“Solid” Fannie-Freddie earnings are a foundation for mortgage giants’ next act (EPS Miss)

MarketWatch – Fannie Mae FNMA-3.02% and Freddie Mac FMCC-2.57% on Thursday reported earnings that reflected a healthy, yet slowing, housing market, even as weighty questions about their future swirl.

The two enterprises are at the heart of the American housing finance system: they buy mortgages from banks and other lenders, enabling lenders to extend credit for longer periods than would be possible if they had to keep the loans on their own balance sheets, and, presumably, open up the housing market to a larger swath of the population. Throughout 2018, the two companies together funded approximately 3.2 million mortgages.

In the fourth quarter, Fannie had net income of $3.2 billion, and Freddie had $1.5 billion. The two enterprises are still in government conservatorship, as they have been since the 2008 financial crisis, and will sweep those profits over to the U.S. Treasury in March, while continuing to retain a slim capital buffer of $3 billion each.

It is difficult to compare the companies’ financial results to the year-earlier quarter because that’s when changes in the tax laws left both with hefty accounting losses. Compared to the year ago quarter, Fannie’s pretax income fell to $4.06 billion from $4.96 billion, while Freddie Mac’s dropped to $1.39 billion from $3.82 billion.

Despite Fannie and Freddie’s positive net income, analysts were expecting even higher earnings. Take Fannie Mae, who earnings have generally fallen as the housing market cools.

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But FF’s equity has soared recently on specualtion of Fannie and Freddie being released from Treasury bondage.

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On Thursday, the Trump administration’s pick for head of the regulatory agency overseeing Fannie and Freddie, Mark Calabria, is facing the Senate Banking Committee. As MarketWatch was first to report, the interim director of the regulator, the Federal Housing Finance Agency, has already begun working with Treasury to lay out a long-term vision for the American housing finance system, finally freeing the two companies from conservatorship.

If he is approved, Calabria’s responsibility will include two companies that look vastly different than the entities that helped plunge the U.S. economy into turmoil about a decade ago. In the fourth quarter, Fannie’s serious delinquency rate was just 0.76%, and Freddie’s was 0.69%, both near historical lows. Both companies continue to experiment with additional ways of selling slices of their portfolio to private-market investors, in order to spread the risk more broadly. And they continue to work toward the issuance of a single bond, a step that aligns their fortunes more closely, rather than intensifying the competition between them.

Being released from conservatorship can mean many things. One, they became private corporations again (but who or what will provide their capital buffer?). Second, they could be shut down (likely gradually) and the private market takes care of securitizing residential mortgage loans. And about 5,000 other proposals, most are just more of the same.

But this is Washington DC, and they will tell “we the people” as little as possible.

Here is the link to Mark Anthony Calabria’s hearing testimony that began at 10am. Perhaps Calabria will shed some light on what he plans to to as FHFA Director.

Here is a photo of both Mark Calabria and I testifying in the House. Calabria looks like he is thinking “What is Sanders going to say?”

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US Economy Growing Above Long-run Trend Without Sustained Inflation (As Gov’t Measures Inflation)

The good news? The US economy is growing above the long-run trend. But without sustained inflation.

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At the last reading Core Personal Consumption Expenditure (PCE) growth was only 1.88%. Compare that to home prices growing at 4.7% YoY (CS) and FHFA’s Purchase Only YoY at 5.76%.

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Zillow’s rent index for all homes YoY is only 0.485, well below The Fed Funds Target rate and Core PCE growth. And The Fed Funds Target rate is above Core PCE growth.

Here is a closer look at the past year. Rising Fed Funds Target rate, stable inflation (Core PCE YoY), decling house price growth and continued balance sheet undwinding.

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Dust Their Brooms: Should Lehman Bros Have Been “Surprised” By Their Sudden Illiquidity? (Bear Stearns Then Fannie Mae And Freddie Mac’s Stock Price Already Plunged)

Movies like “Margin Call” and “The Big Short” make the financial crisis look like a total surprise … to them. Well, it wasn’t a surprise to GSEs Fannie Mae and Freddie Mac. Their common stock prices (green line) began plummeting in December 2007. Lehman Bros stock price didn’t start plummeting until February 2008.

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Why? National home prices had peaked in 2006 and had slowly begun to retreat. But as of December 2007, the Case-Shiller national home price index had fallen 17.4% from the peak in 2016. Subprime delinquencies had risen 46.5% over the same period. U-3 unemployment started rising in a big way in 2008.

But as home prices nosedived in 2008, subprime delinquencies skyrocketed. You can see Fannie Mae’s large drop in price in November 2008 (while they didn’t purchase subprime loans in high volume, they did invest in subprime ABS and ALT-A loan deals). While ALT-A turned out to suffer big losses, they performed better than subprime after the intial subprime spike.

