Fannie and Freddie foreclose on almost 16,000 homes in May, almost 4 million since 2008

Fighting Off Foreclosures

http://www.dsnews.com/daily-dose/08-08-2017/fighting-off-foreclosures

Editor’s Note:  Fannie and Freddie have foreclosed on almost 4 million homes since the financial crisis of 2008.  The GSEs typically can’t prove they own the loan if it was securitized between 1999 and 2014.  Did you know that Fannie Mae and Freddie cannot accept a note that is not properly endorsed and assigned?  A note that is not properly endorsed or assigned is considered a ‘fail’.  See Document Custodian information here.

Avoid Foreclosure BHFannie Mae and Freddie Mac wrapped up 15,683 foreclosure prevention actions in May, according to the Federal Housing Finance Agency (FHFA) May Foreclosure Prevention Report. This brings the total number of foreclosure prevention actions to 3,914,668 since the inception of the conservatorships back in September 2008. More than half of the actions reported for May—or 10,769—were permanent loan modifications, compared with 11,328 in April. All told, since September 2008, the Enterprises have granted permanent loan mods to 2,076,345 distressed homeowners.

Along those same lines, the share of modifications with principal forbearance accounted for 25 percent of all permanent modifications in May, according to the report. Modifications with extend-term only leapt to 45 percent during the month thanks to ongoing positive headwinds in house prices. Additionally, a combined 1,489 short sales and deeds-in-lieu sealed in May. There were 10 percent more—or 1,650—in April.

As for the Enterprises mortgage performance metrics, the serious delinquency rate spiraled down further, plunging from 1.01 percent at the close of April to 0.98 percent at the end of May. Loans 30–59 days’ delinquent charted at 402,780 in April; they stood at 348,141 in May. Continuing their downward trajectory, 60-plus-days’ delinquent loans hit 1.3 percent in May, decreasing from April’s 1.34 percent.

In terms of Fannie and Freddie foreclosures, third-party and foreclosure sales jumped 9 percent, from 5,523 in April to 6,042 in May. Foreclosure starts tumbled 13 percent from 17,056 in April to 14,905 in May.

The top five reasons for delinquency in May included curtailment of income (21 percent), excessive obligations (22 percent), unemployment (7 percent), illness of principal mortgagor or family member (6 percent), and marital difficulties (3 percent).

The Fannie Freddie Document Treasure Trove

Editor’s Note: Former Secretary of Treasury Timothy Geitner was instrumental in greasing the runways for HAMP so the GSEs could steal homes.  But he also engineered the theft of GSE investor profits while proclaiming Fannie Mae and Freddie Mae to be on the verge of collapse.  Instead, the federal government, in an act of unconscionable bad faith, implemented net worth sweeps to steal money from investors.  These massive profits were also used to artificially prop up failing Obamacare.

The Libertarian Opinions expressed by Forbes Contributors are their own.

July 19, 2017 marked the release of the first set of much-awaited government documents that addressed the government knew and when, before the implementation of its net worth sweep on August 17, 2012, which gave the government all profits from the operation of those two Government Sponsored Entities (GSEs) Fannie Mae and Freddie Mac.  That deal was embodied in the Third Amendment to the original Senior Preferred Stock Purchase Agreements (SPSPAs) of September 2008.  Analytically, these documents are irrelevant: the case against the government is air tight without them. Practically, these documents should transform all phases of this complex litigation.  The best way to beat the government in litigation is to show its bad faith throughout.  It is important to see why both the propositions are true, and how they impact on the ongoing litigation.  I am offering this analysis, in my capacity as an advisor to institutional investors.

