By William Hudson
Despite what they may claim- Fannie Mae does not own any note that was previously securitized. The trust does (or is supposed to anyways). Fannie Mae, by their own admission, owns nothing. Fannie Mae acts as a guarantor (insurer) but often forecloses in its own name or a servicer’s name, thus deceiving the court. Fannie Mae’s secondary job is acting as a debt collector for the federal government.
The federal government is well aware of this fraud and has gone to epic efforts to conceal an 11,000-document cache of government communications relating to financial policy. Whatever is contained in this document cache is so toxic that the Obama administration invoked executive privilege over these documents and insisted that their release would “impact” global financial markets. Last week some of these materials were unsealed. Federal judge Margaret Sweeney said the government’s sole motivation was to avoid embarrassment.
“Instead of harm to the Nation resulting from disclosure, the only ‘harm’ presented is the potential for criticism,” Sweeney wrote. “The court will not condone the misuse of a protective order as a shield to insulate public officials from criticism in the way they execute their public duties.” The federal government does not want you to hear about the details surrounding the seizure of mortgage giants Fannie Mae and Freddie Mac, also known as the government-sponsored enterprises, or GSEs.
The documents allegedly reveal issues regarding the assets and financial power of zombie-debt holding GSEs. Fannie and Freddie’s quasi-private status where funds were originally intended to keep credit flowing in the housing markets- were instead used in a sleazy mortgage backed scam engineered by the big banks. Fannie and Freddie were turned into the vultures of the housing implosion and bought up toxic mortgages that the big banks were desperate to unload. The big banks packaged their road kill and sold to the GSEs.
In 2008, Treasury Secretary Hank Paulson was directing Fannie and Freddie to “buy more mortgage-backed securities from overburdened banks.” In 2008 after being placed in receivership, Fannie and Freddie purchased almost $40 billion in zombie assets per month from private banks. Although Fannie and Freddie bailed out the big banks, they were also bailed out by tax payers.
In the original take-over $110 billion was provided and Fannie and Freddie were placed into conservatorship. In exchange, the fed received an 80 percent stake and the promise of future dividends. However, a few years after the crash, the housing markets had improved and Fannie and Freddie were once again profitable. The government then unilaterally changed the terms of the bailout agreement. Instead of taking a 10 percent dividend, the government changed the term to 100 percent. The Federal Housing Finance Agency (FHFA) that manages the GSEs explained the new terms and justified their decision as a way to “ensure stability [and] fully captures financial benefits for taxpayers.”
The government would justify the drastic change in the bailout terms by explaining that the GSEs faced enormous credit losses that may have resulted in the failure of the GSEs. Furthermore the Treasury claimed the would need to provide more tax payer money and possible insolvency, and yet the GSEs were actually on the verge of profitability. The GSEs paid back the federal government $228 billion over the next three years. This resulted in an overpayment of $40 billion more than they owed, but NONE of that profit went towards paying off Fannie and Freddie’s debt. The US Treasury would then claim that the bailout was not a loan but an “investment”. WHAT? The GSEs could not exit conservatorship because they were not permitted to pay back the loan and were unable to “exit” the contract.
Whereas banks that received bailouts during 2008 (voluntarily or by force) were allowed to pay off the loan and exit their agreement with the government, Fannie and Freddie were prevented from doing so and became a fascist federal government entity. In doing so the federal government can play either the private corporation angle, or the governmental entity depending on what best serves their self-interests. For example freedom-of-information requests do not apply to Fannie Mae, and on the other hand Fannie Mae will never answer a Qualified Written request because they are not a lender under the Truth in Lending Act.
Lawsuits have ensued as Fannie and Freddie investors become perturbed that their investments are not paying off. The government refuses to provide any information in Discovery for the plaintiff/investors (just like they stonewall consumers). This level of secrecy is usually for cases involving national security situations or proprietary business secrets. Fannie Mae and Freddie Mac are shady enterprises that resort to secrecy to commit their nefarious activities. What could possibly require such secrecy? The government is profiting from Fannie and Freddie’s payment stream that is based on a bunch of empty trusts- why not protect it?
