- Former Freddie Mac executives, who were accused of lying about Freddie’s exposure to subprime mortgages before the financial crisis, settled with the SEC.
- Citibank shareholders slam the Bank’s motion to dismiss a case over mortgage-backed securities worth more than $17 billion as NY federal courts have rejected similar arguments to dismiss similar cases.
- The Second Circuit dismisses a class action against Royal Bank of Scotland PLC finding that the bank did not lie about its exposure to residential mortgage-backed securities.
- DC federal judge certified a class action of evicted homeowners, with a lead representative who lost his home over a $134 unpaid tax bill. The court will decide whether district law creates a property interest in equity, if its tax-sale statutes effect a taking of the property and if class members were properly compensated.
Tag Archives: Freddie Mac
Friday’s Government Reports Roundup
- The Office of the Comptroller of the Currency released a report on mortgage performance.
- CFPB releases its Consumer Response Annual Report analyzing the complaints it received in 2014 and its fourth annual Fair Debt Collection Practices Act
- FHFA releases its 2014 fourth quarter Foreclosure Prevention Report stating the foreclosure prevention actions by Fannie Mae and Freddie Mac.
- HUD releases report in which it evaluates the Neighborhood Stabilization Program.
The Rescue of Fannie and Freddie
Federal Reserve researchers, W. Scott Frame, Andreas Fuster, Joseph Tracy and James Vickery, have posted a staff report, The Rescue of Fannie Mae and Freddie Mac. The abstract reads,
We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms’ value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.
This staff report provides a nice overview of the two companies since the financial crisis. I was particularly interested by a couple of sections. First, I found the discussion of receivership versus conservatorship helpful. Second, I liked how it outlined the five objectives for an optimal intervention:
(i) Fannie Mae and Freddie Mac would be enabled to continue their core securitization and guarantee functions as going concerns, thereby maintaining conforming mortgage credit supply.
(ii) The two firms would continue to honor their agency debt and mortgage-backed securities obligations, given the amount and widely held nature of these securities, especially in leveraged financial institutions, and the potential for financial instability in case of default on these obligations.
(iii) The value of the common and preferred equity in the two firms would be extinguished, reflecting their insolvent financial position.
(iv) The two firms would be managed in a way that would provide flexibility to take into account macroeconomic objectives, rather than just maximizing the private value of their assets.
(v) The structure of the rescue would prompt long-term reform and set in motion the transition to a better system within a reasonable period of time. (14-15)
You’ll have to read the paper to see how they evaluate the five objectives in greater detail.
Transferring Risk from Fannie & Freddie
The Federal Housing Finance Agency has posted its FHFA Progress Report on the Implementation of FHFA’s Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac. As its name suggests, it provides a progress report on a range of topics, but I was particularly interested in its section on credit risk transfers for single-family credit guarantees:
The 2014 Conservatorship Strategic Plan’s goal of reducing taxpayer risk builds on the Enterprises’ previous risk transfer efforts. Under the 2013 Conservatorship Scorecard, FHFA expressed the expectation that each Enterprise would conduct risk transfer transactions involving single-family loans with an unpaid principal balance (UPB) of at least $30 billion. The 2014 Conservatorship Scorecard tripled the required risk transfer amount, with the expectation that each Enterprise would transfer a substantial portion of the credit risk on $90 billion in UPB of new mortgage-backed securitizations. FHFA also expected each Enterprise to execute a minimum of two different types of credit risk transfer transactions. FHFA required the Enterprises to conduct all activities undertaken in fulfillment of these objectives in a manner consistent with safety and soundness. During 2014, the two Enterprises executed credit risk transfers on single-family mortgages with a UPB of over $340 billion, which is well above the required amounts. (14)
Risk transfer is an important tool to reduce the risks that taxpayers will be on the hook for future bailouts. The mechanism for these risk transfer deals are not well understood because they are pretty new. The Progress Report describes how they work in relatively clear terms:
The primary way that the Enterprises have executed single-family credit risk transfers to date has been through debt-issuance programs. Freddie Mac transactions are called Structured Agency Credit Risk (STACR) notes, and Fannie Mae transactions are called Connecticut Avenue Securities (CAS). Following the release of historical credit performance data in 2012, each Enterprise has issued either STACR or CAS notes that transfer a portion of the credit risk from large reference pools of single-family mortgages to private investors. These reference pools are comprised of loans that the Enterprises had previously securitized to sell the interest rate risk of the loans to private investors. The STACR and CAS transactions take the next step of transferring a portion of the credit risk for these loans to investors as well. Each subsequent credit risk transfer transaction is intended to provide credit protection to the issuing Enterprise on the mortgages in the relevant reference pool. (14)
The Progress Report provides more detail for those who are interested. For the rest of us, we may just want to think through the policy implications. How much credit risk can Fannie and Freddie offload? Is it sufficient to make a real dent in the overall risk that the two companies pose to taxpayers? It would be helpful if the FHFA answered those questions in future reports.