The Analytics.  A close look at the disclosed documents tell us nothing about the net worth sweep that is not apparent on the face of the published agreement that the Federal Housing Finance Authority (FHFA) and the Department of Treasury used to put the Net Worth Sweep (NWS) in place. These were expert lawyers and they meant what they said and said what they meant—namely, that the sole purpose of the deal was to make sure that all the future profits generated by Fannie and Freddie would end up in the pockets of the United States Treasury above and beyond the 10 percent dividend set in the original 2008 agreement.  It would have been, of course, imprudent for the two government agencies to announce their intention to collude publicly, so they engaged in a planned, but sham, transaction, that made it appear as if their joint action was the salvation of Fannie and Freddie.  The supposed benefit was that the enterprises were relieved of any obligation to pay money to Treasury when they did not have money to pay it.

Unfortunately, for the government, the enterprises and their private shareholders already had two airtight defenses against such an unhappy result.  First, if a company is insolvent it can’t pay any money to its shareholders as dividends or to its creditors anyhow.  So it is a simple sham to claim that consideration has been supplied by relieving parties of any obligation to pay amounts that could not pay in any event.  Second, as a legal matter, the SPSAs contained a so-called payment-in-kind clause, which allows Fannie and Freddie to not pay cash dividends so long as the deferred amounts accrue at a rate of 12 percent annually, two points higher than the 10 percent rate stipulated for cash dividends.

The ability to exercise this deferred option carries with it two unambiguous consequences. First, it meant that Treasury never had to make any further advances to the entities if it thought it imprudent to do so.  The GSE amounts due would just continue to accrue.  Accordingly, there could be no death spiral in which Treasury would have to make advances to prop up a worthless enterprise, and no exhaustion of Treasury’s financing commitments.  Second, this arrangement was not an open invitation for the conservators of the enterprises to squander money.  Any net distributions to the enterprises’ private shareholders, whether as dividends or distributions on liquidation, were subordinate to the government’s senior preferred stock.

It would therefore be unwise for any prudent trustee to incur higher rates of payment on the senior preferred if cash were available to make current cash dividends.  The initial deal had a built-in financial stability that worked well in all states of the world.  At no point in the documents did Treasury make reference to this decisive clause.

Similarly, the judicial treatment of the complete dividend arrangement on the motion to dismiss, no less, completely misunderstood these provisions.  That short cut is perfectly permissible if the opinions make an accurate assessment of the stated transaction.  But that was not to be had.  In the original 2014 trial court decision by judge Royce Lamberth in Perry Capital v. Lew, this additional shareholder option was perversely construed as a penalty for late payment, which therefore had to be ignored in deciding on the validity of the NWS.   Similarly, the clause was put to one side on the decision of the majority of the D.C. Circuit in Perry v. Mnuchin,  with the glib pronouncement that director of FHFA, as a fiduciary, did not have to avail himself of the one option that worked to the greatest advantage of his beneficiaries, but could instead fork over all that excess cash to the government knowing that it received nothing of value in return. Why this extreme statement? Because there is no state of the world in which the private shareholders were better off after the NWS than they were without it.  On the downside, the got no money either way.  On the upside, they got no money either, as all the cash above the standard 10 percent (or, if appropriate, 12 percent) dividend went to the government.  The government should have lost on the motion to dismiss.

The Documents.  The overall message from the published documents is in perfect sync with the basic structure of the underlying deal.  None of them are remotely privileged. The only damaging information that they contain is directly pertinent to the case, namely, on the state of mind of key government officials on the eve of the NWS. In order to best understand their impact, it is useful to examine the documents in reverse chronological order, starting with those that prepared just before the NWS was implemented.  The point is quite simple.  Whatever the earlier uncertainties, given the indications of the GSEs’ financial strength right before planned enactment, the government could have simply canceled the NWS without any public fanfare, knowing that the financial situation had stabilized.  By going forward with the NWS, the high government officials knew that the NWS was not a salvage operation to prevent the bailout from collapsing, but a calculated effort to strip all the profits from the GSEs in a no-risk transaction for the Treasury.

Thus, on the Monday, August 13, four days before the announcement of the NWS, an email from Jim Parrott to Brian Deese, takes the candid view that:

  • We are making sure that each of these entities pays the taxpayer back every dollar of profit they make, not just a 10% dividend. (emphasis in original)
  • The taxpayer will thus ultimately collect more money with the changes.
  • With the overall set of changes, we have removed any doubt about the long-term fate of these entities: they will NOT be allowed to return to profitable entities at the center of our housing finance system, but instead wound down and replaced with a system driven by private capital and lower risk to the taxpayer.

