McCain Pushes Ban on Fannie, Freddie Bonuses

Sen. John McCain wants to ban executive bonuses at Fannie Mae and Freddie Mac while the companies remain under federal control.

An effort to bar bonuses for executives at Fannie Mae and Freddie Mac could move forward in the U.S. Senate this week.

Sen. John McCain (R., Ariz.), a long-standing critic of the mortgage giants, said Tuesday he would try to advance a measure that would bar senior executives at Fannie and Freddie from receiving bonuses while the companies remain under federal control. (Video.)

Mr. McCain and Sen. Jay Rockefeller (D., W.Va.) sought to attach the restriction on pay to a bill prohibiting members of Congress from trading on inside information about government activities that could impact stocks. That bill easily cleared a 60-vote procedural hurdle on Monday and could pass by the end of this week.

Lawmakers became outraged last fall over nearly $13 million in bonus and incentive pay for Fannie’s and Freddie’s top executives granted last year.

“I find it hard to believe that we can’t find talented people with the skills necessary to manage Fannie and Freddie for good money…without the incentive of multi-million dollar bonuses,” Mr. McCain said on the Senate floor on Tuesday. “There are many examples of intelligent, well-qualified, patriotic individuals working in our federal government who make significantly less than the top executives at Fannie and Freddie with just as much responsibility.”

Representatives for Fannie and Freddie declined to comment. Their regulator, the Federal Housing Finance Agency, didn’t immediately comment.

The FHFA has defended the current pay packages as appropriate given the technical expertise needed to oversee two companies that guarantee $5 trillion in mortgages and the fact the executives couldn’t be paid in the companies’ stock, which essentially is worthless.

Taxpayers, who have put about $151 billion into Fannie and Freddie since their takeover in fall 2008, “would not be better off if we provoke a rapid turnover of senior management by further slashing compensation,” said Edward DeMarco, the FHFA’s acting director, at a November hearing.

Fannie CEO Michael Williams announced in mid-January his plans to step down as soon as the Fannie board finds a successor. His counterpart at Freddie Mac, Charles E. Haldeman Jr., said last fall that he would leave sometime in 2012. Both executives took their jobs in 2009, less than a year after the government put the companies under federal control.

Correspondent Investors: News, Volumes and Rumors; Government Turns Focus to HEMP

Sorry, did
I hit the incorrect letter? The Administration announced important enhancements
to the Making Home Affordable Program, including the Home Affordable Modification Program (HAMP) late last week. The
expanded program is expected to be available by May, but we should keep a few
things in mind. First, this is not the mortgage refinancing program that
President Obama mentioned in the SOTU speech (that referred to helping current
borrowers refinance into a lower rate). The HAMP update is a focus on debt
forgiveness modifications, and arguably impacts investors more than originators
and Realtors – the implications for
agency MBS investors seem limited but are very meaningful for non-agency
. (Removing the 31% DTI constraint for HAMP eligible borrowers
could embrace about 800,000 potential borrowers, and the program will be
extended through 2013.)

Analysts suggest that the effect on
agency MBS prepayment speeds should be minimal
, since the vast majority of debt
forgiveness will be on delinquent loans, which are typically already bought out
of the agency MBS trust (if they are more than 120 days delinquent). The only
effect could be if underwater borrowers in agency MBS pools start going
delinquent on purpose to qualify for debt forgiveness, speeds will obviously
rise – hopefully unlikely. And only pools of loans originated before 2009
qualify for this program. FHFA Acting Director Edward DeMarco released a press
statement stating that “principal forgiveness did not provide benefits
that were greater than principal forbearance as a loss mitigation tool”.
Further, the press release noted that “FHFA’s assessment of the investor
incentives now being offered will follow its previous analysis, including
consideration of the eligible universe, operational costs to implement such
changes, and potential borrower incentive effects.” This suggests that
Fannie Mae and Freddie Mac may not adopt this program. The incentive to
investors for principal reduction in HAMP has been tripled (the range of 6-18
cent payout on debt reduction goes up to 18-63 cents) – a significant change
for various reasons and should result in higher modification rates. It is
important to note that the incentives for servicers are not any different now
than before (servicer strip dependence on the balance).