Seven documents unsealed by Judge Sweeney last week demonstrate that the government knew the GSEs weren’t insolvent and profitable before the bailout terms were changed. As usual, the government is deceptive about their actions and intentions. Within the documents released was information about the future reorganization plans for Fannie and Freddie. The private sector is involved in the proposals for reform and you can guess what that means. The homeowner/taxpayer will get the proverbial shaft. Likely, the too-big-to-fail banks would take control of Fannie and Freddie assets. Who better to table fund loans that are guaranteed by Fannie and Freddie, while foreclosing on Notes that Fannie and Freddie claim to own when they don’t? The incompetence and deceptive practices of the banks know no bounds.
So what is the government going to such great lengths to conceal? Judge Sweeney has yet to rule on the vast majority of the documents, and it is unlikely the remainder of the material will be unsealed (the banks and courts will conspire to make sure that doesn’t happen). It is very strange that Obama and crew are asserting privilege over documents that really shouldn’t be any big deal- unless there’s a backstory going on that is so potentially volatile that it must be handled like a top-secret nuclear document (and probably is equally explosive).
If the federal government believes they made a sound investment they may want to rethink their strategy. Fannie Mae has reported that their investment portfolio — once the majority stream of its revenue — experienced a rapid decline in the first quarter of 2016, but executives are now claiming they will focus on other areas of growth in the future.
Apparently government-sponsored enterprise’s (GSE’s including Fannie Mae and Freddie Mac) holdings of mortgage-backed securities (MBS) and mortgage-income producing assets fell below $200 billion. MBS income has decreased because of defaults, lawsuit expenses and low interest rates among other expenses. However, this is nothing compared to what is coming when the second wave of defaults occur (2008 Part II).
Fannie Mae executives must be aware that the MBS portfolios they hold are worthless and are therefore reducing their exposure. “Today we have wound down the investment portfolio from a historic high of $900 billion to less than $200 billion with further reductions underway,” said Timothy Mayopoulos, the GSE’s chief executive, during an earnings conference call Thursday.
Although Fannie Mae contends that these holdings are still profitable, dependency on these investments resulted in volatile earning reports, interest rate fluctuations and of course hedging strategies that take advantage of volatility. Fannie plans to shift to loan guarantee fee income from its single-family and multifamily businesses, thus insuring themselves against their own MBS insurance policies. “It is a stable source of revenue and much less subject to interest rate and market volatility,” Mayopoulos commented.
In the first quarter of 2016 Fannie generated $3.2 billion in single-family guarantee income. Multifamily guarantee income totaled $333 million in both quarters. In order to bring in these numbers Fannie Mae has had to lower single family borrower loan standards and further decrease down payment amounts to 3% (that can be provided as a gift).
Overall, Fannie Mae (aka the federal government) posted $1.1 billion in net income for the first quarter, compared to net income of $1.9 billion in the first quarter of 2015. Despite the fact that home ownership levels are at 1967 levels, Mayopoulos said he expects Fannie will “remain profitable on an annual basis for the foreseeable future.” Mayopoulos must be oblivious to the fact that Fannie Mae’s non-lender status is now known, home default levels are rising again, and lenders are becoming desperate to induce borrowers to purchase homes. Last week Barclays bank announced they would be reintroducing zero-down mortgages, with other big lenders soon to follow.
Fannie Mae was able to post a profit but Freddie Mac issued its earnings on Tuesday and reported a $200 million loss. This loss raised shed light on the fact that a reduction in the investment portfolios and the new emphasis on risk sharing transactions will reduce the GSEs’ earnings potential. Both GSEs are in still in conservatorship and are considered undercapitalized for their size. As stated above, conservatorship is unnecessary.
Fannie has a net worth of $2.1 billion, compared to Freddie’s $1 billion. Mayopoulos noted that the GSEs have a line of credit with the U.S. Treasury (in case they need a quick bailout). Two albatross-mortgage companies who have proven they can’t properly manage their business operations are extended more credit on behalf of the US tax payer? Wonderful.