That of course is exactly what the NWS did.  The obvious reading of this document is that four days before the NWS all the relevant officials on the eve of the NWS knew that government stood to make profits in excess of the agreed 10 percent dividend rate, notwithstanding any earlier doubts Treasury and FHFA had several months prior about the expected financial performance of Fannie and Freddie.

Just before the NWS, these officials knew with certainty that there was no possibility of a death spiral in which the Treasury would constantly have to lend money to the GSEs in order to collect the required dividend from them. That result is confirmed by an earlier memo dated July 30, 2012, which announces the government’s intention to announce the changes on Friday, August 10 after the markets close.  (The actual launch date was a week later, still on a Friday in in August in order to avoid serious media attention.)  The memo’s stated rationale for the NWS was “GSEs will report very strong earnings on August 7, that will be in excess of the 10% dividend to be paid to Treasury.”  The relevant information had not changed from July 30 to the announcement of the NWS on August 17.

The next critical document was dated June 25, 2012 from Treasury official Mary Miller to Michael Stegman.  It relates that Ed DeMarco, the acting head of FHFA, had some doubts about how to proceed but no doubts about the increasing financial strength of Fannie and Freddie.  Its relevant portion reads:

  • Through weeks of negotiating terms of possible amendments to the PSPAs, he [DeMarco] never questioned the need to adjust the dividend schedule this year. Since the Secretary raised the possibility of a PR [principal reduction to benefit distressed homeowners] covenant, DeMarco no longer sees the urgency of amending the PSPAs this year.
  • He has raised two competing reasons for this new position: (1) the GSEs will be generating large revenues over the coming years, thereby enabling them to pay the 10% annual dividend well into the future even with the caps; and, (2) instituting a net worth sweep in place of the dividend will further extend the lives of the GSEs to such an extent that it would remove the urgency for Congress to act on long-term housing finance reform. He now sees the PSPA amendments as a backdoor way of keeping the GSEs alive-getting to an Option 3-type plan [calling for the separation of special purpose vehicles for good and bad assets] without the need for legislation.

For these purposes the most salient portion of the document is the acknowledgment of the large revenues that will be sufficient to cover the dividend payments in the future with the caps in place, which meant that Treasury understood that no additional advances would ever be needed.  The third option mentioned in the last paragraph refers to a position paper submitted to Secretary Timothy Geithner on December 12, 2011, or over eight months before the bailout took place. It contained a preliminary discussion of various policy options, the first of which called for restructuring “Treasury’s dividend payments from a fixed 10 percent annual rate to a variable payment based on available positive net worth (i.e. establish an income sweep). This will ensure that remaining PSPA funding capacity is not reduced in the future by draws to pay dividends.”  At the very least both Miller and Stegman knew that both Fannie and Freddie could turn profitable shortly, which came to pass to its knowledge when the NWS was put into effect in August, 2012.  This case is open and shut.

Commentaries on the released documents.  Most of the commentators who read the documents thought that they revealed that Treasury and FHFA had a full knowledge that the GSEs had turned the corner into positive territory when the NWS was adopted. Gretchen Morgenson’s article of July 23 was entitled “U.S. Foresaw a Better Return in Seizing Fannie and Freddie Profits.”  It was well understood”, she wrote “that decision to divert the profits knew that the change would most likely generate more revenue for the treasury.  She explicitly concluded that Treasury’s stated explanation, to protect the taxpayers from further losses, was contradicted by the documents which showed “as early as December 2011, high level treasury official knew that Fannie and Freddy would soon become profitable again.”