The President’s State of the Union address
suggested a new government effort to refinance borrowers but at this point most
expect it will be aimed at non-agency loans
, but more details should emerge in the near term. Total
borrower savings from such a refi effort would be at most $5-6 billion per year,
but in reality would be a small fraction of that amount. The program may
involve non-agencies refinancing into FHA loans and so expect the impact on the
agency MBS market to be modest, however. Total throughput of the program should
be low, given the challenges witnessed in agency HARP, lack of servicer
incentives, and rep/warrant hurdles. Recently a speech by HUD Secretary Donovan
sparked fears of a Ginnie refi program and while this program is likely
targeted at non-agencies investors continue to fear event risk in Ginnies,
possibly via a restructuring of MIPs at some point.

And while
we’re talking about residential MBS’s, agency (Fannie, Ginnie, Freddie) MBS prices have had a great run since
mid-December compared to Treasury prices
. Some now expect agency MBS
spreads to remain tight so long as the 10-year Treasury stays at current
levels.  Should the 10-year yield hit 2.5%, however, they would see those
spreads widen significantly. These projections are due in part to the Fed’s
announcement that they will likely keep short-term rates low until late 2014,
which both creates an ideal scenario for banks to buy up agency MBS and for
implied volatilities to decline, and to the fact that the Treasury has been
selling about $10 billion agency MBS monthly but that this should be drawing to
a close, leaving only $15 billion.  Additionally, the MBS sector is
attractively priced
compared to investment grade corporate bonds right now, so
the long-term “supply-demand technical” look good. In the event that the
10-year yield reached 2.5%, though, spreads would widen, a prediction assuming
that a selloff is caused by improving fundamentals of the economy, which
reduces the probability that the Fed’s QE3 involving agency MBS would diminish
significantly in a rates backup scenario.  Such a shift in rates would
also indicate that volatility had increased, which would likely lead to a
sudden increase in agency MBS, which of course skews that nice supply-demand
projection. There’s your dose of daily technical talk.

There is a lot of chatter about
investors out there, some of it factual, some of it rumored
. The most recent big move was from
Citibank, which, due to liquidity and market risk concerns, became the latest
major bank to stop the purchase of “medium” and “high risk” mortgage loans from
its correspondent originators. No one wants buyback requests appearing in their
mailbox, and Citi is no exception. And we know that these, if they can’t be
fought, are passed on to the company that sold the loan to the investor. So Citi is attempting to improve the quality
of the mortgages it buys
, a good thing, and told correspondent lenders
“to withdraw medium/high risk loans,” saying the bank could not
predict time frames for when the loans would be reviewed “if we are able
to review them at all.” Perhaps Citi’s pre-purchase review process (begun
in 2010) is still letting some potentially defective loans slip through.

While this
is a good goal, and should be done, for correspondent
clients it is more tough news since it comes on the heels of Bank of America
and MetLife’s exit from correspondent lending. Ally/GMAC has scaled back. And
rumors surfaced last week, and I repeat – rumors, that SunTrust will be
combining its wholesale and correspondent channels, and that PHH is also
contemplating scaling back operations.
(Of course wholesale reps love
calling on larger correspondent clients, but it doesn’t work the other way –
correspondent reps rarely want the opportunity to call on brokers. Certainly
the rep and warrants are different.) On the positive side, we have Wells Fargo being featured on the
Forbes cover
and recent results from Flagstar
showing that mortgage banking operations had strong revenues in the fourth
quarter. (Flagstar’s gain on loan sale income increased from Q3 totals to
$106.9 million, with a margin of 102 basis points. The firm reported
residential first mortgage loan originations of $10.2 billion in Q4, an
increase of $3.3 billion, or 47.1 percent, from third quarter totals.)

pretty much done with much of the earnings reports from the big
banks/servicers. Things don’t look too peachy as most took charges for
repurchasing soured loans, complying with federal mortgage servicing standards,
paying for an upcoming settlement with state attorneys general and resolving
significant foreclosure and litigation costs. Wells Fargo posted the strongest
fourth-quarter mortgage results but still had $300 million in costs related to
mortgage servicing and foreclosures. U.S.
Bancorp and PNC Financial Services both took charges in the quarter related to
the pending settlement agreement
with state attorneys general and to the
cost of complying with federal consent orders for past mortgage servicing
failures ($164 million and $240 million, respectively). Most lenders would
agree that mortgage banking profits are up and origination volume increased in
the fourth quarter, things are slower than a year ago. BofA’s mortgage origination volume dropped 77% from a year ago and
Wells saw a 6.2% decline from a year earlier in fourth-quarter mortgage
originations (to $120 billion). Chase’s mortgage origination volume dropped 24%
from a year earlier, and Citigroup’s fell 3%.
One investment bank noted,
“Solid organic loan growth is very difficult to achieve when consumers and
corporations are deleveraging (cutting back on debt in their lives) and
economic growth is moderate.”

