Archive for the ‘GSE’ Category

Former Ginnie Mae execs submit GSE reform plans

August 24, 2011


Former Ginnie Mae presidents Robert Couch and Joseph Murin said the future structure of Fannie Mae and Freddie Mac should be based on the agency they used to lead, according to a letter they sent to Republican lawmakers last week.

In the letter sent to Sen. Richard Shelby (R-Ala.), and Reps. Spencer Bachus (R-Ala.) and Scott Garrett (R-N.J.), the former Ginnie chiefs expressed concern over the health of the secondary mortgage market and its weight on the economic recovery.

"Any effort to replace Fannie Mae and Freddie Mac with a new framework must be designed to provide a steady flow of mortgage finance to consumers in all economic cycles while protecting taxpayers from undue risk," Couch and Murin wrote. "We believe the Ginnie Mae guarantee program provides an effective model to achieve these objectives."

Outside of fringe and sometimes duplicitous reforms, Congress has yet to take up meaningful legislation to revamp the future housing finance system. Even though the Obama administration submitted three options for winding down Fannie and Freddie in February, news reports surfaced last week that some within the administration may be opting to maintain a large government role.

The Treasury Department maintains its commitment to the original options.

Regardless, it grows increasingly unlikely that Congress will pass GSE reform before 2013, leaving plenty of time for proposed plans.

Couch and Murin said an ideal solution would be remove the federal government altogether but the current financial market could not fill the void and support long-held features of the housing finance system such as the 30-year, fixed-rate mortgage.

"Until financial markets settle down, federal credit backing is required," they write. "In the meantime, based upon our experience, we believe that it is possible to design a guarantee that sustains the long-term mortgage market while protecting taxpayers from undue risk."

All this they said can be borrowed from Ginnie Mae, which guarantees the timely payment on securities backed by Federal Housing Administration and Department of Veterans Affairs loans.

They suggested placing a guarantee only on securities backed by the safest loans. They said shareholders and credits in the private replacements of Fannie and Freddie should be wiped out before the guarantee is triggered.

The guarantee pricing would also be increased to protect against a possible 20% to 25% drop in home prices as opposed to what Fannie and Freddie charged, which covered a 10% decline.

In many areas, the housing downturn cut prices in half since 2007.

Couch and Murin suggested also including a "recoupment" provision requiring other firms to step in and repay taxpayers should catastrophe strike.

"Without properly protected private investors, we would not have a reliable market for long-term financing of mortgages," Couch and Murin write. "As the Ginnie Mae example continues to show, a limited federal guarantee would ensure a steady flow of mortgage finance and can be designed and priced to shield taxpayers from undue risk."

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GSEs suspend Republic Mortgage Insurance

August 4, 2011


Freddie Mac and Fannie Mae will no longer purchase for securitization most mortgages insured by Republic Mortgage Insurance and its affiliate RMIC of North Carolina.

RMIC, a subsidiary of Old Republic International (ORI: 9.95 -2.26%), a Chicago-based insurance underwriting company with a market capitalization of $2.6 billion, had been showing signs of financial stress since at least last fall.

The company breached its regulatory risk-to-capital limits as of Sept. 30, 2010, said Fannie Mae in its statement announcing the company’s suspension as an approved mortgage insurer.

While North Carolina regulators had temporarily allowed the company to keep selling insurance, the state’s waivers were due to expire Aug. 31 and there was no sign they would be renewed, said Fannie in explaining its move. Calls to Fannie Mae and Old Republic for comment were not immediately returned.

Fitch Ratings shined a spotlight on the insurer’s financial woes earlier this year, putting the company on a negative ratings watch in March and then downgrading it from a double B rating to double B- with a negative outlook a month later.

The downgrade "is driven primarily by RMIC’s comparatively weak capital levels, continued operating losses and uncertain business prospects," said Fitch in a statement. "At year-end 2010, RMIC’s total capital resources represented just 78% of its delinquent risk-in-force, the lowest ratio among the six active U.S. mortgage insurers."