Her views were adopted wholesale by HousingWire, where once again the headline tells the whole story:  “Newly sealed documents reveal real reason for Fannie, Freddie Profit sweep:  Report:  Geithner knew in 2011 that GSEs would soon be profitable.”  Bloomberg News told the same story when it wrote “New Documents Give Hope to Fannie Shareholders seeking redress,” specifically pointing out that evidence undercut the key government claim that the NW was necessary to avert “a process known as a ‘circular draw’ or ‘death spiral.’”

The impact on litigation.  The last question is how these revelations will impact ongoing litigation.  The documents were released in connection with the Fairholme takings claim in the Federal Court of Claims.  The sound theory of that case is that government had confiscated shareholder property when it stripped them of their dividend rights, their liquidation preferences, and their voting rights—the three attributes that give shares their value. Similarly, Jerome Corsi at InfoWars stated: “New Docs Support Fannie Mae and Freddie mac Shareholders in Court: Apologist [John Carney] Ignores Evidence They Illegal Confiscated Fannie and Freddie Earnings.”

That claim is made out by an examination of the relevant documents. If these cases are treated as direct expropriation of funds, governed by the per se rule in Loretto v. Teleprompter  Manhattan CATV Corp.  the bad faith of the government should not matter.  But, if, as thus far has been the case, the NWS is evaluated under the more flexible doctrine of Penn Central Transportation Company v. City of New York this evidence fills any gap in the plaintiff’s case. Penn Central requires an explicit examination of the government reasons for imposing the sweep.

The Treasury’s bad faith of the government overrides any potential government justification for making these shareholders bear a disproportionate share of funding general government activities.  In the language of Penn Central, the NWS “has interfered with distinct investment-backed expectations,” without reference to any traditional police power concerns with health and safety.  As Justice Holmes quipped in Pennsylvania Coal v. Mahon “a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for the change.”  The government has meet its financial needs from general revenues, not by picking the pocket of the private shareholders. The takings claim therefore should be solidified by the release of these documents.

The documents revealed in the takings litigation should also influence the treatment of the various breach of fiduciary and contract claims in Perry Capital v. Lew, and in Perry Capital v. Mnuchin.  Both the trial court in Lew and the D.C. Circuit on appeal in Mnuchin let the government win on summary judgment, without the benefit of any discovery at all.  A correct reading of these documents shows that they gave summary judgment for the wrong party, the government.  But now that Mnuchin is back to the District Court on remand, it should take those documents into account in making its decision on the validity of the plaintiff’s surviving contract claims.

The first time around, the Circuit Court badly mangled the proper tests for determining expectation damages. Its decision to divide outstanding shares into different subclasses destroys the underlying market, which can function only if all shares have identical attributes.  Hence it was a huge mistake to insist that shareholder claims be fractionated so that individual shareholder expectations somehow depend whether the shares were purchased before or after the NWS was into place.  The correct answer in all cases is that shareholder expectations are fixed at the time of initial issuance and purchase of these shares, such that any resales or other transfers of those shares do not affect the nature of the contract claims.

The D.C. Circuit’s revised opinion of July 17, 2017 backs off that categorical error.  Nonetheless it still goes astray because of its failure to affirmatively state as a matter of law the correct rule that treats all shares identically.   Instead its states the relevant inquiry on remand is “whether the Third Amendment violated the reasonable expectations of the parties.”  The government knew at the time of the NWS that it was claiming more than it was entitled to.  That fact should shape the reasonable expectations of the private parties who are entitled to think that the government will not consciously abuse its power by collusive transactions that were intended to strip the shareholders of all value in a sham transaction.

The NWS benefited the government, and only the government.  The District Court cannot decide this case in an informational vacuum, but must take this information into account in determining the reasonable shareholder expectations. The abuse of NWS is as relevant to the contract claims as it is to the takings claims.  Judge Lamberth should not ignore undisputed evidence, which points to the total viability of the contract claims that the D.C. Circuit has asked him to reevaluate on remand.

Richard A. Epstein is the Laurence A. Tisch professor of Law at NYU, senior fellow at the Hoover Institution, and senior lecturer at the University of Chicago Law School.

