Getting From Here to There

Since Fannie Mae and Freddie Mac were forced into conservatorship in 2008, they have faced two daunting uncertainties: their near-term fates in that conservatorship, and their long-term fates in mortgage reform. The two are interrelated, and resolution of the first almost certainly will affect resolution of the second.

Before addressing why this is so, it’s useful to recap how we got to where we are.

In the mid-1970s, the U.S. had a deposit-based mortgage finance system: nearly three-quarters of all single-family mortgages were made and held by thrift institutions and commercial banks (with thrifts’ holdings being roughly three times those of banks). Two successive thrift crises—the first in the late 1970s triggered by deposit deregulation and the second in the late 1980s triggered by asset deregulation—caused that system to collapse. Thrifts’ share of single-family mortgages financed plunged from 57 percent in 1975 to just 17 percent in 1995. Financing by Fannie and Freddie filled almost the entire gap. The companies’ ability to tap the international capital markets for mammoth amounts of low-cost fixed-rate mortgage funding enabled the U.S. mortgage finance system to undergo a seamless transition from a deposit-based to a capital markets-based system, with little discernible adverse effect on homebuyers. At the end of the 1990s, Fannie and Freddie either owned or guaranteed more than 40 percent of all outstanding single-family loans, up from less than 5 percent 25 years earlier.

Fannie and Freddie’s rise to prominence as sources of mortgage finance coincided with a period of tremendous concentration of assets and originations among mortgage lenders. In 1990, the top 10 U.S. banks held 26 percent of banking assets; in 2000 that same share was over 50 percent. There was comparable concentration among mortgage originators. The independent mortgage banking company virtually disappeared between 1990 and 2000 (Countrywide being the prominent exception), with most being acquired by banks. During that same period the origination share of Fannie’s top 10 customers more than doubled, rising from 17 percent to nearly 40 percent.

We entered the 21st century, therefore, with Fannie and Freddie dominating mortgage financing in the secondary market, and large banks dominating mortgage originations in the primary market. It was a relationship that worked efficiently: the cost of origination came down, credit was widely available, and underwriting standards were disciplined so both credit losses and guaranty fees remained low. But the relationship also was fraught with tension. The standards Fannie and Freddie set for their secondary market operations placed severe constraints on banks’ operations in the primary market, specifically their product offerings, pricing and profitability. The large banks, in particular, chafed under those constraints. At the time the U.S. residential mortgage market was the largest credit market in the world (the Federal budget had temporarily gone into surplus, and Treasury debt was shrinking). Banks did not wish to cede control of that market to Fannie and Freddie, and what I refer to as the “mortgage wars” began.

It is critical to understand that the mortgage wars were fought not over who could provide the lowest-cost or safest mortgages to homebuyers, but to determine who could get the most power in the mortgage market and thus command the flow of profits from it. The fight took place at a time when the principal financial regulators, the Federal Reserve and the Treasury, were embracing free market principles and declining to police any lending practices or mechanisms. In that environment, the combatants had free rein to turn underwriting from a tool to prevent losses into a weapon to produce market share. They did this to an unprecedented degree, with the subsequent “race to the bottom” in lending standards resulting in a cascade of bad loans and uncontrolled overheating in the housing market that once underway sped to an inevitable meltdown.

The great irony in this meltdown was that, as it was occurring, the two entities whose regulatory policies created the conditions that led to it—the Fed and the Treasury—were given extraordinary latitude to create winners and losers out of the carnage. Fannie and Freddie had by far the best lending practices of any sources of mortgage credit leading up to the crisis, but consistent with longstanding Fed and Treasury policy objectives they were singled out for punitive treatment. With no basis in statute, and against the companies’ will, Fannie and Freddie were put into conservatorship and saddled with a senior preferred stock purchase agreement designed to enable their conservator, FHFA, to bury them under a mountain of non-repayable senior preferred stock intended to keep them in conservatorship until Treasury or others could figure out a way to replace them.

Replacing Fannie and Freddie, however, turned out to be a much more challenging task than anyone, including Treasury, had counted on. In part this was because the companies were so successful: their business model works, while most alternatives to them do not.

All of which brings us to where we are at present. At Treasury’s direction, FHFA has been managing Fannie and Freddie not to prepare them for release from conservatorship but to ultimately wind them down. We now know from the “Promising Road to Mortgage Reform” proposal released in late March that the current plan of what I call the Financial Establishment—large banks and Wall Street firms, and their supporters at Treasury and elsewhere—is for Congress to at some point turn Fannie and Freddie into a single government corporation with an explicit federal guaranty on its securities. Consistent with this goal, FHFA has required the companies to collaborate on building a common securitization platform, and mandated that they do the types of securitized risk-sharing transactions the Financial Establishment would like to see become the standard means of managing mortgage credit risk in the future.

There is, however, a huge potential roadblock in the “Promising Road,” and that is the plethora of lawsuits challenging Treasury and FHFA’s treatment of Fannie and Freddie, not just with the net worth sweep but prior and subsequent to that action as well. To get around that roadblock, Treasury and FHFA must prevail in the lawsuits. Oral argument on April 15 in one of those cases—the appeal of Judge Lamberth’s September 30, 2014 lower court decision dismissing a suit brought by Perry Capital—highlighted just how hard it will be for them to do so.

In dismissing the Perry Capital case, Judge Lamberth held, among other things, that the language in the statute governing FHFA’s management of Fannie and Freddie in conservatorship (the Housing and Economic Recovery Act) made FHFA immune from legal challenge no matter how egregious its conduct. Lamberth seemed sufficiently confident in his opinion on the law that he did not require FHFA to produce a full administrative record of the facts. Based on my reading of the transcript of the appeal’s oral argument, and the readings of many legal analysts, at least two of the three judges on the appeals court panel, Judges Ginsburg and Brown, disagree with Lamberth’s ruling on the law. If that interpretation is correct, Lamberth’s ruling has little chance of being affirmed; it either will be vacated and remanded to his court for further fact-finding, or be reversed, invalidating the net worth sweep.

I would not rule out reversal, but believe it more likely that the Perry Capital case will be remanded to Lamberth’s court, with instructions to develop a complete administrative record. Remand would allow the net worth sweep to remain in place for a while longer, but it still would not be a good development for the government. It would mean that in both the District Court and Judge Sweeney’s Federal Court of Claims, judges will have opined that facts matter. And if facts matter, what Treasury and FHFA did with Fannie and Freddie in 2012 with the sweep, and currently are doing with the companies in their management of them in conservatorship, at some point will be judged to be illegal. The only question is when.

The “when” on the net worth sweep is not easy to predict, because it depends on which court rules first. It probably is least likely for the first ruling to come from Sweeney’s Court of Claims. While Sweeney seems to have lost patience with the government’s foot-dragging on document production and excessive claims of privilege (saying in her ruling to release the seven documents prior to the Perry Capital oral argument, “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 calendar she has set will take her at least a year to determine if her court has jurisdiction in the case. More likely to see the first net worth sweep ruling is Jacobs-Hindes in the Delaware District Court. That case currently is on hold pending a FHFA request to a Multi-District Litigation (MDL) panel to consolidate it with other District Court actions. But the MDL panel should rule on this request in early July, and I expect it to allow Jacobs-Hindes to remain in Delaware. If it does, the point of law in that case is straightforward—the suit claims the net worth sweep is illegal under Delaware state law, and is void ab initio—so it should proceed expeditiously, and very likely be decided in favor of the plaintiffs.

If and when the net worth sweep is overturned, there will be two possible remedies. The first would be for Treasury to write checks to each company for the difference between what they paid since the sweep began and what they would have paid had the 10 percent senior preferred stock dividend remained in effect. Currently that is about $130 billion—$79 billion to Fannie and $51 billion to Freddie—although those numbers should decline somewhat as time goes on, since the companies’ normalized earnings are likely to be less than their annual dividend requirements. Treasury might prefer this option, but it is not feasible politically because it would require a massive cash outlay that would increase the deficit. That makes the only practical alternative the second remedy: retroactively crediting all net worth sweep payments in excess of the companies’ original quarterly dividend payment as reductions in their amounts of senior preferred stock outstanding.

If done soon, this second method of unwinding the net worth sweep would not require Treasury to pay out any cash at all. Assuming that Treasury pays the same 2 percent per annum on its excess collections in the net worth sweep as the IRS pays on corporate tax overpayments, I calculate that unwinding the sweep would leave Fannie with about $12 billion in outstanding senior preferred stock at the end of 2015, and Freddie with about $5 billion. (The interest payments amount to only about $5 and $3 billion, respectively.) The longer the net worth sweep remains in place, however, the more likely it is that Treasury will have to make an outlay even under this option. Fannie could fully pay off its senior preferred stock with about $10.5 billion in net income this year, and Freddie could do so with about $5 billion in net income.

A ruling against the net worth sweep and an unwinding of the senior preferred stock (and removal of its 10 percent dividend), which I believe are now likely, would significantly change the dynamic of mortgage reform. Fannie and Freddie each would be operating successfully and profitably, be able to retain all (or nearly all) of their retained earnings to build capital, and be able to raise capital publicly. At the same time, an adverse ruling in a net worth sweep case would focus attention on Treasury’s true motives for having taken the companies over in the first place. With the alleged dangers posed by the continued existence Fannie and Freddie seen as the fabrications they are, it would be much more difficult to justify the risks of replacing them with untested alternatives—particularly those that raise costs for homebuyers to the benefit of financial institutions.