Monday’s Adjudication Roundup
- BofA has asked a PA federal judge to dismiss a class action RICO suit alleging kickbacks from overpriced mortgage insurance claiming it is the same suit that was dismissed as time-barred by Third Circuit in October.
- Deloitte is potentially facing $1.3 billion plus punitive damages to Freddie Mac for negligently auditing work for Taylor Bean, a mortgage lender with a massive employee fraud.
- Circuit split continues on whether and when lenders are responsible for development project failures when the Seventh Circuit ruled that the lender’s insurers would not cover the emergence of contractor liens in a failed $118 million real estate development.
Wells Fargo Smackdown
Circuit Judge Elliott of Missouri Circuit Court issued a Judgment in Holm v. Wells Fargo et al. (No. 08CN-CV00944 Jan. 26, 2015) that awarded nearly three million dollars in punitive damages. This is just one of a number of searing judicial opinions that I’ve discussed on the blog. The Court found that
Wells Fargo and its agents expended immeasurable, if not incomprehensible, time and effort to avert reinstatement. The result of Wells Fargo’s egregious conduct was to impose approximately six and one-half years of uncertainty, lost optimism, emotional distress, and paralysis of Plaintiffs’ family.
The evidence established that Wells Fargo’s intentional choice to foreclose arose from its own financial incentives. Dr. Kurt Krueger testified that Wells Fargo had financial incentives to seek reimbursement of its fees at a foreclosure sale. This economic motivation collided with the well-being of David and Crystal Holm, and was clearly contrary to the interests of Freddie Mac. In other words, in this case, a powerful financial company exerted its will over a financially distressed family in Clinton County, Missouri. The result is predictable. Plaintiffs were severely damaged; Wells Fargo took its money and moved on, with complete disregard to the human damage left in its wake.
Defendant Wells Fargo is an experienced servicer of home loans. Wells Fargo knew that its decision to foreclose after reinstatement was accepted would inflict a devastating injury on the Holm family. Wells Fargo’s actions were knowing, intentional, and injurious. (7)
It is not certain that this judgment will be held up on appeal. If it is, it is still worth asking whether the occasional verdict of this magnitude is sufficient to change the behavior of servicers. There have been many efforts to change the incentives that servicers have, but cases such as these make one wonder if there is some deeper problem that has not yet been identified and addressed. One cannot imagine how Wells Fargo employees could have let this go on for so long in this case. But they did.
Friday’s Government Reports Round-Up
- U.S. Census Bureau/U.S. Department of Housing and Urban Development Joint Release – New Residential Construction January 2015
- Federal Reserve Bank of New York Staff Report, Credit Supply and the Housing Boom – provides a novel perspective on the possible origins of the Great Recession.
- Freddie Mac – Fourth Quarter 2014 Financial Results
- Freddie Mac – Refinance Report Concludes that Borrowers who Refinanced in 2014 will Save Approximately 5 Billion in Interest Payments
