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Showing posts with the label Fannie Mae and Freddie Mac

Hearing on the link between Fed Policy and Bank Supervision (Frank Hung, Intern)

We attended the hearing held by House Financial Services Committee on Wednesday March 17, 2010. Among the speakers:

The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve

The Honorable Paul Volcker, Chairman of the President’s Economic Recovery Advisory Board, Former Chairman of the Federal Reserve

Their testimony focused on interest rates and government guarantees, such as those granted Fannie Mae and Freddie Mac. One Congressman asked if holding rates too low for too long causes inflation? Bernanke indicated he is watching economic trends closely will move rates up or down in order to avoid future economic problems. He stated that arbitrage opportunities still happened and that, based on current reports and research, demand is still lower than the full employment level. He noted that low interest rates can stimulate consumer expenditures and alleviate the unemployment problem.

He also stated that the Fed cooperates with other regulatory agencies in superv…

Plot to destroy Fannie Mae data

According to the Washington Post, "A fired Fannie Mae contract worker pleaded not guilty on Friday to charges he planted a virus designed to destroy all the data on the mortgage giant's 4,000 computer servers nationwide, according to federal prosecutors.

If the virus had been released as planned on Saturday, the Justice Department said the disruption could have cost millions of dollars and shut down operations for a week at the largest U.S. mortgage finance company.

Rajendrasinh B. Makwana, 35, of Glen Allen, Va., pleaded not guilty Friday in U.S. District Court in Baltimore to one count of computer intrusion, the U.S. attorney's office said."

Fannie and Freddie

Of course, the US Treasury forced Freddie and Fannie into "Conservatorship."

According to FHFA Director James B. Lockhart and the Treasury, "Conservatorship is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate (Fannie and Freddie) until they are stabilized.

There are several key components of this conservatorship:

First, Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.

Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.

Third, as the conservator, FHFA will assume the power of the Board and management.

Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the tr…

Freddie, Fannie and Socially Responsible Investors

Here is what we think happened.

Freddie and Fannie became arrogant, in that way that says: we know more that you do, we know more that you ever will, we are smarter, better paid and better looking than you. They were right, for a time. But time always runs out.

They were "socially responsible" companies of long standing, the originals, immune to either criticism or improvement. Their attitude, financial and reputational strength gave them great power, power they misused.

Deregulation supported them on the upside and failed them on the downside. They should have stopped abusive home mortgage market lending practices, as we suggested in 1995 and 2001, but found themselves turning up the heat on a housing market mania that required fraudulent practices. Generating income and increasing "shareholder value," became the order of the day. Managers at Freddie and Fannie were caught up, too. They wanted their share of the American Pie, even if that meant turning the oven up …

Socially Responsible Investors and the Housing Bill (Amy Rosenthal, Peter Murray, Angela Wang)

We anticipate that the Housing Bill will impact socially responsible investors via it's impact on low and moderate income communities. Mortgage borrowers will win; lenders will suffer some losses. Several sections in the law (for example, rules concerning disclosure) will now force lenders to fully explain to borrowers exactly how mortgage loan payments work. In addition, new borrower counseling programs are created to provide advice to borrowers.

The bill’s first impact on social investors will come in the form of block grants given to the states. These block grants are meant to spur investments in troubled neighborhoods. Many times, foreclosed homes drive down property values in the neighborhood, leading to more foreclosures. The grants are targeted to areas with large amounts of foreclosed properties, and will help to prevent domino effect cited above. Low to moderate income communities, which have been hit hardest by the increase in foreclosures, should specifically bene…

Federal Reserve Chairman Ben Bernanke’s Monetary Policy Report to the Senate Banking Committee (Emerson Bluhm)

In his semi annual Monetary Policy Report to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke spoke about the current troubles in the economy, the future outlook and the FED’s plans to help the economy return to health. With an average of 94,000 jobs lost per month over the last six months, unemployment at 5.5%, home prices falling, rising inflation, soaring commodity prices and trouble at Freddie Mac and Fannie Mae, Bernanke was less than optimistic about the economy over the next year, forecasting extremely slow growth. While he claimed that the U.S. is technically not in a recession by a textbook definition, he acknowledged the hardships many Americans are facing with extremely low consumer confidence, declining wealth, and rising food and energy costs.

According to the Chairman, the housing crisis and rising commodities prices are at the center of the current economic problems. Bernanke told the committee that he believes the Treasury Department’s plan to ba…

Freddie and Fannie: What should be done now

Our recommendations for dealing with the housing GSEs are as follows:

1. Freddie Mac should be closed. Having a second housing GSE was supposed to provide competition and serve as a check on the first housing GSE, Fannie Mae. Clearly, this did not work. No need to continue, so:
2. Merge Freddie and Fannie. Instead of two failing agencies, we now have one. Allows for a concentration of focus, effort. Stabilize the resulting institution.
3. After one year, move Fannie back into HUD. Fannie Mae was separated from HUD in 1968. Time to reverse this. Moving Fannie into HUD extends the full faith and credit guarantee umbrella.

Time to revise the housing GSE experiment.

Mortgage GSE's, Predatory Lending and Minority Banks

The Washington Post reported yesterday that "government-chartered mortgage funding companies Fannie Mae and Freddie Mac .. shares rose on speculation that regulators may relax restrictions on their investments to allow them to pick up slack in the troubled market for home loans." We believe equity markets will trend to the downside until the end of 2007, but believe an increase in lending limits will be good, over the long run, for both mortgage and stock markets.

We believe troubles at Fannie and Freddie allowed predatory lenders to enter the mortgage market in full force. While there is no question that Fannie and Freddie were hurt by their own fraudulent practices, large and small predatory lenders, using groups like FM Policy Focus as a shield and a proxy, were able to obtain a greater share of the profits being generated by an overheated home mortgage market. Significant profit increases depended, however, on an ability to engage in predatory practices. Given distraction…