I have long felt that the biggest danger we face in mortgage reform is not inaction, as bad as that is, but doing something that sets the system back, whether in terms of cost, access or risk. To date there have been nine essays published by the Urban Institute in its “Housing Finance Reform Incubator” series, and they contain a rich mix of ideas. Some are promising, some are uninformed or misguided, and a few are dangerous. (I will have more to say about the essays in subsequent posts.) But if we as a nation can have a serious debate about these and other alternatives at a time when the myths about what happened during the previous crisis have been dispelled, we will greatly increase our chance of getting mortgage reform right, and avoiding serious mistakes. Developments in the court cases over the past few weeks leave me optimistic that the conditions that could produce such an outcome may be present before too much longer.


[A note to readers: This coming Saturday I will be leaving for a month of travel outside the country, returning on June 4. While away it is unlikely I will do much if any posting, and because I will not be checking this site nearly as often as I have since it was launched my response to questions and comments will be slower, and probably less frequent.]

147 thoughts on “Getting From Here to There

  1. Tim,

    Hank Paulson officially spoke about illiquid non-performing loans clogging the financial system as the major problem in 2008.

    How was this problem solved?
    How did the financial system got rid of illiquid loans, who owns these assets now and in what form?
    What measures really contributed in resolving financial crisis and are helping to resuscitate the U.S. economy?
    What measures did not help?

    An article with facts and analysis will be of great help to many and will also serve as historical document from an independent expert. This article may provide a good context to your article “Fixing What Works”.

    Liked by 1 person

    1. The problem in 2008 was that uncertainty about the true value of banks’ subprime and other high-risk residential mortgages caused the prices of those mortgages to plunge, calling into question selected banks’ solvency and in turn triggering a flight of short-term credit (and deposits) from those banks. The Federal Reserve and Treasury “solved” that problem by making trillions of dollars in short-term credit available to the banks–lending to them based not on the current market value of their mortgages, but on their normalized “long-term” value, which was much higher. (Both the valuation of bank mortgages and the volume and terms of the credit extended to banks stood in sharp contrast to how the Fed and Treasury were treating Fannie and Freddie during essentially the same period.)

      The financial system didn’t “get rid of” its illiquid loans; it was able to take advantage of massive volumes of short-term, low-cost repayable loans from financial regulators–together with temporary injections of equity using TARP money– to ride out the period of illiquidity. Ultimately, market prices of toxic mortgages did come back up to levels more representative of their ultimate economic value. Banks still own the vast majority of those loans, but they no longer threaten their solvency.

      Liked by 2 people

        1. Fannie and Freddie’s refinancing program–the Home Affordable Refinance Program, or HARP–was used only for loans the companies already owned or guaranteed, while the mortgage-backed securities acquired by the Federal Reserve (with a current balance of $1.74 trillion, up from zero pre-crisis) are limited to “agency MBS,” that is, Fannie Mae, Freddie Mac and Ginnie Mae securities. Neither of these programs were used to relieve banks of their holdings of high-risk or low quality mortgages.

          Liked by 1 person

  2. Tim,

    Is it true that Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as in below bloomberg article?

    Does not this contradict all the narratives FHFA/Tsy have used to punish FnF?
    This article basically supports the allegations that SPSPA investment was forced on FnF so as to buy all toxic assets from the banks. FnF shareholders were made to pay the price to bailout banks.



    Frannie to buy $40 billion in junk mortgages each month
    Submitted by cpowell on Sun, 2008-10-12 04:10. Section: Daily Dispatches
    By Dawn Kopecki
    Bloomberg News
    Saturday, October 11, 2008

    WASHINGTON — Federal regulators have directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

    Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A, and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.

    Liked by 1 person

    1. This topic has come up on several occasions, and my response to it hasn’t changed.

      The only contemporaneous report of any request to Fannie and Freddie by “federal regulators” that each buy “$20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities” is this Bloomberg article by Dawn Kopecki. The absence of similar reporting from any other source—either at that time or subsequently—is telling.

      Whether or not federal regulators did actually make such a request, however, there is no evidence it ever was acted upon. As I’ve mentioned elsewhere, the risk profile of the loans Fannie Mae purchased or guaranteed in first several quarters following the conservatorship was markedly better than the profile of the loans it acquired in 2006, 2007 and the first three quarters of 2008. The actual credit performance of the 2009 credit book also is markedly better than that of the 2006, 2007 and 2008 books. Had Fannie in fact been acquiring anything like $20 billion per month in toxic mortgages in the initial stages of the conservatorship, it would have shown up in both the risk profile and the loan performance data.

      Liked by 1 person

      1. Tim,

        Thanks, You are strictly going by factual information and you do not want to speculate in order to preserve the integrity of your analysis and ideas. In a way it is good for us. Unlike others you are maintaining much higher standards in discussions.

        But There is no harm in looking at various possibilities and this one seems to have good chance of being true in some way for many reasons. So far Defendants have used every means to keep the thousands of outdated documents secret (related to FnF conservatorship) from public. Recently released documents indicate that defendants mislead the courts and public to deny justice to FnF and FnF shareholders. So we do not have complete information to say one or the other way with 100% certainty.

        In 2008 criss, there was no other way for banks to get rid of massive bad illiquid loans assets other than to sell it to some one. Fed and Tsy were not allowed buy the non-performing loans from banks and there was no private or public market for these bad loans. FnF were the only means thru which Fed and Tsy could have bought these bad loans from banks. Many refinancing programs were used to turn these non performing loans in to performing loans. This may explain why the FnF loan profile after 2008 looks much better than that before 2008.

        However FnF 2006-2008 loan profile may look bad because these FnF loans may not have been refinanced the way bad bank loans were refinanced after 2008. May be there was no need to refinance these FnF bad loans or Defendants wanted to keep that way so as prove the point that FnF did some thing wrong.

        “The absence of similar reporting from any other source” does not disprove the news. If the news was not true then there have been no reported denials on such important news. Even the “Eton Park Meeting (July 21, 2008)” was reported once by bloomberg, no one else reported it and most importantly there have been no denials.

        It may be in the best interest of FnF and FnF shareholders not to rule out any possibilities until all the documents have been made public and nothing is hidden from public.

        Liked by 1 person

        1. You asked me for my opinion about the report that Fannie and Freddie were told to purchase $20 billion in toxic mortgages per month, and I gave it to you. You’re certainly free to disagree with it.

          I would add that there are two differences between the Bloomberg story about the July 21, 2008 meeting at Eton Park Capital and the Dawn Kopecki story about the toxic loan purchase mandate. The Eton Park Capital story gave the names of, and had quotes from, some of the meeting’s attendees, none of whom have denied the story; no named individuals at Fannie, Freddie, FHFA or Treasury have confirmed the toxic loan purchase report. Second, there is no reason to doubt that the Eton Park Capital meeting took place, while the data I cited for Fannie’s credit quality and loan performance statistics–together with the absence of any specific evidence in Fannie’s financial statements or other disclosures suggesting the influx of large amounts of toxic loans post-conservatorship–are very serious obstacles for the toxic loan rumor to overcome.

          Liked by 1 person

          1. I will add something that Tim is too thoughtful and a gentleman to note. The Bloomberg reporter (DK), who authored this article, seemed to have major access to an unusual amount of regulatory accusations which showed the GSEs in an unsavory light and resulted in a large number of articles..

            This issue was touched on in a quite damning HUD IG report into OFHEO’s press manipulations/tactics and other media stunts designed to drive down GSE stock prices and otherwise make company officials look bad. The report implied that someone in the Director’s office had lied but didn’t identify who may have done what.

            Many of us were surprised that the IG’s report did not result in possible criminal charges for OFHEO senior execs.

            (I believe David Fiderer has written extensively about this HUD IG’s report.)


          2. Tim,

            Thanks, Most rightly value your opinion for your sound objective analysis and inferences.

            Considering every thing that has been done in a hush-hush manner during FnF conservatorship, people assume the worst case scenario. Release of all documents and official clarification may clear doubts in the minds of all.

            Liked by 1 person

    2. AIG, famously, had to close out positions with GS and other counterparties at face value immediately after seizure, despite market values that were vastly lower. I don’t think that is the case with FnF, they did buy MBS but at market prices, arguably they ended up making money on it.

      Liked by 1 person

  3. Could you tell us the major revenue streams for Fannie and Freddie and approximately what percentage of the overall revenue comes from the retained portfolios that they were forced to liquidate down to $250 billion by 2018?


    1. I can give you my estimates for Fannie’s revenue streams (Freddie’s should not be very different).

      Most of Fannie’s earnings now come from its single-family guaranty business. The volume of that business has been stuck at around $2.85 trillion for the past five years, but the average net guaranty fee rate (i.e., charged fee less the amount remitted to cover the payroll tax fee implemented in April 2012) has risen from 25 basis points in 2010 to 38 basis points last year, and is headed higher, since the net fee charged on new business is now around 50 basis points. Administrative expenses for the single-family business are about 9 basis points (elevated because of costs incurred to build the common securitization platform), and a conservative figure for ongoing loan loss provisions would be 6 basis points. So, if in three years the volume of single-family business stays the same, the average guaranty fee rate rises to 45 basis points, and admin costs (9 bp) and loss provisions (6 bp) remain where they are now, Fannie’s single-family guaranty business should be earning about $8.6 billion pre-tax.

      Fannie’s multifamily guaranty business totaled about $205 billion last year, with an average fee rate of close to 69 basis points. The company’s multifamily volumes and fee rates have both been growing in recent years, and if that continues, in three years Fannie’s multifamily business should be earning about $1.4 billion pre-tax.

      Since the net worth sweep Fannie’s portfolio business has been shrinking at a 15 percent annual rate, per Treasury’s directive. In three years it should have bottomed out at $250 billion, however. It seems reasonable that the portfolio stabilized at $250 billion could earn about 100 basis points in margin, after administrative expenses. If it does, that would be another $2.5 billion pre-tax in earnings.