Refinancing mortgage? Maybe you don’t need that appraisal after all

Editor’s Note:  The Fed is doing everything in its power to maintain the real estate bubble in order to maintain demand- by lowering credit score requirements, offering lower down payments (1 to 3%), and now removing the lender’s responsibility for home valuations.  What could go wrong?

http://www.miamiherald.com/news/business/real-estate-news/article157002859.html

New products could increase the number of investors shorting U.S. home loans

A sluggish mortgage-bond market could be jump-started by a new service that allows investors to short home loans.

Skeptics say the rise of derivatives on credit-risk transfer notes sold by Fannie Mae and Freddie Mac has echoes of the 2008 credit crisis, when the market plunged under the weight of collapsing subprime securities.

Fannie and Freddie – the biggest guarantors of U.S. home loans –  started transferring mortgage-default risk to bond funds and other investors in 2013 to help reduce risks to taxpayers according to Bloomberg. But the program has been generating more traction in recent months, after New York-based Vista Capital Advisors rolled out a pilot program that would eventually allow investors to bet on U.S. homeowner defaults.

Craig Phillips, a former BlackRock executive serving as head of financial markets advisory and client solutions for the Treasury Department, said credit-risk transfers will be core to U.S. housing policy.

The madness begins again with creative new derivatives and credit risk transfers that put the risk on the taxpayer.

Fannie, Freddie cut mortgage modification interest rate for first time in 2017

After four months of leaving the benchmark interest rate for standard mortgage modifications (not including HAMP mods) at an 18-month high, Fannie Mae and Freddie Mac recently announced that they are cutting the benchmark rate.

Back in January, Fannie and Freddie increased the standard mortgage modification benchmark rate from 3.875% to 4.25%. That level is the highest the benchmark rate has been since July 2015.

Now, Fannie and Freddie are cutting the benchmark rate slightly, but leaving it above 4%. The government-sponsored enterprises announced last week that they are cutting the benchmark rate to 4.125%.

The January hike marked the second straight month of an increase, after Fannie and Freddie dropped the benchmark rate throughout 2016, progressively decreasing it below 4%.

The increases also came after the GSEs dropped the standard mortgage modification benchmark interest rate to the lowest level ever, 3.5%, in August 2016.

Then, the GSEs increased the benchmark rate from 3.5% to 3.875% in December, before hiking it well above 4% in January.

And now, they’re cutting it back a bit.

The benchmark rate tracks with prevailing market rates, and the most recent data from Freddie Mac shows that interest rates have generally been the decline (with some slight modulation) over the last several months.

The standard modification program is “designed to help those borrowers who are ineligible for the Home Affordable Modification Program.”

According to the GSEs, the standard modification program is “designed to help those borrowers who are ineligible for the Home Affordable Modification Program.

Therefore, the new rate does not extend to HAMP borrowers.

The new 4.125% interest rate took effect on May 12, 2017.

CitiBank Whisteblower Richard Bowen: They’re Back! Fannie and Freddie Ride Again

By Richard Bowen

http://www.richardmbowen.com/theyre-back-fannie-and-freddie-ride-again/

It looks as if Fannie Mae and Freddie Mac have not learned from their previous enabling of banks leading to the financial crisis. In fact, it looks as if the two are still using the same business model; they are lowering even further their underwriting standards to allow loans to be underwritten, ignoring student, credit card and auto loans supposedly “paid by others.” Didn’t this kind of tactic fail before? 

Their creativity now extends to former college students who are so heavily burdened with student and other debt, so why not excuse the debt? Why not change the rules and allow mortgage lenders to ignore the debt that would prevent many students out of school to not be able to buy homes, cars, etc? Why not put them into more debt, not less and oh, by the way, maybe cripple the economy as they helped do before?!

Fannie Mae has just released new rules allowing millennial borrowers to exclude student loans, credit cards and auto loans that are “paid by someone else” when they are applying for a new mortgage. To further incent, taxpayer subsidized mortgage loans can also now be used to repay student debt.

