The Federal Housing Finance Agency and the Treasury Department illegally implemented the so-called sweep amendment last summer that altered Fannie Mae’s and Freddie Mac’s preferred stock purchase agreements to seize nearly all the two GSEs’ profits, in direct violation of the 2008 conservatorship legislation, according to investors’ lawsuits filed in federal court last week. Unlike the initial litigation filed by investors last month that challenges the entire 2008 government takeover of Fannie and Freddie, the separate suits filed by hedge-fund Perry Capital and by Fairholme Capital Management claim that Treasury’s August 2012 amendment to the preferred stock purchase agreements violated the Housing and Economic Recovery Act of 2008, which placed the GSEs in conservatorship.
Fannie Mae and Freddie Mac are both widely recognized entities in the collective mind of the general public, but more than half of those surveyed hold a “nearly toxic” image of the two GSEs, according to a new poll released this week. Conducted by ONMessage Inc. on behalf of the American Action Forum, the poll noted that 72 percent of respondents knew of or “widely recognized” Fannie and Freddie. The survey consisted of 1,200 likely voters from 18 congressional districts.
As expected, the president’s nomination of Rep. Mel Watt, D-NC, to head the Federal Housing Finance Agency was approved late this week by the Senate Banking, Housing and Urban Affairs Committee. Also as expected, the committee voted 12-10 strictly along party lines to advance Watt’s nomination to the full Senate, where it awaits a vote on confirmation. “As Congress continues to seek consensus on a long-term solution for our housing finance system, we need a Senate-confirmed director in place at the Federal Housing Finance Agency,” said Committee Chairman Sen. Tim Johnson, D-SD. “Congressman Mel Watt is well qualified to lead the FHFA in its conservatorship of Fannie Mae and Freddie Mac, and he too should be confirmed without delay.”
The Federal Housing Finance Agency’s official watchdog recommended in a report this week that the agency devise a way to measure how its guaranty fee hikes of the past two years have actually increased the participation of private investment in the mortgage-backed securities sector. As Fannie Mae’s and Freddie Mac’s conservator, the Finance Agency directed the GSEs to increase their guaranty fees as a means to encourage greater private-sector investment in mortgage credit risk, reduce their dominant position in housing finance and limit potential taxpayer losses, the FHFA Office of Inspector General report noted. “The enterprises’ average combined guaranty fees have nearly doubled since 2011 – due to legislation and FHFA’s initiative – and FHFA plans further gradual guaranty fee increases to spur private-sector mortgage investment,” said the OIG. “However, it is not yet clear how high FHFA must increase guaranty fees to achieve its objectives.”
California remains the top source of new single-family mortgages for Fannie Mae and Freddie Mac, even as Fannie remains the dominant GSE in terms of production through the first half of the year, according to an Inside The GSEs analysis. A total of $160.3 billon home loans on Golden State properties were securitized by the two GSEs during the first six months of 2013, accounting for 23.1 percent of their total business for the half year. That was up 21.2 percent from total California production during the first six months of 2012 as the overall GSE market rose 20.2 percent from a year ago.
While Congress drafts and debates different legislative remedies to GSE reform that could take at least two years to materialize, regulators and administration officials can, and must, begin to act now to implement a mortgage finance solution, the head of the Mortgage Bankers Association said this week. At a press briefing, MBA President and Chief Executive Officer David Stevens rolled out the trade group’s five-point plan – “Key Steps on the Road to GSE Reform” – that could be immediately implemented by the Federal Housing Finance Agency and/or by Fannie Mae and Freddie Mac without the need for authorizing legislation and without disrupting the housing finance system. “Given the recent market recovery, some worry that if the status quo were to change, lenders could end up being in a worse position and lose some of the parity gained,” said Stevens. “We believe these steps are extremely important to support a competitive, robust and sustainable housing finance system regardless of the ultimate path taken by policymakers in Washington.”
A Manhattan federal judge earlier this month dismissed a class-action lawsuit against Standard & Poor’s Financial Services after finding no evidence that the rating agency defrauded investors when it gave a favorable rating to Fannie Mae stock prior to the financial crisis.The suit, filed in December 2012 on behalf of potentially hundreds of thousands of investors who bought stock in an offering by Fannie in May 2008, four months before the GSE was taken over by the government, alleged that S&P knowingly misrated Fannie’s stock. Valued at about $25 per share when it was issued, the stock dropped to about $3 per share after Fannie’s government conservatorship began in September 2008.
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