Once Mayopoulos stood on his pulpit, he couldn’t be stopped :”We try to keep credit standards high so as to minimize losses. We have been aggressive in addressing loss mitigation when loans go delinquent,” he added. Yes, Fannie Mae has been aggressive in their loss mitigation practices having instructed servicers to fabricate documents, create fake affidavits and create inauthentic chain of assignments. Credit standards have been lowered considerably in the last year as the housing market has started to stagnate. Borrowers can now obtain financing with lower credit scores and no out-of-pocket down payment thanks to the geniuses at Fannie Mae.
The serious delinquency rate (90 days or more past due) on Fannie loans has been declining since 2010. Its $2.8 trillion single-family loan guarantee portfolio had a 1.44% serious delinquency rate as of March 31 and 55% of its delinquent loans were originated in 2005 through 2008. However, this may all soon change. Large U.S. companies report that job cuts were 35 percent higher in April than in March. So far this year overall, job cut announcements are running 24 percent higher than for the exact same period in 2015. U.S. firms are laying off people at a rate that we have not seen since the last financial crisis. People without income do not buy homes. Here is what Zero Hedge had to say about these latest numbers…
While one can debate the veracity of the BLS’ seasonally adjusted data, one thing is certain: when a company announces it will layoff thousands, it will. So for all those who suggest that all is well with the US jobs picture based on initial claims reports, here is the latest report from Challenger according to which the pace of downsizing increased in April jumped by 35% to 65,141 during the month of April, from the 48,207 layoff announcements in March.
Looking further back, in the first four months of 2016, employers have announced a total of 250,061 planned job cuts, up 24% from the 201,796 job cuts tracked during the same period a year ago. This represents the highest January-April total since 2009, when the opening four months of the year saw 695,100 job cuts in the aftermath of the biggest financial crisis in modern history.
These numbers will have a direct impact on the loans that Fannie Mae insures that tend to be moderately priced homes.
Fannie Mae claims that they manage credit risk by, “intelligently distributing it other market participants. We do this through capital market transactions, reinsurance transactions and other types of transactions,” he said. Basically they do this by creating derivatives and selling or repackaging worthless paper backed by empty trusts and kick the can down the road. This may be the reasoning behind all the secrecy. If Fannie Mae can properly re-securitize (there is no such thing) the MBS loans they guarantee- the government will make a handsome profit and then be able to hand off the responsibilities of Fannie Mae to private lenders in a dissolution type scenario. At this point you might find that Fannie Mae assigns a Note they don’t own to your current servicer (or a new servicer) in order to ‘perfect’ the assignment. In doing so then all the worthless Notes Fannie Mae holds would appear legitimate again. They wouldn’t dare you say? Oh yeah- they would and most people would be none the wiser.
Over the past two years, Fannie Mae states they have sold a portion of the credit risk on $590 billion of single-family loans, which represents 18% of its single-family guarantee portfolio. Those investors are taking a portion of the first-loss position and receive a share of the guarantee fees. Fannie Mae admits that they sell the guarantees to the MBS portfolios and that investors receive guarantee fees.
The illusions spun by Fannie Mae are even worse than those the private sector has managed to spin. Whereas private banks must reveal the true creditor and the trust that allegedly owns the Note- Fannie Mae doesn’t have to prove anything (they are not a lender under TILA). They simply claim they own the Note (even if the empty trust does) and stonewall the homeowner who is typically forced to take their word for it. Fannie Mae has been able to stonewall homeowners, investors, courts and taxpayers for way too long. The 11k cache of documents would reveal the wicked truth. Therefore you will never see the documents unsealed. Fannie Mae is allowed to exist in this quasi-public, quasi-private no man’s land where investors and taxpayers aren’t allowed to discern the truth. Obama’s promises of transparency are as translucent as a block of lead.
Filed under: foreclosure