According to Jonathan Lawless, Vice President of Customer Solutions, Fannie Mae, ”We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution, …. These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”

And, ironically, the person in charge of cleaning up these Wall Street rules is Craig S. Phillips, a former top executive on Morgan Stanley’s trading desk, who is now in charge to head up the effort to reform the Government-Sponsored Entities, Fannie Mae and Freddie Mac. At Morgan Stanley, Mr. Phillips headed a division that sold billions of dollars of toxic mortgages and mortgage-backed securities to Fannie, Freddie, and others.

Just this last April, Gretchen Morgenson of the New York Times wrote in an article that Mr. Phillips, then  leader of Morgan Stanley’s mortgage desk during the peak mortgage-mania years of 2004 and 2005, ran the operation that bundled loans and sold them to the two government-sponsored enterprises and many others. The loans blew up, the government sued Morgan Stanley and Mr. Phillips was a named defendant in the initial case — a case that resulted in the firm paying a $1.25 billion settlement. 

Discussing the financial crisis in December 2008 at the National Press Club, Phillips said he felt terrible about the level of government support of the financial system at that time, but government actions such as injecting capital were “critical because we can’t have systematic failure and a breakdown in all markets.” 

As I commented in a recent article, before the 2008 debacle the push was on to make housing affordable for everyone, and Congress gave directives to loosen the underwriting standards. And, although this was certainly one of the reasons Fannie and Freddie had such catastrophic losses, I strongly believe that the primary reason Fannie and Freddie had the huge losses was that they purchased many, many mortgages which did not even meet that lowered bar of creditworthiness. That is, they did not review the individual mortgages purchased but relied almost solely upon false certifications by the large bank sellers that the mortgages sold met the published standards. 

It was a perfect storm: a lack of controls, the implicit guarantee the government would stand by the loan, and the assumption that the institutions doing the lending wouldn’t go under and were providing true certifications. No one was checking. It was a circus! And still continues to be one!

The more mortgages were purchased, the more incentives went straight to Fannie and Freddie and their executives, until their collapse, when they were bailed out and placed into conservatorshipThen, in a move some have described as nationalizing the entities, the US Treasury started taking all of their profits, thus ensuring they would never be able to rebuild a capital base.

Our country is now faced with the dilemma of what to do with Fannie and Freddie. Should they be recapitalized and returned to private ownership, or should another path more favorable to the large banks be followed?

What to do with Fannie and Freddie is a huge decision now facing President Trump’s administration. Bad enough we’re encouraging – read enabling, those who may not be able to afford more debt to do so. Yet to appoint someone with Mr. Phillips’ less than clean hands to make this decision is a travesty.

H.R. 1694 Passes: Fannie and Freddie Open Records Act of 2017

Homeowners start preparing your Fannie and Freddie FOIA requests.  A brief window to submit your request may occur prior to the GSEs being privatized again.

Last week H.R. 1694  passed in the House of Representatives.

This bill will make Fannie Mae and Freddie Mac subject to the requirements of the Freedom of Information Act, which would make their records available to the public on request.

The Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) are government-sponsored enterprises (private corporations with federal charters that confer special privileges) that buy mortgages from lenders and either hold those mortgages in their portfolios or package the loans into mortgage-backed securities that may be sold.

To stabilize the housing market in the aftershock of the financial crisis, the Federal Housing Finance Agency (FHFA) used its authority in 2008 to place Fannie Mae and Freddie Mac into its conservatorship. In conservatorship, the government takes control of a failing financial institution with the goal of returning it to financial health and stockholder control. Well into their eighth year in conservatorship, they have operated under government control for longer than initially expected.

The Freedom of Information Act (FOIA; 5 U.S.C. §552) allows any person—individual or corporate, citizen or not—to request and obtain existing, identifiable, and unpublished agency records on any topic. Pursuant to FOIA, the public has presumptive access to agency records unless the material falls within any of FOIA’s nine categories of exception. Disputes over the release of records requested pursuant to FOIA can be appealed administratively, resolved through mediation, or heard in court.

Source: Republican Policy Committee

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