      Putting earnings from these three businesses together– $8.6 billion single-family, $1.4 billion multifamily, $2.5 billion portfolio—gives pre-tax net income of $12.5 billion. Add another $0.5 billion in miscellaneous income, and you’re at $13 billion pre-tax (or about $8.5 billion after-tax). The share of that total coming from the portfolio business ($2.5 billion of $13 billion) is just under 20 percent.

      Compare that portfolio share to what it was in 2003—the last year Fannie reported earnings using a consistent method of accounting for all of its business, prior to the restatement of its earnings, and before it was required to begin shrinking its portfolio (in 2008). Then, the company’s after-tax core business earnings—that is, earnings adjusted for the effects of the accounting for derivatives standard, FAS 133—were $7.3 billion. Of that amount, $4.4 billion—or just over 60 percent—came from the portfolio business.

      Liked by 1 person

  4. Good morning Tim.
    Sometime ago you said that it was convenient to wait until all the “building blocks” of a housing reform are known to start working in a proposal that use ideas with some consensus among the parties.
    1) Do you think that those building blocks have been laid down in the 10 proposals presented at Urban Institute? Or may still be something unknown and better?
    2) Can you build a comparison chart to highlight the pro and cons? I mean for example placing the advantages and disadvantages in the first column and the proposals in the first row. Finally in the intersection of the advantage and the proposal the word “yes” or “no”.

    I believe that your proposal is outstanding and a comparison chart can show the differences and the benefits for the American people. Later on this comparison chart will spread widely so please make it “for dummies” for all of us to understand.

    Please do it. We need your ideas to reach Congress, the press and make evident the malicious work of the paid lobbyists at AEI, MBA and UI (Parrott).

    Liked by 1 person

    1. Having some way to evaluate, compare and contrast the proposals made in response to the Urban Institute initiative makes a great deal of sense. We now have all ten of the solicited proposals on single-family financing, all three of the multifamily proposals, and two of the six proposals on affordability and access.

      While it may not be possible to do a “mortgage reform for dummies” table that is as clear and compelling as you suggest without oversimplifying, I’ll start working on how best to do the comparison. I have a ten-hour plane trip back to the states this Saturday that will give me ample time to get going on it.

      Liked by 4 people

      1. Thank you Tim.
        Take your time. It doesn’t have to be done right away, but if you cannot sleep in the airplanes it may be a good thing to do.

        Liked by 1 person

    1. Tim,

      Is it appropriate for private AEI members (who now mostly work as lobbyists for financial establishment) to meddle in private company future. These AEI members are high level ex-Gov officials. These people are in someway prohibited in influencing on matters they worked on while in Gov. How is that such people continue to have high level access in Gov?

      These AEI members clearly identified themselves as “fellow travelers” and worked hard while in Gov positions, to destroy systemically important national institutions to solely benefit their favored financial establishment and themselves. Gov should investigate such officials who associated themselves with private parties while in public service.

      Laws prohibit Gov agencies influencing FnF conservatorship in any way.
      Considering the in-appropriate activities of organizations like AEI and its members to influence matters related to FnF conservatorship, Gov should immediately ban any type of relationships with such organizations and its members.

      Liked by 1 person

    2. I’m more interested in the AEI event on FnF from 2008, with Douglas Ginsburg as the moderator. Not that there is anything wrong with a judge acting as a moderator. Google Douglas Ginsburg and Peter Wallison and it will show up.


        1. Dear Wayne,
          is there a video or an audio record of this Federalist Society event ? if so, can you post the link please?
          Are you concerned about a fellowship between Ginsburg, Wallison and Pollock?


      1. Wayne,
        I did not read full transcript but I searched for “Ginsburg” in the document, but did not find anything of of specific interest. Obviously with this convention, Judge is familiar with 2008 crisis and FnF conservatorship.

        The event was sponsored by “Journal of Law, Economics & Policy, Fall, 2009, 2008 National Lawyers Convention”.

        Judge Ginsburg was the moderator and panel consisted of
        1. Peter Wallison resident scholar at the American Enterprise Institute (AEI)
        2. Bert Ely, chairman of Ely & Company Consulting
        3. John Taylor of the National Community Reinvestment Coalition (NCRC)
        4. Professor Todd Zywicki, George Mason University School of Law
        5. Alex Pollock, also at AEI
        6. Andrew Redleaf of Whitebox Advisors


    3. I’m just now seeing this question (I’ve been without internet access for the past couple of days).

      I wouldn’t look for much objectivity or insight from an AEI-sponsored event. Their position on Fannie and Freddie is well known, and hasn’t changed for years (although the arguments they advance to support that position does change, sometimes bizarrely).

      My answer to the “what should be done with Fannie and Freddie” question is given in the piece I did for the Urban Institute series, which I called “Fixing What Works.” The more other essays that have been published in this series, the better I think my idea looks.

      Liked by 2 people

      1. Tim

        Thanks, Your ideas stand out as far superior to any other ideas because of your comprehensive knowledge and experience in mortgage finance field.

        Generally speaking, it is ok for private entities with no relationship with Gov to express any ideas. But entities having previous relationship as well as consulting relationship with Gov should be careful about influencing conservatorship and future of FnF.


  5. I recognize that the newly released documents and the deposition of
    Macfarlane help to build up the narrative that the Treasury was in
    charge and decidedly knew that Fannie Mae was turning a profit when it
    enacted the net worth sweep amendment. And I’m also very glad to know
    that the data from Grant Thornton was outdated. But listening to the
    Perry oral argument, one theme that Judge Ginsburg kept coming back to
    was the idea that there were “competing views” at the time. He
    repeatedly refers to the 10-Q that Fannie Mae filed on August 8/9,
    which essentially said that they don’t expect to make any profits that
    would exceed the dividend owed to the Treasury:

    Here is a quote from that 10-Q that Ginsburg cited: “We have paid over
    $25 billion in dividends to Treasury since entering into
    conservatorship in 2008. Although we may experience period-to-period
    volatility in earnings and comprehensive income, we do not expect to
    generate net income or comprehensive income in excess of our annual
    dividend obligation to Treasury over the long term.”

    Click to access q22012.pdf

    So Ginsburg uses this quote to demonstrate that you can’t just say
    that Fannie Mae was turning a profit, but but maybe the Treasury
    didn’t actually think the net worth sweep would make the GSE’s worse
    off than the status quo at the time, given the fact that they already
    had to pay that massive dividend to the Treasury. And this quote makes
    it seem like they may have been helping the GSE’s since even they
    didn’t believe they’d profit beyond what they’d owe the Treasury.

    Putting aside all the arguments about how the Treasury was being
    disingenuous by spinning a tale of a death spiral and that they
    clearly implemented the sweep in order to wind down the entities, how
    do you deal with the 10-Q?


    1. I don’t see anything either surprising or troubling in the quote you cite from Fannie Mae’s second quarter 2012 10Q.

      The first thing one needs to remember is that all language in Fannie’s 10Ks and 10Qs needed to have sign-off from officials at FHFA. For that reason, I wouldn’t have expected to see anything close to the phrasing Dave Benson used in talking to his own management in July 2012 (over a month before Fannie’s second quarter 10Q was released) about a “Golden Age of earnings” in the coming eight years.

      We now have a couple of pieces of context on this from the documents released last week. First, in a draft “housing finance/ GSE reform proposal” from Treasury circulated in early February 2012, we know Treasury already was talking about “restructur[ing] PSPAs to allow for variable dividend payment based on positive net worth” at that time. Second, an August 9, 2012 (pre-Third Amendment) memo from FHFA official Mario Ugoletti makes reference to “previous versions we had reviewed in terms of net worth sweep.” Given that Treasury had been contemplating a net worth sweep for at least six months—and that FHFA knew this well before the sweep was announced—FHFA wasn’t going to permit language in Fannie’s 10Q that cast doubt on Treasury’s professed rationale for the sweep, which was that Fannie and Freddie were facing a “death spiral” of continued borrowing to pay their quarterly PSPA dividends.

      And note the cleverness of the language actually used in Fannie’s second quarter 2012 10Q. It says “we do not expect to generate net income or comprehensive income in excess of our annual dividend obligation to Treasury over the long term.” For the next several years, Fannie was going to see huge profitability because of the cessation or reversal of the temporary or artificial losses booked over the previous four years. But after that–“over the long term”–the nearly $18 billion in pre-tax earnings Treasury had forced Fannie to pay each year by running up its book losses through 2011 very likely would have been more than the company could earn on a sustained basis. So the language in Fannie’s second quarter 2012 10Q wasn’t inaccurate, just misleading—and deliberately so.

      Liked by 2 people

    2. I’d hate to disillusion you, but 10-Qs have a lot of boilerplate, along the lines of… we can’t predict the future. The August 17, 2012 narrative that is emerging as some of the 12,000 or so documents get revealed is that TSY realized that FnF were becoming profitable, developed a game plan, got FHFA on board, and did the 3rd Amendment. Ginsburg may not buy that at this point, but its possible that the true fact situation will become more self-evident as more and more documents are released.


      1. Wayne: I’m not sure who you’re addressing with your comment. If it’s me, you’ve misunderstood my response to Steve. Fannie’s 10Qs were “sanitized” by FHFA, and as such don’t give a comprehensive picture of what Fannie’s executives knew about the company’s financial condition and prospects in the summer of 2012. This should become more clear as additional documents produced in discovery are made public (and, to be accurate, the 12,000 documents you referenced haven’t even been shown to plaintiffs’ counsel yet–that why they’ve filed a motion to compel them).


