Saturday, January 25, 2014

What We’re Hearing: Time to Investigate the Government Takeover of Fannie and Freddie? / Fairholme Increases its GSE Holdings / Lenders Rolling out First Lien HELOCs / George Mason Mortgage Loses Money, for Real / NTC Sees Fewer Differences Among Lenders / SLS Expands


By Paul Muolo
It doesn’t take a genius to figure out that the Treasury Department’s point man on GSE reform, Michael Stegman, doesn’t think all that much about the huge profits Fannie Mae and Freddie Mac have been generating the past year. As IMFnews reported this week, Stegman noted that $86 billion of GSE profits were tied to “one-time” tax reversals and the recapture of loan loss reserves. Okay, fair enough. But then the question becomes: who at the GSEs (or at the Federal Housing Finance Agency) was responsible for telling the two to set aside so much money for loan losses and were those assumptions way off base? It’s not an unfair question – and maybe it’s time for the chairman of the House Financial Services Committee or Senate Banking Committee to press for an investigation into why Fannie and Freddie’s loan loss reserves were so high. Anyone familiar with the GSEs knows that when they bought non-agency securities most of the product was AAA rated. Also, some of the underlying loans had coverage from mortgage insurance firms. Well, guess what? The MIs made good on their policies. Might someone in government conclude that the two GSEs should never have been taken over in the first place, or is all this Monday morning quarterbacking? Will Rep. Jeb Hensarling, R-TX, lead the charge of an investigation into potential government abuse? Will Sen. Rand Paul of Kentucky? Don’t hold your breath…
Keep in mind that one of the plaintiff’s in the “takings” case against the government estimated that the GSEs were over-reserved by $109 billion…
Meanwhile, certain investors in Fannie/Freddie junior preferred shares are sitting on huge paper gains on their investments. Fairholme Capital Management, run by Bruce Berkowitz, is one of them. A few weeks ago there were scattered reports that FCM was unloading some of its holdings in the GSE, only to be followed by speculation that the investment firm was doubling down…
Adapt or die – that’s how mortgage firms have always survived light production years. Late this week we were hearing reports that two banks were in the process of rolling out first lien HELOCs as hybrid ARM products “as a way to circumvent” the qualified mortgage rule. We’re not sure what that means exactly, but look for additional coverage in the week ahead…

Fourth quarter earnings are rolling in. Thus far, most banks reporting have earned money on their mortgage operations – but a lot less than in earlier periods. However, some are actually losing money. Cardinal Financial Corp., Tysons Corner, VA, reported that its mortgage banking affiliate, George Mason Mortgage, had a net loss of $1.6 million in the fourth quarter. In the year ago quarter, it earned $3.7 million…

Also, competition for new production will be intense this year. John Hillman, CEO of Nationwide Title Clearing, noted recently that the new ability-to-repay will play a role as well. “The new rules are likely to regiment the industry, so there will be fewer differences between mortgages offered by different lenders, thereby intensifying the competition and making compliance of the utmost importance”…

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