MGIC (which injected $200 million into a subsidiary last
month to keep writing policies) announced that it posted its sixth straight
quarterly loss. MGIC said its risk-to-capital ratio will probably exceed the
maximum 25-to-1 allowed by some state regulators in the second half of this
year. The ratio was 20.3-to-1 on Dec. 31 compared with 22.2-to-1 on Sept. 30.

Friday saw our share of bank closures. In Florida First Guaranty Bank and
Trust Company of Jacksonville was enveloped by CenterState Bank of Florida, with
the help of the FDIC. Up in Tennessee, Tennessee Commerce Bank became part of
Kentucky’s Republic Bank & Trust Company and BankEast in Knoxville is now
part of U.S. Bank National Association of Ohio. And up in Minnesota Patriot
Bank Minnesota is now part of First Resource Bank of Savage, Minnesota.

also had news that the U.S. economy expanded less than forecast in the fourth
quarter as consumers curbed spending and government agencies cut back,
validating the Federal Reserve’s decision to keep interest rates low for a
longer period. GDP disappointed analysts. Remember – jobs and housing, housing
and jobs. “We’re going into 2012 with less momentum than people were thinking,”
said Michael Hanson, a senior U.S. economist at Bank of America. This week’s
Fed announcement that they would hold rates near zero for years was a stunning
admission that monetary policy has failed to stimulate the economy to anywhere
near the extent anticipated. And fiscal policy has had the same impact. So what
does the government have up its sleeve? Not much.

If that’s
the case, then we’re in for a weak 1st quarter here in the United
States, and we’re going to have to face the prospect that European debt needs
to be written off. At this point it is arguable how much of Europe’s coming
recession spills into the United States, but it will indeed have an impact.
And, more often than not, a slowing U.S.
economy leads to lower rates
(since there is less demand for capital) – unfortunately
for LO’s the lower rates have to be balanced against the higher fees,
documentation hurdles, and appraisal problems.

Our 10-yr
T-note closed Friday with a yield of 1.90%. One headline I saw this morning
noted that, “US stocks are poised to open lower Monday after the weekend came
and went without Greek leaders reaching an agreement on a debt-relief deal.” Is
that a surprise to anyone? In this country this morning we’ve already had Personal
Income +.5%, Personal Consumption was unchanged, the savings rate went to 4%,
and the Core PCE Price Index was +.2%. For the remainder of the week, the big
excitement will be Friday’s employment data. But rates continue to drop, and we find the 10-yr down to 1.83% and MBS
are about .250 better.

An old man walks into the barbershop for a shave and a haircut, but he tells
the barber he can’t get all his whiskers off because his cheeks are wrinkled
from age.
The barber gets a little wooden ball from a cup on the shelf and tells him to
put it inside his cheek to spread out the skin.
When he’s finished, the old man tells the barber that was the cleanest shave
he’s had in years. But he wanted to know what would have happened if he had
swallowed that little ball.
The barber replied: “You’d just bring it back tomorrow like everyone else

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at The current blog discusses
residential lending and mortgage programs around the world. If you have both
the time and inclination, make a comment on what I have written, or on
other comments so that folks can learn what’s going on out there from the other

…(read more)

Forward this article via email:  Send a copy of this story to someone you know that may want to read it.

Analysts: Refinancing Plan ‘Dead on Arrival’?

White House officials are optimistic that the new refinancing plan outlined by President Barack Obama on Tuesday night will be enacted into law. There are few details so far, but Mr. Obama said in his speech that he would send Congress a plan “that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates.”

Most analysts, however, are skeptical. They don’t give the refinancing plan much of a chance of winding its way through a deeply divided Congress, especially during an election year.