        1. I was trying to comment on a commentor’s comment. That commentor was saying: what about the 10-Q. The judges were trying out a similar argument during oral arg. in the appeal. I’m just saying a 10-Q has lots of exculpatory along the lines of we can’t predict the future. What is evident in the 10-Qs in early 2012 is that the GSEs were quickly entering the “golden years.”


    1. I worked with Zigas for a dozen years at Fannie Mae, and have kept in contact with him since. Before I left the D.C. area earlier this month, he and I discussed both the “Promising Road” paper he co-authored with Messrs. Parrott, Ranieri, Sperling and Zandi and the content of his Urban Institute piece, which focuses on affordable housing. I’ve commented on the basic structure of “Promising Road” on this site before—I believe it is misguided, particularly its heavy reliance on securitized risk sharing—so in this reply I’ll address just the aspect of affordable housing access.

      In his paper, Zigas does his best to make lemonade out of a lemon. He is candid about the lemon: he states that what he refers to as the “credit box” of the Promising Road’s proposed replacement for Fannie and Freddie—the National Mortgage Reinsurance Corporation (or NMRC)—would be no wider than it is now. (I would argue it actually would be narrower, since the NMRC would be less effective at risk diversification and cross-subsidization than entity-based guarantors such as Fannie and Freddie.) But Zigas says that having the FHA linked more closely with the government-owned NMRC would remove the stigma now attached to FHA loans, and, in effect, allow the NMRC-FHA combination to be viewed as a continuum of credit that operates successfully as a whole. Perhaps. But that’s optics, not substance. And Zigas’ further speculation that if linked with the NMRC the FHA could be run more effectively or innovatively, and thus provide more affordable housing access, strikes me as weak. If the FHA can be improved it should be; you don’t have to replace a conventional secondary market system that works (entity-based guarantors) with one proven not to work (securitized risk-distribution mechanisms) to reform the FHA.

      Liked by 3 people

    2. Difficult understand what Barry is trying to convey in this article.
      Barry starts with lofty goals in the first paragraph then meanders thru different convolutions.
      In the end comes “Promising Road to nowhere” with expanded scope of merging all Gov supported housing programs.


  6. Good evening Tim.
    Do you think that Mr Obama will try to clear this mess while he is office instead of let the next president decide about the assertion of executive privilege? Maybe the next one won’t want to be an accessory in this giant robbery. Can Obama run the risk of let other president decide how he himself (Obama) will be remembered in US history? Also, is Obama asserting the privilege on documents produced while Bush was in office? I mean all the documents previous to the conservatorship and during the takeover, execution of the PSPA, replacement of the boards, instructions for changes in accounting statements etcetera etcetera. I bet that the more juicy documents are those from that period of time. Can we expect a 4th amendment that renders worthless all the lawsuits? Such as considering the senior preferred paid and retired and at the same time cancel the warrants. Can he do this regardless of the reforms that Congress may, or may not, do in the future? This 4th Amendment may clear Obama’s name in US judicial and political history.

    Liked by 1 person

    1. It would be ideal if the Obama administration would take the initiative to remove Fannie and Freddie from conservatorship through something like a Fourth Amendment to the PSPA that not only would unwind the third amendment but also cancel the original PSPA (which in my view was never necessary). But we are rapidly running out of time for this to happen.

      As I see it, the problem is that the President has no direct experience with the secondary mortgage market or Fannie and Freddie; virtually all of the information he receives on issues related to the companies comes from senior members of his financial team. Most if not all of these people are former commercial or investment bankers, who for competitive, political or ideological reasons support winding down Fannie and Freddie and replacing them with entities and mechanisms that give more control over the secondary market to the banks. Neither of these is in the best interest of homebuyers—nor would replacing Fannie and Freddie with a bank-centric system be good for the President’s legacy—but I believe Obama does not know this, and nobody senior in his administration is telling him.

      As Treasury’s misdeeds with respect to Fannie and Freddie become more widely known, some within Obama’s inner circle are bound to realize that if the President allows these acts to stand, his legacy in the critical area of minority homeownership will be irremediably tainted. For him to remedy this, however, he, or someone close to him, will need to override a powerful group of bank-friendly advisors who are insistent on keeping a chokehold on the companies. There probably is not enough time left in this administration for such a complex dynamic to sort itself out and produce positive action on Fannie and Freddie before next January, but one can always hope.

      Liked by 3 people

      1. Obama would be blamed for dismantling an 80 year installed democratic program that helped the poor, minorities, disadvantaged to share in the American dream and build wealth! Wow, ,how greedy is that, and coming from the first black president. Instead of helping the minorities he totally performed a huge disservice to them and took away there jobs and ability to own a home.


        1. I don’t like Obama, but I think Tim’s position is that Obama’s actions regarding FnF are based on misinformation, not personal greed as a first order cause.


      2. These guys work quick. Didn’t they execute the sweep in like three weeks.?
        Maybe I’m just hoping that if Sweeney squeezes hard enough they will pop.


    1. Ginnie Mae was created in 1968 when Fannie Mae was privatized. Ginnie remained part of the government (as a division of the Department of Housing and Urban Development), with its primary task being the securitization and issuance of FHA and VA-guaranteed mortgages; Fannie became a shareholder-owned company that purchased FHA and VA loans for its portfolio. (Fannie received conventional—that is, non-government guaranteed—mortgage purchase authority in 1970, and began issuing mortgage-backed securities in 1981.)

      Today, the main distinction between the two is that Fannie takes the primary credit risk on the mortgages it purchases or guarantees, while the loans Ginnie securitizes already have been guaranteed by an agency of the US government (either the VA or FHA). For this reason, Ginnie has no mortgage underwriting or pricing expertise itself. Mortgage reform proposals that have Ginnie replacing Fannie and Freddie ignore or downplay this fact, which in my view is a critical disqualifier.

      Liked by 1 person

      1. With all the bailout programs of 2008 related to mortgages; How is it that those programs did not help Fannie and Freddie financially or did they? IE If legislation was passed to reduce principal wouldn’t that cost be a partial credit or loss reduction to Fannie and Freddie?


        1. In a very general sense, you can make a case that the plethora of bailout programs undertaken in the fall of 2008 helped all financial institutions—Fannie and Freddie included—by preventing the U.S. financial system from melting down. Beyond that, though, the specific bailout programs that related to Fannie and Freddie harmed the companies rather than helped them.

          You can start with the biggest one: the Preferred Stock Purchase Agreements imposed on the companies by Treasury and FHFA after they were put in conservatorship. Had the Federal Reserve or Treasury truly wanted to assist Fannie and Freddie, they could have made short-term collateralized loans to them, either through Treasury’s secured lending credit facility or, for the Fed, under section 13(13) of the Federal Reserve Act. Instead, they chose to take the companies over against their will, then to have FHFA ramp up their non-cash losses and force them collectively to take $187 billion in senior preferred stock they didn’t need, resulting in a required payment to Treasury of nearly $29 billion pre-tax in perpetuity (prior to replacing that annual dividend with the net worth sweep in 2012). That definitely can be classified as “harmful.”

          Less catastrophic, but still costly, was Treasury’s Home Affordable Mortgage Program, or HAMP, passed as part of TARP. HAMP was a formulaic approach to loan modification that was mandatory for Fannie and Freddie but elective for all other financial institutions. I looked at HAMP for Fannie when I did my amicus brief for the Perry Capital appeal, and found that it had two negative effects. The first was to cause Fannie to add $35 billion to its loss reserves between 2008 and 2011—increasing its draws of senior preferred stock by a like amount. Most of those reserves were unnecessary. Second, under HAMP Fannie reduced the interest rates on far more loans than it would have done at its own initiative, leading to an estimated loss of half a billion dollars per year in net interest income during the years the modified loan payments were in effect.


  7. Hi Tim, big developments with more documents revealed from Sweeny’s court. Have you had time to look at them? Also did you read the NY times article?


    1. I did read Gretchen Morgenson’s New York Times article, and also have reviewed the latest set of documents released by Sweeney.

      I’ll start with the obvious: these new documents remove any doubt about several key points. First, contrary to law Treasury has been running the Fannie and Freddie conservatorships from the beginning, with FHFA meekly doing whatever Treasury tells it to. Second, Treasury clearly knew that Fannie was, to use Dave Benson’s term, about to enter a “Golden Age” of profitability when it imposed the net worth sweep on it and Freddie. Third, the language in Jim Parrott’s contemporaneous emails–such as “we’re not reducing their dividend but including in it every dime these guys make going forward and ensuring that they can’t recapitalize”– fatally undermines the government’s factual arguments in the net worth sweep cases, leaving it with the sole legal argument that HERA permits the government to do anything to Fannie and Freddie that it chooses to. While this argument was accepted by Judge Lamberth–based on facts put forth by the government that now have been shown to be brazenly inaccurate–it almost certainly will be reversed or remanded on appeal.

      Beyond these obvious points, however, the documents for me have further implications. Most importantly, they are totally consistent with the thesis I outlined in the post to which these comments are attached, claiming that both the conservatorships themselves and the net worth sweep were part of a long series of actions by members of the Financial Establishment to remove Fannie and Freddie as the centerpieces of American mortgage finance and replace them with mechanisms that were more profitable for the large banks and Wall Street firms that have historically opposed Fannie and Freddie. I found it particularly interesting that while working for the White House, Parrot would have viewed the blatantly partisan AEI officials Peter Wallison and Ed Pinto as “fellow travelers,” and apprised them in advance of Treasury’s plan to prevent Fannie and Freddie from recapitalizing.