Fitch also cited Old Republic’s failure to inject more capital into its subsidiary as a negative sign for the company’s financial health. "Although RMIC’s delinquencies have started to show positive trends, Fitch expects the company to experience operating losses for the foreseeable future," said analyst Ilya Ivashkov in his report on the downgrade.

RMIC was the fifth-largest U.S. mortgage insurer as of year-end, said Fitch, with $18 billion of risk-in-force.

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Senate steps toward new mortgage servicing standard

August 2, 2011


The Senate Banking Committee will hold a hearing Tuesday to develop a new national mortgage servicing standard.

In January, federal regulators announced a new initiative to develop a set of servicing standards following weaknesses in the process that arose last year.

The industry immediately began pushing for a unified approach, and regulators are at work with the 50 state AGs to align new requirements, especially for servicing nonperforming loans.

Already, Congress is hearing from those who would like to be exempted from guidelines they see as too burdensome, especially for smaller institutions.

B. Dan Berger, the executive vice preside of the National Association of Credit Unions, sent a letter to Senate committee leaders Monday asking for an exemption.

"In short, credit unions have not participated in the practices that have led to discussions about the worthiness of national mortgage servicing standards and should not be unjustly punished for the shortcomings of institutions that have," Berger said. "While it is important that the bad actors who failed thousands of their borrowers are held accountable, we would oppose extending any new compliance burden stemming from national mortgage servicing standards onto good actors such as credit unions."

A review of more roughly 2,800 foreclosure files at the 14 largest mortgage servicers last year led regulators to conclude that although the issues were indeed widespread, the largest institutions showed the most signs of activities such as robo-signing, dual-track foreclosures and unnecessarily delayed modifications.

Sen. Olympia Snow (R-Maine) and Sen. Jeff Merkley (D-Ore.) introduced legislation in May that would establish federal standards for mortgage servicers, but it was attached as an amendment to another bill and has yet to make it out of committee.

Testifying before the committee Tuesday will be representatives from the Hope Now alliance of industry servicers, investors and counselors and a member of the Independent Community Bankers of America.

No one from the major mortgage servicers will be taking questions at the hearing, however.

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Fed’s Massive Stimulus Had Little Impact: Greenspan

July 13, 2011


The Federal Reserve’s massive stimulus program had little impact on the U.S. economy besides weakening the dollar and helping U.S. exports, Federal Reserve Governor Alan Greenspan told CNBC Thursday.

In a blunt critique of his successor, Fed Chairman Ben Bernanke, Greenspan said the $2 trillion in quantitative easing over the past two years had done little to loosen credit and boost the economy.

"There is no evidence that huge inflow of money into the system basically worked," Greenspan said in a live interview.

"It obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion," he said. "Aside from that, I am ill-aware of anything that really worked. Not only QE2 but QE1."

Greenspan’s comments came as the Fed ended the second installment of its bond-buying program, known as QE2, after spending $600 billion. There were no hints of any more monetary easing—or QE3—to come.

Greenspan said he "would be surprised if there was a QE3"  because it would "continue erosion of the dollar."

The former Fed chairman himself has been widely criticized for the low-interest rate policy in the early and mid 2000s that many believe led to the 2008 credit crisis.

Bernanke, who took over for Greenspan in 2006, began implementing the quantitative easing program in 2009 in an attempt to unfreeze credit and prevent a collapse of the US financial system. The strategy has gotten mixed reviews so far.

On Greece, Greenspan said a default is likely and will  "affect the whole structure of profitability in the U.S." because of this country’s large economic commitments to Europe, which holds Greek debt. Europe is also where "half the foreign [U.S.] affiliate earnings" are generated, he added.

"We can’t afford a significant drop in foreign affiliate earnings," Greenspan said.

