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FHFA Makes a Big Bet

Bruce Krasting's picture




 

There were several releases from the Federal Housing Finance Agency (FHFA) this past week including:

-A speech by acting FHFA Acting Director Edward DeMarco.
-A report on the efforts by Fannie and Freddie regarding restructuring exiting mortgages.

First consider this from the restructuring report:

Trial loan modifications under HAMP more than tripled from June to August, from 66,200 to 202,200.

In
addition, the Agencies restructured 58,000 outside of HAMP. The average
loan is close to $200,000. That means that the GSE’s have restructured
$52 billion in loans. $39 billion of that was in the three months
ending in August. Their rate for September must have been close to $20
billion. The total is north of $70 billion. As a percentage of their
total book this comes to 1.25%, or 5+% annually.

From the speech this slide:


On
numerous occasions the FHFA has used this type of graph to demonstrate
how well they are doing. They point to the relatively low default rate
they are experiencing compared to the private sector and other
government lenders. DeMarco said in his speech:

Fannie
Mae and Freddie Mac have a combined 57 percent share of mortgages
Outstanding, that accounts for only 25 percent of serious delinquencies.

The
FHFA is blowing smoke at us. Their default rate looks good by
comparison because they are not recognizing losses. They are just
rolling them forward. They have done $70billion already and now that
they have it figured out they will continue the process. How much of
the 5% annualized rate should go on top of their stated numbers? Over
time, more than half . The Agency default rate is understated in the
report as a result.

Most of the restructured loans are from
seriously delinquent borrowers. Those in payment default by 90 days.
When these loans are restructured they go off of the Delinquent list.
Therefore the more the Agencies restructure, the lower their
delinquency rate looks. Mr. DeMarco said this about his ability to
restructure dead mortgages:

With
HARP, these barriers have been addressed. Fannie Mae and Freddie Mac
today will refinance mortgages they currently hold, even up to a
current loan-to-value of 125 percent.

The ‘barriers’ he
is referring to are prudent lending standards. Recent data shows that
one half of these loans will re-default.If real estate prices do not
make a significant recovery, the very high re-default rate will
continue.

Also from the speech this slide on the balance sheets of the Agencies:


The
funded portfolio at the Agencies has been static. This is because there
are limits on the size of the portfolio. These were mandated as a
result of the conservatorship. But there are no limits on the amount of
MBS that is guaranteed. They are using that loophole to maximum
advantage. Who owns this guaranteed MBS? Increasing it is the Federal
Reserve through their non-stop POMO buys. The Fed is mixing its QE
monetary policy objectives with support for bad credits. Agency MBS is
not money good at par unless Treasury funds the losses. Agency MBS is
still not full faith and credit paper. With the absence of a full
guaranty the Fed would normally have to haircut this paper. The Fed
typically requires ‘two ways out’. (1) The promise to pay by the
borrower and (2) the collateral that backs up that promise. As of today
there is only one certain way out of this MBS. And that is not worth par.

The Fed's POMO buys have facilitated HAMP. That is well outside of traditional monetary policy.

From the speech, a comment by Mr. DeMarco:

There
is an opportunity today to help many more homeowners strengthen their
own balance sheets by taking advantage of the HARP program.

How
can lending someone 125% of the value of their home improve a balance
sheet? At best it improves cash flow for the borrower for a short
period of time. This is at the expense of a larger principal
obligation. Underwater borrowers are bad credits. Rolling over bad
loans is a bet on the come. The FHFA is playing at the big casino on
the hope of a RE recovery. It isn't an even money bet.

 

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Sun, 10/04/2009 - 17:21 | 88379 Anonymous
Anonymous's picture

Bruce, another excellent post. As I have been saying for months, ignore the MBS market at your own peril.

The recidivism rate on HAMP mods will be much higher than 50pct, because the mods don't address the underlying problem - negative equity. Reducing monthly payments is only a solution if the payment levels are the problem. They are not.

At the limit, you could reduce the payment to zero, but that still gives the borrower any incentive to pay the bank to take back the house when the borrower is finished with it.

Reducing payments is just can kicking, in hopes prices will return to bubble levels so equity returns. That is the equivalent of hoping the Nasdaq returns to 5000. Not gonna happen.