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On September 6, 2008, Fannie Mae and Freddie Mac were placed into conservatorship with their regulator, FHFA and remain there ever since. Also in September, Lehman Bros declared bankruptcy … afer Fannie Mae and Freddie Mac were placed into conservatorship.

*There was other lenders that failed or had to be absorbed elsewhere, like Countrywide, and Wachovia.

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But Fannie Mae, Freddie Mac and Lehman Bros demise came AFTER Bear Stearns demise in March 2008, owing to subprime deal failures. In fact, you could see trouble brewing shortly after home prices started to fall. By 2007, both Bear and Lehman were showing distress, but not Fannie Mae. Fannie Mae and Freddie Mac’s regulator, FHFA saw the warning signs with subprime and took action on September 8th (maybe prematurely since they could have continued).

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Congress bailed out the banks and Fannie Mae and Freddie Mac and swept the financial dust away (aka, dust their brooms).

Just look at the above chart. Starting in 2016, risk managment at all financial firms should have been on yellow alert. By Q4 2007, it should have been upgraded to red alert. How is it possible that Lehman Bros or Bear Stearns (or Goldman Sachs) were taken by surprise as Margin Call implied.

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Oh well.

Fannie-Freddie Soar on FHFA Chief’s Conservatorship Comment (What Is Hip?)

Joseph Otting is the acting director of FHFA while Mark Calabria is Trump’s nominee to be the new FHFA director and Fannie Mae – Freddie Mac regulator.

(Bloomberg) — Fannie Mae and Freddie Mac shares soared Friday amid fresh reports that the Trump Administration is working on proposal that would recommend freeing the mortgage-finance giants from government control.

Joseph Otting, acting director of the Federal Housing Finance Agency, commented on the administration’s plans at an internal gathering to introduce himself to staff and establish open lines of communication, an FHFA spokesperson said in a statement. MarketWatch reported on the meeting earlier Friday.

Otting mentioned, as he previously has, that the Treasury Department and the White House are expected to release a broad plan for housing that will include details about reform and will likely include a recommendation for ending Fannie and Freddie conservatorships, the FHFA spokesperson said. Treasury Secretary Steven Mnuchin has said that the Trump administration wants to end government control of the companies, and Otting intends to work to advance that plan, the spokesperson said.

Shares of Fannie rose more than 31 percent to $2.37 and Freddie Mac climbed 24 percent to $2.25 at 2:05 p.m. in New York. The increases were the biggest since November 30, 2016, when then-Treasury Secretary nominee Mnuchin first said getting the companies out of the government’s grip was a priority.

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Investors in the two companies, which have been under U.S. control since the 2008 financial crisis, have been optimistic that President Donald Trump’s appointees at Treasury and FHFA will allow them to reap a windfall by ending the conservatorship. Hedge funds, including Paulson & Co. and Bill Ackman’s Pershing Square Capital Management, are among the companies’ biggest shareholders.

Fannie and Freddie don’t lend. Instead, they underpin the mortgage market by buying loans from banks, packaging them into securities and making guarantees to investors in case borrowers default.

The statement by Otting, who is serving as interim FHFA director in addition to heading the Office of the Comptroller of the Currency, corroborates earlier reports that the administration is working on a plan. Still, the FHFA spokesperson didn’t offer details on what might be included in any proposal, such as whether Treasury would call for releasing the companies without Congress passing legislation.

Mnuchin has long promised to deal with Fannie and Freddie but two years into the Trump administration he has yet to outline specific steps he wants to take. That’s prompted many lobbyists and housing-policy analysts to question whether there’s an urgency to take bold measures.

Walt Schmidt, head of mortgage-backed securities research at FTN Financial, said he’s skeptical the White House would want to mess with U.S. housing policy with Trump gearing up for a re-election campaign. Any plan could be received poorly, underscoring the fact that the issue poses political risks with uncertain upside.

“The whole GSE system and conservatorship is fairly intractable because of the political ramifications around housing,” Schmidt said. “I don’t know why the administration would want to upset one of the pillars of our economy so significantly going into the next presidential election.”

Will Mark Calabria rock the housing finance boat? Mark is a seasoned DC insider and has worked with the National Association of Homebuilders, so he knows the importance of housing to the US economy. I haven’t talked with Mark since we ate dinner at BLT Steakhouse in DC a while ago when he was still at The Cato Institute.

But will Fannie and Freddie be set free as in  “Let my GSEs  people go.”  Or will Calabria shut them down and turn over housing finance to the largest banks for mortgage origination  (in this case, Quicken Loans)?

It is difficult to tell if anything will be done. It also be could be the Zandi/Parrot model of expanding Fannie/Freddie’s role in mortgage markets or Calabria’s notion of shrinking their footprint. It really depends on “What is hip?” in Washington DC.

Below is Mark Calabria  pleading  to Let Our GSEs Go!. Or will he?

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