Here’s a sampling of their views:

Edward Mills, analyst, FBR Capital Markets: “We believe that this program would be dead on arrival in Congress, as congressional Republicans are opposed to additional intervention in the mortgage market and are philosophically opposed to a bank tax. This should be confirmation that the administration realizes that a mass-refinance program can only be achieved by legislation and not by regulatory fiat.”

Jaret Seiberg, senior policy analyst, Guggenheim Securities: “The question is whether Congress will enact this into law. To us, that is a very high hurdle in an election year. Republicans will be loathe to give the president a political win and we expect they will portray this as a policy that rewards the irresponsible at the expense of the responsible. Yet one should not dismiss this idea outright. We believe it may be far less expensive for the government than the market may believe. That could make it difficult for Republicans from states still suffering from housing woes to object.”

Alec Phillips, economist, Goldman Sachs: “While the universe of eligible borrowers isn’t entirely clear, this implies that the legislation might go beyond refinancing loans backed by Fannie Mae and Freddie Mac and could also allow refinancing of loans held by investors or banks. Given the stalemate in Congress on most housing-related issues at present, the fact that the president is seeking congressional approval should probably be interpreted as a sign that the administration has taken its own refinancing efforts as far as it can without legislation.”

Issac Boltansky, policy analyst, Compass Point Research & Trading: “While the details of the plan were almost nonexistent, the broad contours of the plan lead us to believe that the likelihood of successfully enacting it are exceptionally low. We are concerned that the proposal would have to be enacted legislatively, that it would call on the government taking on much more mortgage risk, and that the corresponding proposed bank tax will serve as a political wedge.”

Follow Alan @alanzibel

Six Questions on Obama’s Mortgage Refinance Proposal


President Barack Obama said Tuesday night in his State of the Union address that he would send a plan to Congress to allow all homeowners who are current on their mortgages to refinance. Here’s a quick look at the proposal:

How is this program different from the refinance initiative that was announced three months ago?

In October, the White House said it would change an existing program that allows homeowners with mortgages backed by Fannie Mae and Freddie Mac to refinance. That program has been up and running for years, and the White House was able to make the changes administratively, meaning they didn’t have to go to Congress for approval.

The latest initiative will not be limited to borrowers with Fannie and Freddie backed mortgages, though the full details of what loans will be eligible have yet to be released. It isn’t clear, for example, whether loans that don’t meet the criteria for the existing Home Affordable Refinance Program would be eligible for this new plan.

When will borrowers be able to refinance?

Unlike some previous efforts, this program will require Congress to pass legislation, and that’s a tall order given the current gridlock in Washington. Senior Obama administration officials said they believe there could be bipartisan votes for such a measure, but recent comments from some Republicans about the prospect for any major legislative proposals this year suggest otherwise.

How would refinancing work under this program?

Details haven’t been announced, but the most likely venue for such refinancing is the Federal Housing Administration. The latest idea would allow any borrower that has been current on their mortgage to refinance, regardless of whether they owe much more than their home is worth or whether their income has fallen since the last time they refinanced. To refinance those borrowers through FHA will require Congress to change the current requirement that borrowers have at least a 3.5% down payment.

Haven’t similar programs been tried before?

Yes. But those programs put in place a series of rules designed to ensure that government entities weren’t taking on more risk by allowing investors and financial bank to offload risky mortgages onto the government.

In 2010, for example, the Obama administration rolled out a program to let underwater borrowers refinance through the FHA, but that program required banks to first write down loan balances so that borrowers could qualify under existing rules. Fewer than 1,000 loans have refinanced through the program. Congress approved a more complicated version of this idea in spring 2008 called Hope for Homeowners, but it also resulted in just a few hundred refinances. The latest incarnation of this program seeks to vastly streamline the refinance process by eliminating many of the wrinkles that policy makers and banks enacted in previous versions.

How much would such a program cost?

President Obama said the cost of his plan would be covered by a tax on the largest financial institutions that he initially proposed in 2010 but that didn’t pass through a Democratic-controlled Congress. These fees on financial institutions would presumably offset the cost that government-guaranteed mortgages would default.

Some analysts have called for “automatic” refinancing of borrowers—is that what this is?

No. Borrowers under this plan would still have to apply to refinance and pay the normal upfront fees.

Check the Developments blog for future updates on this program.

