From: Inside Mortgage Finance
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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