      And this leads to an additional point I’ll make briefly. From the time I first learned of the government’s request to cover all documents produced in discovery with a protective order–and to keep many other documents from being produced at all– my reaction was that the government’s insistence on secrecy stemmed from the fact that the plan to take over and then eliminate a healthy Fannie and Freddie was embraced by such a broad group of individuals, inside and outside the government– who when talking among themselves made no effort to “cover their tracks”– that there had to be a large number of incriminating documents that would be produced during the course of the discovery permitted by Judge Sweeney. Just the very few such documents made public so far suggest that my intuition on this may be right, and if it is there should be many more “smoking gun” documents released in the future. Judge Sweeney now seems to understand that counsel for the defense has not been truthful in many of the representations it has made before her in court, as evidenced by the stern language in an order she issued this past Friday, giving the defense a week to justify its invocation of deliberative process privilege on some 12,000 documents it continues to withhold from plaintiffs’s counsel.

      More “bad documents” coming out will be positive not just for plaintiffs in the legal cases but also for those who are advocating for the average homebuyer in the mortgage reform debate. To date, the Financial Establishment has been in control of the reform dialogue, successfully equating in the public mind the concept of “reform” with the elimination of Fannie and Freddie. The more apparent it becomes that the Financial Establishment has been acting in its own financial interest– and NOT in the interest of homebuyers– and that it has been untruthful about both its actions and its motives, the more likely it will be that their plans for remaking the mortgage system to their liking will not come to fruition. I, for one, hope that’s the case.

      Liked by 7 people

      1. Thanks Tim, that’s pretty damning on the fraud by the Govt. Moving forward I like to ask, since it’s becoming so plain and basically beyond any reasonable doubts that the defence of all the legal cases are invalid,what’s stopping the judges for Perry appeals to vacate the NWS instead of remanding back to Lamberth. Can the plaintiffs advance the latest evidence to the appeals judges?

        At the same time, would Sweeney be able to fast track or even make a judgement if the subsequent privilege and protected info. reveals more evidence that the outcome of the cases is only going to reach one logical conclusion?


        1. Very good questions. I’m not certain, but I believe plaintiffs’ counsel CAN apprise the appellate judges of these latest documents, and if they can they certainly will. Having them included in the record would definitely raise the odds for reversal of the Lamberth decision, perhaps even to above fifty-fifty. Based on my observation of how Sweeney has been managing her case, however, even with the content of the new documents known publicly I doubt she will deviate from the schedule she’s already laid out. Thus, in unlikely event that her court is the first to make a definitive ruling on the net worth sweep, we’ll most likely need to wait at least a year before an outcome that now seems a foregone conclusion becomes official.

          Liked by 4 people

          1. Thank you very much for your insightful and extremely well thought out response…..I must stridently disagree, however…..this case will be fast tracked……we’ll have success by the end of June-2016——–Way too much sneaky illegal crap to drag this out any more in any way shape or form.


      2. Thank you for the reply Tim. This blog is great! Keep it up. Your thoughts and knowledge on this whole debate are very appreciated.


      3. Given this new evidence, and the previous claims made under oath by government officials, it seems to me that the Justice Department has suborn perjury in several cases. At the very least, several government attorneys need to be disbarred, and several government officials need to see some jail time.

        By the way, thank you for responding to these most recent developments. I think you mentioned in your blog that you would be out of the country traveling, so it’s very much appreciated by all of us that you have taken the time to provide us with your thoughts and your perspective. Cheers to you, Mr. Howard.

        Liked by 3 people

      4. What might Dave Benson have meant by the statement, “SPSA amendments migh be used to better serve conservatorship goals.”


        1. Benson made this statement before the Third Amendment came out, and at the same time as he called the coming eight years the “Golden Age of earnings” for Fannie Mae. Putting these two observations together, if I had to guess what he meant it would be that in order for FHFA to truly “conserve” Fannie, it would have work with Treasury to amend the SPSA in a way that would permit the company’s long-term operation and financial health. I knew Dave Benson well when I was at Fannie, and I’m sure that in 2012 he was well aware that the non-repayable $11.6 billion annual senior preferred stock dividend obligation ($17.8 billion per year pre-tax) FHFA and Treasury had burdened Fannie with in perpetuity would be a crippling impediment to its returning to pre-conservatorship status as a self-sufficient shareholder-owned company. Little did he know that not only would FHFA and Treasury not reduce Fannie’s financial burden, in a very short time they would make it markedly worse.


      5. “Most importantly, they are totally consistent with the thesis I outlined in the post to which these comments are attached, claiming that both the conservatorships themselves and the net worth sweep were part of a long series of actions by members of the Financial Establishment to remove Fannie and Freddie as the centerpieces of American mortgage finance and replace them with mechanisms that were more profitable for the large banks and Wall Street firms that have historically opposed Fannie and Freddie.”

        So glad to hear you say this Tim. The PRIVATE NON-FEDERAL RESERVE has been hoodwinking US citizens since their inception with their brazen scheme of setting interest rates and printing fiat money, all to their benefit. There is nothing federal about them. They are no more federal than Federal Express. Their shareholders are private banks. Fannie and Freddie are the last major remaining obstacles in their quest of taking total control of the population.

        “Give me control of a nation’s money and I care not who makes it’s laws” — Mayer Amschel Bauer Rothschild

        History of the corrupt Federal Reserve pt.1 (8 minutes)

        History of the corrupt Federal Reserve pt.2 (8 minutes)


    1. Yes, I do. The authors do not understand what they’re writing about, and seem to have assumed that their lack of understanding equates to something sinister happening between Fannie and Freddie (in conservatorship) and the Wall Street banks. It does not.

      To manage the interest rate risk on their mortgage portfolios, Fannie and Freddie use large amounts of derivatives– principally pay-fixed interest rate swaps, and options to enter into interest rate swaps in the future (known as “swaptions”)– which they both disclose and discuss in detail in their 10Qs and 10Ks. They money they spend on these swaps and swaptions gets paid to their counterparties, which are the principal commercial and investment banks: Citigroup, JP Morgan Chase, Bank of America, Goldman Sachs and Morgan Stanley. That’s it; end of story.

      Liked by 2 people

  8. Mr. Howard,

    You explained to us how you are somewhat restricted, perhaps not the right word, when you were rightfully found innocent of all charges against you [and in fact received positive remarks from the judge at the end of the case] in your past court case.

    Would that “agreement” prevent you from assisting Saudi Arabia in its formation of a FNMA/FMCC/GSE type mortgage business being reported in the media?

    I can’t believe given your expertise and proven innocence that all concerned would not find your input on the Fannie and Freddie issues of the highest importance and welcome your guidance beyond the UI series articles.

    Liked by 1 person

    1. The October 16, 2012 ruling by Judge Richard Leon granting my motion for summary judgement in the civil case against Fannie Mae imposed no restrictions on me of any sort. The restriction I referred to in an earlier post was part of the April 18, 2008 consent order I (and Frank Raines, and Fannie Mae’s controller Leanne Spencer) signed to settle the Office of Federal Housing Enterprise Oversight (OFHEO) lawsuit against us. In that order, I agreed not to challenge a condition imposed on Fannie Mae in its May 23, 2006 settlement with OFHEO, which states, “The Board agrees that Mr. Franklin Raines and Mr. Timothy Howard may not be engaged, employed or otherwise provide services to Fannie Mae, whether for compensation or not, subsequent to the separation of these employees from Fannie Mae, unless otherwise required by law.” But that same clause goes on to say, “Fannie Mae may apply to OFHEO for approval to utilize such individuals to meet obligations it may have under regulations or regulatory agreements.” So it’s possible that OFHEO’s successor, FHFA, could remove my ban against working for the company (although I’ve agreed not to ask them to, and I wouldn’t).

      Other than that, I’m free to do whatever I wish to do in the mortgage world, or anywhere else.

      Liked by 2 people

      1. Tim,

        So far we have not seen any durable and viable alternative plans even after 8 years other than the one you published through Urban Institute. Even with all disregards as well as violations of laws, it has not been easy for them to destroy the system that has worked for many decades. The process is not complete even after 8 years and there are no alternative systems in place.

        Because FnF are private institutions for public policy purposes, your service to nation through FnF is no less than that of any public servant. It is long over due, to seek help and guidance of people like you in the best interest of the nation…

        Your saga looks like another example of how people with power and connections work to eliminate any competition they see in in getting what they want. Were you people perceived as obstacles coming in their way?


    1. The bulk of Olsen’s article addresses an appellate decision written by Judge Janice Rogers Brown–one of three judges hearing the appeal of Judge Lamberth’s dismissal of the Perry Capital case in September 2014–in a case involving Amtrak, and gives Olsen’s analysis of the possible implications of this case for the Perry Capital appeal. Since I have not read the Amtrak decision, however, I’m not in a position to give an informed opinion on Olsen’s article.


  9. hey tim

    hope you are enjoying your travel.

    during 2015 fnma’s deferred tax asset account was reduced by about $5B. what do you think were the corresponding credits?


    1. I am indeed enjoying my travels; thank you.

      I’m not sure I understand your question, however. The “credit” corresponding to the $5 billion drop in deferred tax assets on Fannie Mae’s balance sheet in 2015 was a comparable reduction in debt outstanding. But what I think you’re probably asking is WHY Fannie’s deferred tax assets fell by that amount in 2015. It was because of an even larger decline (from $17.4 billion to $11.8 billion) in deferred tax assets related to the company’s loan loss allowance.

      When Fannie began ramping up its loss reserves after it was placed in conservatorship, the increase in those reserves far exceeded what the IRS deemed to be deductible for cash income tax purposes (indeed, at the end of 2011, nearly half of Fannie’s $64.1 billion in deferred tax assets– $29.9 billion– was for deferred deductions from its loss reserves). That component of Fannie’s deferred tax assets has been declining since that time, although it still is sizable.