Follow Nick @NickTimiraos

Outlook for Mortgage Market: Feels Like ‘Groundhog Day’

By Nick Timiraos and Al Yoon

LAS VEGAS—The American Securitization Forum returned here after a two-year hiatus for an annual meeting with little of the optimism for a quick turnaround in the market for mortgage-backed securities that had marked previous events.

Instead of predicting how many privately issued mortgage deals would emerge this year, some panelists suggested a better question was whether an organic market would return at any time in the near future.

“Stop pretending like it’ll resolve itself,” said Alan Boyce, an industry veteran who now runs Absalon, a joint venture supported by billionaire financier George Soros. “When it comes to the return of private capital, private capital is still exiting the U.S. mortgage market.”

Congress and the White House have made little progress to overhaul mortgage-finance giants Fannie Mae and Freddie Mac, with lawmakers generally arguing that the housing market remains too fragile to take any steps that would raise borrowing costs.

Discussing government plans for the firms has begun to feel like “Groundhog Day,” said Jay Diamond, managing director of Annaly Capital Management. One year from now, the housing-finance market “will probably look a lot like it is right now” despite more hearings, conferences, white papers, and calls for an overhaul.

The firms involved in creating and buying asset-backed securities spent much of the time lamenting an uncoordinated policy response from Washington, raising alarm that regulators were gambling with a brew of new rules that they said would have far-reaching and costly side effects.

The industry was badly fractured four years ago when investors lost confidence in securities backed by home mortgages and credit-card receivables amid huge losses. Since then, Congress passed the Dodd-Frank financial-overhaul law, which includes a wide range of regulations, many of which have yet to be finalized by a mix of agencies.

Regulators are trying to “concoct a pill for every symptom associated with the unhealthy practices” that prevailed during the go-go years of the past decade, said Ralph Daloisio, chairman of ASF. But he warned that the medicine would produce “interactions and side-effects” that would go far beyond the problems regulators had diagnosed.

“You don’t have to say, ‘I don’t know what’s going to happen,’” said Reginald Imamura, executive vice president of PNC Capital Markets. “You can actually see the interaction of some of these rules combined could cause liquidity to evaporate.”

But other industry officials also cut regulators some slack, arguing that lawmakers had simply placed unrealistic burdens on them to craft a bevy of intricate rules. “I do believe every regulator I work with is extremely well intentioned and is very much trying in these trying times to get things right,” said Tom Deutsch, executive director of the ASF.

For their part, regulators insisted that several important overhauls needed to be put in place. Adam Ashcraft, senior vice president at the Federal Reserve Bank of New York, reminded attendees that the market for securitizing subprime mortgages had blown up twice in less than a decade—not only in 2007, but also in the late 1990s. “We didn’t seem to learn there,” he said.

Industry and government officials have made reviving the private mortgage market for residential mortgage bonds a top priority. For the past four years, government-backed entities have accounted for around 90% of mortgage originations. Banks have opted to keep loans that aren’t eligible for sale to government entities on their balance sheets, while investors have been skittish about buying non-government-guaranteed bonds due to the prospect of future home-price declines.

Only Redwood Trust Inc., a real-estate investment trust based in Mill Valley, Calif., has been able to package loans into private securities, though it has said that bank competition for the loan collateral has limited its efforts. It sold its fourth mortgage bond offering since the financial crisis last week, but the issue has generated little hope for more, analysts said.

The market for privately issued mortgage bonds has shrunk to $1.1 trillion outstanding from $2.4 trillion in 2007, according to Nomura Holdings. Total residential loan securitization volume was $37 billion last year, a fraction of the $711 billion during the market peak in 2006, according to Dealogic.

Mr. Deutsch made no bones about holding the event in Las Vegas at a gleaming luxury hotel, casino and retail complex that opened two years ago and itself had become a symbol of the frenzied real-estate bubble of the past decade.

Venues in Orlando last year and the Washington, D.C., area in 2010 had proven too small to accommodate all of the trade show’s attendees. Las Vegas offered “the only facilities … that are able to accommodate this size of event,” Mr. Deutsch said, noting that this year’s 5,000 attendees exceeded last year’s crowd of 4,500.

Mr. Daloisio said that hosting the event in Las Vegas, a “location of natural and manmade surrealism,” was proving to be “all too fitting for the surrealism we are experiencing from the policy environment.”