Greenspan was also pessimistic about the U.S. deficit talks, saying he didn’t think Congress would reach an agreement on raising the debt ceiling by the Aug 2 deadline.
“We’re going to get up to Aug 2 and I think on that night, we are not going to have the issue solved,” he said.
If that happens, he said, the U.S. would have to continue paying debt holders or risk major damage in global financial markets. As a result, “we will default on everything else.”
He added: “At that point, I think we’ll all come to our senses.”

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Fed’s new money policy: ‘Wait and see’

July 13, 2011


After pumping more than a trillion dollars into the financial system, forcing interest to near zero and buying back hundreds of billions of dollars of bad mortgage bonds, the Federal Reserve has adopted a new monetary policy.

Call it "wait and see."

Fed Chairman Ben Bernanke was on Capitol Hill Wednesday testifying on the central bank’s latest strategies for getting the economy back on a stronger footing. The hearing comes a day after minutes of the Fed’s latest Open Market Committee meeting in June showed the group divided over what to do next.

Some members want to consider resuming the pump-priming policy of buying up bonds. The majority, including Bernanke, argue that the recent "soft patch" in growth resulted from a temporary surge in oil prices and the supply bottlenecks from the Japanese earthquake.

"Once the temporary shocks that have been holding down economic activity pass, we expect to see again the effects of (recent Fed policy) reflected in stronger economic activity and job creation," Bernanke told the House Financial Services Committee.

After a convincing pickup in growth last year, the economy slowed sharply in the first quarter and has been limping along since. First quarter gross domestic product edged up just 1.9 percent. The latest monthly data, especially the surprising collapse in job growth in May and June, have raised concerns that the recovery may be stalling out.

For now, central bankers don’t see that happening. Bernanke said that while they’ve trimmed their growth forecasts, Fed forecasters believe growth will rise in the second half of the year to between 2.7 percent and 2.9 percent for the full year. The Fed forecast sees the economy gathering more steam next year, expanding at a rate of 3.3 to 3.7 percent.

So until the data from the second half starts rolling in, Bernanke and most of his colleagues think the best course is to do nothing.

"The Fed has thrown the kitchen sink at the markets with massive liquidity," said Paul Ballew, a former Federal Reserve economist and now chief economist at Nationwide. "So I expect in the second half they stay on the sidelines, they try get a read for the overall health of the economy and then make their decisions from there."

Though the Fed is on hold for now, Bernanke was quick to note that the central bank stands ready to take action if there are new shocks to the global economy or the financial system. Investors were cheered by just a mention that central bank might consider showering more money on the financial markets. Stocks and bonds rallied shortly after Bernanke’s prepared testimony was released.

There are plenty of potential sources for shocks that could throw the economy off kilter. The ongoing political fracas over the federal budget, for one, has the bond market on edge. Congressional dithering over raising the debt ceiling has raised the threat of a default on U.S. Treasury debt.

The spreading debt crisis in Europe, for another, threatens to spark a banking panic that could put pressure on U.S. banks.

Bernanke said the U.S. would continue to pay interest on its debt even if Congress failed to extend the debt ceiling by Aug. 2, when the government is scheduled to exceed its borrowing authority.

"The assumption is that as long as possible, the Treasury would want to try to make payments on the principal and interest to the government debt, because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy," Bernanke said.

Nevertheless, any of these shocks could produce the Fed’s worst nightmare: a surge in market-driven interest rates that would severely test the central bank’s ability to keep interest rates low. In his testimony, Bernanke reminded the committee of the importance of holding rates down.

"We know from many decades of experience with monetary policy that when the economy is operating below its potential, easier financial conditions tend to promote more rapid economic growth," he said.

But the Fed doesn’t have many tools left to hold down rates if bond investors get spooked and demand higher interest payment to offset the risk of not getting their money back. Bernanke assured the committee that the Fed has "several options," and cited two. One would be to be more explicit about its plans to keep rates low for a very long time. The other would be to scale back the interest payments to banks that store cash in the Fed’s accounts.

"A lot of the options he put on the table were effectively worthless," said Drew Matus, a senior economist at UBS Investment Research. "So I think Bernanke really is just hoping for the best."