      If you’re interested in tracking Fannie’s deferred tax assets by year and by category, you can do so by looking at the “notes to the financial statements” in its 10Ks. Each year, page F-1 (near the end of the statements) contains an index of the individual notes, one of which will be “Income Taxes.” Go to that section and you will find a discussion of the deferred tax assets (and, during the years it was applicable, the reserve for deferred taxes) as well as a table breaking out the deferred tax assets by category.

      Liked by 1 person

    2. Question rolg: wouldn’t the manner in which the boards were dismissed and agreed to the conservatorship be paramount to almost everything else in the WF case? Also with that enlightening information couldn’t Sweeney “drop the hammer”


    1. I haven’t read the text of the Emergency Economic Stabilization Act of 2008 (ESSA, or the “bailout bill”), and I’m not a lawyer, but I doubt its provisions have any limiting effects on what Treasury can do under the Senior Preferred Stock Purchase Agreement (SPSPA), if for no other reason than that ESSA was enacted on October 3, 2008, nearly after a month after the September 7, 2008 date of the SPSPA. For a similar reason I also have no reason to think ESSA has any controlling or restraining effects on what FHFA can do as conservator of Fannie and Freddie; those actions are governed by the Housing and Economic Recovery Act (HERA), passed on July 30, 2008.

      Liked by 1 person

      1. Tim,
        If TARP funds were used for Sr preferred stock purchases (SPSPA), then there are EESA provisions that prohibit discriminatory, arbitrary, capricious, an abuse of discretion, or not in accordance with law practices.

        These are some of the EESA provisions for using TARP funds:
        1. protect home values, college funds, retirement accounts, and life savings;
        2. provide public accountability for the exercise of such authority.
        3. ensuring that all financial institutions are eligible to participate in the program, without
        discrimination based on size, geography, form of organization, or the size, type, and number of
        assets eligible for purchase under this Act;
        4. Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title
        5, United States Code, including that such final actions shall be held unlawful and set aside if
        found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law.


          1. TARP monies were not used for the SPSPA. Funds for the SPSPA were authorized in HERA, and for that reason the EESA provisions that apply to TARP have no relevance for Treasury’s purchase of senior preferred stock from Fannie and Freddie. And while Treasury’s not allowing Fannie and Freddie to borrow under TARP may have been discriminatory, it was not illegal. Moreover, the government did not need TARP to lend to Fannie or Freddie. Section 13(13) of the Federal Reserve Act allowed the Fed to make loans to the companies collateralized by their holdings of agency (i.e., Fannie and Freddie) mortgage-backed securities. The Fed declined to do that because it didn’t want to assist the companies during the crisis; it, and Treasury, wanted to take them over.

            Liked by 1 person

          2. Tim,

            Thanks for your reply.

            Your statement “may have been discriminatory, it was not illegal.” is not clear. EESA non-discriminatory clause is not a discretionary option. So it is difficult to understand how discrimination is not illegal.

            Hank’s (sole authority to implement EESA) publicly announced intentions/decisions to punish FnF appear to be arbitrary, capricious, an abuse of discretion, or not in accordance with law.

            Were there any formal requests for loans from FnF and then formal refusals from Feds under Section 13(13) and EESA ? Probably conservator never allowed FnF to make such requests.

            The Ben/Tim (Fed) may have probably declined to lend to FnF because of Hank (Tsy). BTW Bernanke and Lloyd Blankfein were contemporaries at Harvard University/ Winthrop House. For the same reasons conservator must have sought most expensive funds in the universe to chain concrete life savers to FnF. It is very difficult ignore these very well linked connections.

            Anyway thanks, you know better than us.


  10. Tim,

    Hope you are enjoying your break.

    I have a question regarding Mel Watt and his management of fnf. It’s plain to see that he’s managing them to profitability and continued existence. From his replies to congress and in public speeches he’s had numerously stresses the intention of making them strong and profitable while also pointing out the crucial challenges of having Low capital levels and that the law was trumped when fnf were placed into conservatorship. Yet what he’s done and spoke about is in direct contradiction to the way FHFA defends the legal suits. Aren’t those Lawyers defending his position and management of fnf? Why are there such contradictions?


    1. I don’t see a contradiction between Watt’s actions as director of FHFA and the stance taken by FHFA’s lawyers in the net worth sweep and other court cases. So far FHFA’s lawyers have taken one major position on the law, which is that HERA gives FHFA absolute discretion in how it governs the companies in conservatorship. That position has been challenged in the appeal of the Perry Capital case, and I think FHFA’s lawyers will lose there. FHFA’s lawyers also have made a number of the assertions of fact in the various court cases that in my view are inaccurate, but to date they either have been deemed irrelevant (in the Perry Capital case) or not gotten to a stage in the proceedings (Judge Sweeney’s Court of Claims cases) where they can be litigated on the merits.

      As for Mel Watt, I would say that he is “mostly” managing Fannie and Freddie prudently and consistent with with the interests of shareholders. The companies’ underwriting is prudent, and they are setting guaranty fees at a level that appears to reflect about a 2.5 percent average capital requirement, which in my view is conservative. On area area in which I think Watt is not acting in the best interests of shareholders, however, is following Treasury’s directive to have Fannie and Freddie do large-scale risk-sharing transactions on terms that I believe are clearly uneconomic. In addition, while developing the common securitization platform may make sense for the shareholders of Freddie Mac–because it addresses a weakness in the payment structure of Freddie’s mortgage-backed securities relative to Fannie’s–it makes no sense for Fannie’s shareholders to be funding such a program. Finally, while Watt has pointed out the danger of the companies having no capital– because of the net worth sweep agreed to by his predecessor, Ed DeMarco– he has yet to act on that concern by refusing to declare senior preferred stock sweep dividends until the companies build up a cushion of capital he deems to be adequate.

      Liked by 3 people

  11. Tim,

    Have you had a chance to read House Bill H.R. 4913, the “Housing Finance Restructuring Act of 2016” introduced by Rep. Mick Mulvaney (R-SC)? If so can you comment on it and its suggested requirement for retained capital?

    Thanks for all of your insight and time.


    1. Michael: I read the Mulvaney (and made some brief comments on it) when it first came out.

      I’m not a fan of the bill. Its biggest benefit–repayment of the senior preferred stock (or the elimination of the liquidation preference)– is something I think we’ll get anyway when the net worth sweep is ruled illegal, as I believe it will be. And the bill has three provisions I don’t like: a 5 percent capital requirement (10 percent of risk-weighted assets, with the risk weight for mortgages being 50 percent), granting Treasury 79.9 percent of the companies’ common stock in legislation, and keeping the companies in conservatorship until their capital equals 5 percent of risk-weighted assets (or 2.5 percent).

      The five percent total capital requirement is the biggest problem. It’s an arbitrary number, and is far too high given the risks involved in guaranteeing the types of mortgages Fannie and Freddie are making currently. I believe that even a stringent risk-based capital standard will result in total capitalization of the companies that is less than half the requirement in the Mulvaney bill. I have two problems with legislating Treasury’s conversion of the warrants it gave itself for 79.9 percent of the companies’ common stock. First, I believe that provision can be challenged successfully in court. Second, Treasury’s conversion of the warrants would cause a five-fold dilution of the ownership of current shareholders with virtually no proceeds coming into the companies, crippling their ability to use the public markets as a means of recapitalizing themselves and leaving retained earnings as their primary capital source. Finally, I see no benefit from leaving Fannie and Freddie in conservatorship, and under the control of FHFA (and Treasury), until they can achieve capitalization of 2.5 percent.

      Liked by 3 people

      1. Hi Tim
        I think that if you write a letter to Mulvaney with all the explanations that only you can give him because of your experience he will be glad to listen. There is no substitute for experience.
        Some guys like Mulvaney and Capuano need all the answers that you have in order to reject and rebuke the so-called “experts” that are working for the big banks. After 5 years reading I never found a good idea coming from this “experts” that shield themselves in “institutes and associations”
        such as AEI , UI, MBA and Milken Institute. Just a bunch of shameless paid puppets.


    1. I hadn’t, but just did. I don’t know Bowler, nor had I been aware of the activities FanoFred discusses in his post. But I’m not surprised about them. What FanoFred calls the “Banking and Financial Elite” and I call the Financial Establishment (and some call the “cabal”) always has had a revolving door dimension to it. I suspect the main reason so many of them are cavalier about disregarding the revolving door ban is that they’ve seen their friends and peers do it without consequence and feel they can, too. (It doesn’t help that the enforcement officials generally have the same the same attitudes toward Fannie and Freddie as they do, so have little motivation to enforce the ban in these cases.) It’s good that Gretchen Morgensen and others are focusing on this issue, however. I don’t see it changing behavior in the near term, but it may do so over time.

      Liked by 2 people

  12. Good evening Tim
    I am sorry to ask a question that the answer may be obvious for everyone but not for me: what happens to GSE profits when the interest rate goes up or down? What is better for the companies? Or is it neutral?


      1. Sue: It IS a good question, and it’s not obvious.

        I’ll start by saying that my answer will be based on my experience at managing portfolio interest rate risk at Fannie Mae, and my observation from the companies’ financial reports and monthly summaries (showing their “duration gaps”—or asset/liability matches—each month) that their approach to interest rate risk management hasn’t changed much (and if anything has become more conservative—that is, risk averse) since then.