To call HAMP mods "performing" is an illusion.

Sun, 10/04/2009 - 19:53 | 88433 Anonymous
Anonymous's picture

negative equity because the Ponzi finance pyramid retraced. Negative equity because the exponential growth necessary to keep greater exponential growth of interest service at bay, failed. Money supply and velocity began to contract. State sponsored fraud with quant aided modeling via regulator sanctioned opacity fed a galactic sized bubble. It was an open lie, extort, steal, defraud, game, gangland-as-govt falsehoodery. It was the open mockery of the American people, civilization, and future expectation. It was a conspiracy to grab all and abscond before the skyscraper built of iron/stone but without wisdom fell from ineptitude, indolence, inability.

Equities went to toast (before money printing made them whatever TPTB wanted them to be), Commodities ramped skyhigh and collapse like a supernova, bonds took the end of a whip for tutelage with the Fed printing/buying and undertabling with PDs to shill demand with sizeable reward for their duplicity, currency too went CAT 5 ocean waves as need to settle for resources in a reserve played oil with need to exit dollar obligation's water.

Everything in the arsenal of USA economy has been nationalized in everything but name. Every resource has been exploited to its greatest extent settling finally on open rampant speculation on the lands and structures of the nations, entwined with capacious fraud in every financial corner to produce a vacuity of potential to repay.

That people do not recognize the scale of want. That people don not sense the size of dishonesty. That people do not see the ramifications of failure in every corner, makes this tragedy exponentially worse.

This episode of history will be THE CHAPTER (should literacy persist) from which all others will be measured.

Sun, 10/04/2009 - 17:21 | 88378 Anonymous
Anonymous's picture

Bruce, another excellent post. As I have been saying for months, ignore the MBS market at your own peril.

The recidivism rate on HAMP mods will be much higher than 50pct, because the mods don't address the underlying problem - negative equity. Reducing monthly payments is only a solution if the payment levels are the problem. They are not.

At the limit, you could reduce the payment to zero, but that still gives the borrower any incentive to pay the bank to take back the house when the borrower is finished with it.

Reducing payments is just can kicking, in hopes prices will return to bubble levels so equity returns. That is the equivalent of hoping the Nasdaq returns to 5000. Not gonna happen.

To call HAMP mods "performing" is an illusion.

Sun, 10/04/2009 - 15:28 | 88328 Anonymous
Anonymous's picture

Anyone else as tortured as I because of the knowledge of what is truly going on? I for one am frightened at what I see is about to happen.

I try to explain this to some of my supposedly intelligent friends and nobody wants to hear it.

Sun, 10/04/2009 - 19:24 | 88367 Lou629
Lou629's picture

"I try to explain this to some of my supposedly intelligent friends and nobody wants to hear it."

In my experience most sheeple, even the smart ones, do not want to know or learn something bad, or even try to prepare for it in a lot of cases. 

It seems as though they prefer to think ( or hope ) that those types of things are what the border collie is there for. 

In their case,  their belief in the system, the rule of law, the police, the government, maybe even common sense banking, represents their protection, their border collie.

They don't seem to understand that no matter how fast or fearless the dog may be, it's no match for a pack of wolves.  Or an avalanche.  

 

Sun, 10/04/2009 - 14:18 | 88298 Thoreau
Thoreau's picture

bubble, bubble, toil & trouble...

Sun, 10/04/2009 - 12:48 | 88234 DaddyWarbucks
DaddyWarbucks's picture

This is a jewel Bruce. If you ever need a job you're just a lobotomy away from a first string MSM position.

Sun, 10/04/2009 - 12:33 | 88223 Lionhead
Lionhead's picture

Excellent post with great charts to depict the info. Thanks!! "The FHFA is blowing smoke at us." IMHO, they're blowing BS at us and they're "hoping" for a recovery that may not ultimately come. The same-o, same-o can kicking down the road. Ho-hum. We've heard this a million times before.

Sun, 10/04/2009 - 11:42 | 88198 AN0NYM0US
AN0NYM0US's picture

or put another way: Why is Madoff in jail?

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