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Republicans considering another 16 bills on GSE reform

April 5, 2011


Republicans on the House Financial Services Committee are planning to submit another 16 bills for the reform ofFannie Mae and Freddie Mac.

Rep. Spencer Bachus (R-Ala.) said during a House subcommittee hearing Tuesday that the bills would accommodate the eight already being heard. The subcommittee is expected to clear the first eight for the full committee Tuesday afternoon. Nonetheless, investment bank Keefe, Bruyette & Woods doubts the strength of that proposed legislation.

"We are considering another 16 bills," Bachus said, though he could not specify when the bills would be introduced.

The original eight bills address issues such as executive compensation at the two firms, ending their affordable housing goals, capping their current portfolios and others. But Democrats on the subcommittee complained of the "piecemeal" approach to winding down the GSEs.

"We want complete legislation that has input from both sides of the aisle and with input from the industry," said Rep. Maxine Waters (D-Calif.). "We cannot undermine the economy with these piecemeal actions."

Trade groups such as the National Association of Home Builders and the National Association of Realtors asked Congress last week to slow down on GSE reform and asked that lawmakers approach these issues with a uniform bill.

Bachus became frustrated with Democrats he said had the chance to address the issue when Dodd-Frank was passed last summer.

"The administration has been talking for about two years about doing something," Bachus said. "And we’re at that task. I guess we’re going to be criticized for anything we do, but we’re moving forward."

Rep. Barney Frank (D-Mass.) also said there should be a uniform bill. The original eight he said don’t address the most difficult part of the problem.

"Getting rid of Fannie and Freddie is the easy part relatively," Frank said. "The question is what do you put in their place. And that’s the problem with the bills."

The original eight submitted by Republicans will not reach the full committee until May if they pass, Frank added.

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House Committee to vote on Republican bills for GSE wind down

April 4, 2011


The House Financial Services Committee is set to vote on eight bills Tuesday proposed by Republicans in an effort to wind down the government-sponsored enterprises Fannie Mae and Freddie Mac.

Members of the House of Representatives introduced the eight bills last week, which cover issues such as GSE executive compensation, fair housing goals, new GSE activity and business, and portfolio caps.

One bill in particular introduced by Rep. Scott Garrett (R-N.J.) hits a hot button issue on whether or not Fannie and Freddie should be exempt from the risk-retention standards of a qualified residential mortgage. According to Garrett’s bill, H.R. 1223 or the GSE Credit Risk Equitable Treatment Act, GSE securities would not be exempt from the risk-retention requirements of Dodd-Frank.

Regulators have proposed an initial mortgage risk-retention plan, which requires banks and lenders to keep skin in the game unless a borrower makes a 20% down payment.

Edward DeMarco mollified lawmakers after the bill was introduced last week, acknowledging that the GSEs already hold 100% of the risk and should therefore be exempt. But Washington think tank MF Global said Monday that risk-retention could be a positive avenue for Fannie and Freddie.

The 5% risk-retention requirement for the GSEs would decrease the supply of mortgage-backed securities in the market but would not increase the cost of capital advantage Fannie and Freddie have compared to the big banks due to government backing, MFGlobal said.

"A 5% risk-retention requirement would simply ensure those (GSE) portfolios do not disappear," MF Global said. "This same funding advantage helps Fannie and Freddie in the securitization business as they can finance their inventory with low cost funds. Risk-retention requirements do not end this funding advantage."

MFGlobal remains cautious, however, as it said a 20% down payment exemption could indirectly hurt the private mortgage insurance sector. Mortgage insurance providers make their living on loans sold to Fannie and Freddie with less than a 20% down payment, according to MF Global.

Some of the legislative options could curtail these sales, the think tank said.

"That means less business for the mortgage insurers unless the private-label issuers decide to adopt similar mortgage insurance requirements," said MF Global. "We note that the MI providers are not the target of his fight. They are just bystanders caught in the legislative crossfire."

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