        Both companies start with the (sensible) assumption that they don’t know where interest rates will go in the future. So, contrary to what you sometimes read, they don’t “bet on interest rates.” When I was at Fannie, we used a proprietary model to generate hundreds of random future paths of interest rates, then determined what structure of initial funding for our mortgage purchases (debt and derivatives) gave us the best expected outcome in the average of all those paths. I suspect Fannie and Freddie today do something very similar.

        Of course, interest rates do move. When that occurs, two things happen: one economic, and one accounting-related. The economic event is that the companies adjust their debt and derivatives positions to maintain a zero duration gap (asset durations equal to debt and derivative durations). This usually, but not always, involves an economic cost, but one that is relatively modest because the companies started with a well hedged portfolio thus don’t have to rebalance by that much. The accounting event is that when rates move all derivatives have to be recorded at their fair values, or “marked to market.” I’ve talked a lot about these accounting-related gains and losses in other comments, so won’t repeat that here.

        You asked about portfolio profit sensitivity to rising versus falling interest rates. Again, let me break that down into economic effects and accounting effects. I’ll generalize about the economic effects of rising and falling rates, but I think this is pretty accurate: in the large majority of cases, sharp interest rate movements either up or down have negative effects of roughly equal magnitude (again, not terribly large, because the portfolios start out well matched); the losses from sharp downward moves tend to be front-loaded, however, while the economic losses from sharp rises in rates occur more slowly over time. The temporary accounting gains and losses on derivatives are dominated by the mark-to-market effects on floating-to-fixed rate interest rate swaps, and for this reason they are negative when interest rates fall and positive when rates rise.

        Portfolio interest rate risk is a complex topic, but I hope this short summary is helpful.


        1. Thank you for your answer. Now… if the GSE wind down the portfolio and get only in the business of guarantee charging G-fees, then the interest rate fluctuations would not affect them, is it right?


          1. They won’t get to the point where they have no sensitivity to interest rate fluctuations. At the end of last year, both companies had portfolios of around $345 billion. Treasury wants them to shrink to $250 billion– about a 30 percent drop. So, if nothing else changed, the expected drop in their earnings volatility coming from their portfolios would be about the same, 30 percent. But I also expect both to change some aspects of either the way they hedge or the way they account for their hedges, to reduce that sensitivity further. (If they change their hedge strategies, I expect they would do so in a way that had minimal economic cost.)

            Even if they “got out of the portfolio business,” I still would expect them to hold some loans on their balance sheets, for three reasons: (a) accumulation of loans sold to them for cash by smaller lenders, prior to being put into mortgage-backed securities (MBS) pools issued by the company, (b) holding delinquent loans purchased out of MBS pools, and (c) purchases of non-standard mortgage products that lenders want to originate but which can’t be pooled and put into a standard MBS. For a portfolio serving these three purposes, figure $100- $150 billion, maybe $200 billion, per company.


  13. It seems that everyone is focused on Freddie’s “loss” and Fannie’s lower profits. As they should be, but I have to wonder, is all their loss/less profit due simply to being wrong on interest rates? If I understand correctly the information released was limited to, “we lost X”. Do we KNOW what all the figures were, OR could F&F be retaining cash with some accounting methods so that their situation looks worse than it really is to outsiders The government took them over by creating losses once, why not again but for a different reason – justifying release? Showing a loss means they are able to subtly raise the pressure for their release. If they are, it is fine with me, I think the only answer is to release them, and maybe this knee jerk reaction that they need money is the prod – or excuse – Watt needs to release them? Otherwise, how can the powers that be, be so obtuse as to let the whole system fall to pieces? Is the government that incompetent?

    Why I think the numbers are fabricated is, Freddie lost just enough so they wouldn’t have to pay the sweep, maybe Fannie simply couldn’t hide that much cash? I am by no means and expert, but the housing market is good, interest rates have not changed much, so to make that large a mistake on interest rate bets seems fishy to me. Maybe I am wrong and there is that much leverage, but from the man on the street level I simply have a hard time believing they made that much of a mistake.

    Could they be retaining cash? It would seem logical from F&F’s point of view, why build new headquarters etc if you are going to be gone in a couple years? F&F executives must think they will be around, so they have to plan for the future, plus they are hinting that the present system cannot be sustained, again they are trying to plan for the future. They might have to be surreptitious about it, but hide a billion here and there and they have a safety net. If cooking the books worked once to hang them out, then why not again, but to survive?. Either that or Watt really is incompetent. No bureaucrat tried to work themselves out of a job do they?


    Liked by 1 person

    1. Centrally cleared swaps are marked-to-market daily. The GSEs have to pay variation margin in CASH to the clearing house. And the Clearing House passes the CASH to GS, JPM, etc. Fannie Mae paid $4 billion in a single quarter in variation margin. This is not some ‘accounting’ loss — this is real CASH moving from the GSE bank accounts to dealer bank accounts. There is absolutely no guarantee that this CASH will ever flow back.

      The GSEs offset their derivatives losses with unrealized gains on some assets. However, these are paper gains.


      1. Barry,
        You keep on repeating this ” margin in cash paid to clearing house”.
        Can you please explain how this works and what is the significance?

        Why the cash that goes to clearing house will not flow back if the conditions that caused it reverse eventually?
        If not, why FnF are using such one way losing strategies?

        Hedging strategies are used to minimize the losses, by counter-balancing losses from one side with gains from the other side.

        It appears, in FnF case, losses in derivatives are balanced by gains in asset values.

        Please help to understand this issue.


        1. Barry,

          Thanks, That is the cost of providing prepayment option.
          Then FnF must have already adjusted the purchase price of loan assets.
          So what is the problem?
          Will this make their business model flawed?

          Even banks have the same problem with CDs and they charge certain percentage as a penalty at the time premature closing of CDs.


        2. In (a delayed) response to both the comment from Barry and the reply from “anonymous,” Barry is correct that swap positions are settled in cash, but that is a technical point that has no bearing on whether derivatives gains and losses are temporary (i.e., net to zero). Barry’s claim that “the GSEs offset their derivatives losses with unrealized gains on some assets” is incorrect, as is his follow-on statement that “these are paper gains.”

          I welcome both criticism and corrections on this site. But because the goal of the site is to be informative to readers, posts need to be accurate and understandable. There now have been several comments posted by Barry that have not met either of these criteria. This may be because Barry isn’t very good at expressing his ideas in a way that clarifies rather than confuses, or it may be that he is deliberately trying to confuse people by cloaking inaccurate or befuddling comments with technical jargon. In either case, these sorts of posts are not helpful to readers, and thus are not welcome. For that reason, I have deleted a further post by Barry (and a response to that post) subsequent to this message, and am asking him to refrain from further posts on this site. Should he not do so, I will delete his posts when I see them.

          I answer the original question by Travis in the comment below.

          Liked by 1 person

          1. Tim,
            I had the same opinion about the posts by Barry. So I asked him to clarify. Anyway thanks making it clear to him about posting confusing messages and asking out of context questions.


    2. Travis: One thing I think we all can agree on is that Fannie and Freddie’s financial statements are not easy to interpret. I have said elsewhere that I believe the companies could, and should, do a better job explaining their quarterly statements to investors. Still, we need to be careful about using words like “fabricated” (which implies fraud) or “hid[ing] a billion here or there,” loaded phrases like “betting on interest rates,” or ambiguous terms like “retaining cash.”

      The vast majority of Fannie and Freddie’s income and expense are determined contractually– such as interest income on mortgages, interest payments on debt and interest rate swaps, and guaranty fees. Some income and expense entries are the result of accounting conventions: mainly the valuation of derivatives. And a few income and expense items are discretionary, such as gains or losses from portfolio rebalancing, gains or losses from sales of loans from portfolio or repurchases of debt, or accounting choices where judgement is involved. For someone familiar with the companies and their operations and financial statements (me, for example), it is possible to analyze Fannie’s and Freddie’s quarterly results in terms of these three categories. You don’t need a fourth, like fraud or “hiding cash.”

      The main questions about both Fannie’s and Freddie’s first quarter financial results stemmed from uncertainties about (a) what drove their derivatives losses, and (b) what types of discretionary actions either company may have taken that affected their bottom line. For us to definitively know the answer to either question the companies have to tell us. When they don’t, it gives rise to speculation–some of it sensible, some of it not (that’s one reason I wish they would disclose more).

      You raise a legitimate point about Freddie “losing just enough so they wouldn’t have to pay the sweep,” although I would say it differently: I would say they “lost just enough so they wouldn’t have to take a draw.” It is entirely possible that Freddie undertook some discretionary transactions in the first quarter to generate enough book income to not require them to take a draw. I can’t tell that from the information they made available in their financials, but if they did, I applaud them for it. I think a draw would have played into the hands of critics who are hoping to be able to depict Fannie and Freddie as “dangerously unsafe,” so Freddie taking some action to produce one or more one-time book gains to prevent that– if indeed they did– would in my view have been a smart and prudent decision. Again, I have no way of knowing if they did that, but it is much more likely than that they would have “cooked their books.”

      Liked by 1 person

  14. Hi Tim,

    First and foremost, thanks for another insightful piece!

    I’ve seen a lot of discussions this week about hedging losses at Freddie, but my impression is that everyone is overreacting due to a misunderstanding based on the mismatch of accounting treatments. Would you be able to explain the quarter to quarter variability in reported earnings with specific emphasis on the hedging program and the accounting treatment of the hedges versus the accounting treatment of the assets which are being hedged? I would be very interested to hear how you conceptualize the hedging program and wonder if you share the perception that it is not well understood.

    Safe travels!


    1. Chris: I would be able to explain the derivatives losses if Fannie and Freddie broke them out in more detail. I am surprised they don’t, since they have nothing to hide and explaining what’s happening more clearly would help remove some of the concern about these losses.

