could be taken as a formula for non-bank mortgage lenders seeking warehouse line relationships under this program and in general:

• “… a defect-free mortgage process…
• “… responsive to the needs of our homeowner customers and business partners …
• “… clearly aligned with the government’s priorities:
  • for consumer protection,
  • data integrity,
  • asset quality and
  • complete transparency for consumers and everyone involved in the mortgage market.”

According to First Cal, its market penetration strategy includes wholesale lending through a broker network.  Our advice for them is the same we’d offer to any mortgage banker with wholesale aspirations:

“Control the GFE process for all TPOs!”

Well, didn’t the SEC’s proposed new rules for asset-backed securities comprised of mortgages, credit card receivables, auto loans and student loans stir up the buzz in the business and financial media on Thursday!?.  The New York Times story was cited by the MBA NewsLink but the Wall Street Journal headline: “Rules Could Favor Fannie, Freddie”, got the story inside the story.  It cited concerns by at least two commissioners that the added disclosures burdens, which will not be applicable to the GSEs, would “tilt the scale in favor of Fannie and Freddie.”  Immediately, and with only today’s details to consider, I’d tend to agree with Tom Deutsch, executive director of the American Securitization Forum, when he said that “Such unintended consequences could create even greater reliance on a costly tax-payer backed system of mortgage credit extension that would not be subject to these rules.”  As policy makers grapple with the absolutely real need to standardize and intelligently regulate the U.S. mortgage economy, they must avoid taking, or appearing to take, a punitive stance with the private mortgage marketplace. “Skin in the game,” is one thing, but the SEC proposal creates two standards, which in our view is nearly as risky as no standards at all.

From Business Week:

Freddie, Fannie cut back mortgage fees
By ALAN ZIBEL
WASHINGTON

Mortgage finance companies Fannie Mae and Freddie Mac, seized by the federal government last month, are rolling back fees imposed as they struggled to shore up their finances over the past year.

Freddie Mac said Friday it would not impose a fee increase scheduled to go into effect next month. The announcement followed a similar reversal by Fannie Mae Thursday night.

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Fannie, Freddie update from today’s MBA NewsLink:

“The resurgence of Fannie Mae and Freddie Mac’s share prices has been aided by the Treasury’s plan to prop up the companies and the Securities and Exchange Commission’s rule to restrict short selling. However, the moves by the federal government do not solve the underlying problems of Fannie Mae and Freddie Mac, including their low levels of capital compared to other financial firms. Critics of the government-sponsored enterprises have spent the past decade arguing that they need to boost their capital to guard against a collapse, which would cause serious problems for the financial markets. Fannie Mae and Freddie Mac face the challenge of building up their capital reserves, but it leaves them with less money to fulfill their mission to support the mortgage market.”

Read the full article from the Washington Post.

Ruth Lee

Bloomberg ran a great article this week giving some industry perspective and feedback on the recent Fannie Freddie Bailout initiative. Bill Gross, founder of Pimco, which has historically been a big buyer of Fannie and Freddie bonds, calls Paulson’s plan “crucial” to the GSEs and the mortgage and investment markets.

“July 21 (Bloomberg) — Bill Gross, who manages the world’s biggest bond fund, said it’s not possible for government sponsored mortgage-finance companies Fannie Mae and Freddie Mac to raise capital without the Treasury Department’s support.

“Let’s be blunt: to the extent the Treasury suggests they’ll never have to use their authority, that’s a sham,” said Gross of Pacific Investment Management Co. “It’s fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don’t think that’s possible.”

The article later reports:

“Housing prices will fall another 10 percent to 15 percent over the next 12 months, making it a mistake for policy makers to raise borrowing costs to curb inflation, Gross said. Home prices in 20 cities dropped 15.3 percent in April from a year earlier, according to S&P/Case-Shiller, the most since the group began collecting data.”

Click to read the full article “Pimco’s Gross Says Fannie, Freddie Need Treasury”.

Gross also commented that he considers Fannie and Freddie’s mortgage products to be good investments. To see Bloomberg’s interview with Gross, click here.

Ruth Lee

The FRB took giant steps this week to rescue Fannie Mae and Freddie Mac from the current mortgage crisis and ensure the ongoing liquidity of the mortgage market. As the Wall Street Journal reported:

“Treasury Secretary Henry Paulson took the lead in crafting a rescue plan for ailing mortgage giants Fannie Mae and Freddie Mac, a move that appears to have staved off an imminent crisis but one that draws the federal government into an ever bigger role managing the American economy. ”

Read the full article in the Wall Street Journal here.

The MBA sent out a letter to their membership this week outlining the Freddie/Fannie bailout that took place over this week. Here is their summation:

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