      The general problem arises from the fact that both Fannie and Freddie fund purchases of their mortgages for portfolio with a mix of short- and long-term debt issued in the cash markets, and derivatives purchased over the counter. When interest rates move, applicable accounting rules require the companies to leave their mortgages and fixed-term debt at their historical costs, but to mark their derivatives to market. When interest rates fall, mortgages and fixed-term debt both increase in value, but you don’t see these increases in the income statement because they remain valued at historical costs. In contrast, when rates fall derivatives hedging debt (principally floating-to-fixed rate interest rate swaps) fall in value, and derivatives hedging assets rise in value. Those changes DO show up on the income statement, because derivatives are accounted for at fair value (or “marked to market.”) On an economic basis, not much has happened, but you wouldn’t know that from the income statement, because of the earnings volatility caused by marking only a portion of the book to market.

      If I were Fannie and Freddie, to make these derivatives gains and losses more understandable I would break them into three components: (a) Amortization of the purchase cost of options, and the net monthly interest payments on floating to fixed interest rate swaps. These are all costs that have been economically incurred, irrespective of interest rate movements; (b) Unrealized market value gains and losses. These are the changes in the value of the derivatives book on positions the companies intend hold to maturity, which will net to zero over the life of the loan; and (c) Realized market value gains and losses. This third category is losses (or, less frequently, gains) on derivative positions that have been terminated as a part of the companies’ ongoing efforts to keep a match between their assets and liabilities (which I call “rebalancing”). These realized losses will NOT net to zero over time. If the companies did this, investors could add components (a) and (b) together and get the economic cost of derivatives, leaving component (b) as the random volatility caused by interest rate movement, that will ultimately reverse itself.

      Finally, in answer to your final question, yes, Fannie’s and Freddie’s hedging programs are not well understood– in addition to being not well explained (by them).

      Liked by 1 person

  15. Tim,

    The entire bailout was a fraud, why do you think major USA media has kept silent? Why haven’t more accountants come forward, forensic accounting has been verified.


    1. I wish I could give a satisfactory answer to your question about the media’s coverage of Fannie and Freddie. I can, though, tell you that the major media’s lack of coverage of stories favorable to the companies has been going on for at least two decades. (And I have some personal experience on that. I have a folder a couple of inches thick of news clips from the Wall Street Journal, Washington Post, New York Times and other papers from 2004 and 2005 discussing the “accounting scandal” at Fannie and the role Frank Raines and I allegedly played in it. When a federal judge dismissed the charges against us in a civil suit related to those allegations in 2012, not one word about the dismissal appeared in any of those papers.)

      If you asked me to speculate, I would say that the anti-Fannie and Freddie media bias really became entrenched after the lobbying group FM Watch was formed by the big banks and mortgage insurers in 1999. Lobbyists for FM Watch consistently depicted the companies as being run by greedy executives who used a favorable federal charter to take risk at taxpayer expense and make unconscionable profits for themselves, while doing little or nothing for the homebuyers they were supposed to be serving. That is the sort of story that is irresistible to most journalists, particularly those in the financial media, which traditionally has been more sympathetic to the points of view of “private sector” companies, as the supporters of FM Watch were considered, in contrast to the “government” companies Fannie and Freddie were said to be.

      As to why more accountants haven’t spoken out about the fraudulent “bailout,” it’s much more a financial analytic story than an accounting story. And it’s complicated. In doing the Perry Capital and Delaware amicus briefs, I had to go through several thousand pages of financial reports. That’s not an easy job, particularly if you’re not familiar with the business of the companies, how their financial statements are structured, and how their accounting works (as I was). And unfortunately, some people who have tried to do financial analysis of Fannie and Freddie have been tripped up by their unfamiliarity with what they’re looking at and made claims about the financials that don’t hold up under scrutiny. That makes it harder both to come up with a clear way to depict and talk about the “bailout fraud,” and for a consensus to form around that depiction as being true.

      Liked by 1 person

      1. Tim, thank you for this detailed response. As someone who has done the work and do understand what happened, have you considered granting interviews to financial or housing media? This is a huge story, and one would think the interest would present.


  16. “All of which brings us to where we are at present. At Treasury’s direction, FHFA has been managing Fannie and Freddie not to prepare them for release from conservatorship but to ultimately wind them down. We now know from the “Promising Road to Mortgage Reform” proposal released in late March that the current plan of what I call the Financial Establishment—large banks and Wall Street firms, and their supporters at Treasury and elsewhere—is for Congress to at some point turn Fannie and Freddie into a single government corporation with an explicit federal guaranty on its securities. Consistent with this goal, FHFA has required the companies to collaborate on building a common securitization platform, and mandated that they do the types of securitized risk-sharing transactions the Financial Establishment would like to see become the standard means of managing mortgage credit risk in the future.”
    Tim, I do not know if you have access to the financial statements of FNF. From your above statement what is your take on the recent losses of Freddie Mac( Fannie Mae results not likely?). Is it part of the “death spiral” for the twins?Is the loss due to the derivatives? I am not a financial guy, so pls explain in layman terms the likely scenario of the twins of winding them down based on their future financial results.
    Again thanks for your incisive analysis.


    1. Like anyone else, I have access to Fannie’s and Freddie’s published financial statements, but nothing beyond that.

      It’s important to distinguish between the loss Freddie reported on Monday for the first quarter of 2016 and the alleged “death spiral” (in a way that John Carney of the Wall Street Journal did not, I suspect deliberately). The “death spiral” concept was the original reason Treasury gave for doing the net worth sweep, saying that if it did not do the sweep Fannie and Freddie would have to engage in an endless cycle of borrowing to pay the quarterly dividend payments on their outstanding senior preferred stock. I don’t think even Treasury believed that at the time. It knew that FHFA had used non-cash accounting expenses to drive Fannie and Freddie’s book losses up to where they had to take $187 billion in senior preferred stock to fill the hole created by these losses. But since the losses were either temporary or artificial, they had to reverse themselves. Treasury knew that. It also knew that once the losses did reverse Fannie and Freddie would be immensely profitable–at least for a while– and would quickly build up capital. With profits and capital, it would have been much harder for Treasury to maintain that the companies had to be kept in conservatorship, so they swept the profits under the (transparently phony) pretext of “protecting” them.

      Now that Treasury has swept all the profits that came from the reversal of book losses created by FHFA, and Fannie’s and Freddie’s annual profits are falling below the amount of the original quarterly dividend payment (nearly $29 billion pre-tax per year), some people are saying, “see, there IS a death spiral!” No. If Treasury hadn’t swept all the companies’ profits, they would have had enough retained earnings to have made their quarterly dividend payment indefinitely. And more and more attention would have been focused on the reason the companies’ quarterly dividend payments were so high in the first place: Treasury used non-repayable stock, and engineered losses, to create a permanent flow of income for itself at the expense of Fannie and Freddie shareholders.

      So, back to Freddie’s losses. I thought they did a fairly decent job of explaining them (conceptually, anyway) on page 4 of the press release they put out (which you can find on their website). They’re largely timing, almost all related to their on-balance sheet mortgage portfolio, and caused by the GAAP requirement that they use different types of accounting for different components of their balance sheet. Freddie noted in its press release that it “continues to assess certain activities and transactions that may reduce or limit its exposure to this variability.” It certainly should do that. It should realize that opponents of Fannie and Freddie will use any quarterly loss– even one that results from Treasury and FHFA having taken all their capital, including the cushion they otherwise would have held for this accounting volatility–at a pretext to claim that they are a “failed business model” that needs to be replaced. The best way to avoid being accused of needing another bailout is to manage your accounting risk so that one is never necessary, notwithstanding being unable to retain capital.

      Liked by 2 people

      1. Thanks for the great explanation.and analysis that is easy for a layman to understand. Hope judges in the Perry appeal and other cases in the NWS (net worth sweep) amendment read this. During the argument it seems judges need to be aware of financial analysis that will help them decide that NWS is illegal through dubious accounting to “engineer losses”.


        1. If Tim can explain to Congress the same things that he explains here 90% will vote his proposal


  17. Tim, I was thinking about something and wanted to hear your opinion. If in fact the appeals court remands the case back to Lamberth’s court, for whatever reason, doesn’t the fact that it is remanded automatically answer the question that Hera doesn’t preclude judicial review. Thanks


    1. With my usual caveat (I’m not a lawyer), I think a remand would mean that the appeals court believes HERA does not bar judicial review of FHFA’s actions irrespective of the motivations behind those actions. That is, there could be some actions taken by FHFA that would be “ultra vires,” or beyond its statutory authority, that WOULD be subject to judicial review. The purpose of the fact-finding would be to determine whether the “facts and circumstances” of what FHFA did caused those actions to fall within the scope of the statute. If they prove not to, as the court sees it, they could be challenged.

      Liked by 1 person

      1. i would agree that any remand to district court for further fact development would require the court of appeals to conclude that the HERA anti-injunction bar does not foreclose judicial review.

        what this would entail is a determination by the appeals court not to find that the NWS violated the conservatorship duties of fhfa on its face, but rather that the NWS may constitute a violation, depending upon the facts that have not been included in the administrative records or otherwise developed through discovery. if the anti-injunction bar foreclosed judicial review, as lamberth held, then the further fact finding would be unnecessary.

        now, here’s the rub: what standard will the court of appeals provide the district court to apply to determine, based upon the facts, whether the conservatorship duties were breached by the NWS?

        if you read the transcript, judge millett is insistent on asking this question. Is it a deferential standard? is it a stricter standard which looks to fhfa’s motivation? how to judge that motivation? is it bad motivation if it indicates that fhfa was subject to direction of treasury? is something less than that bad motivation? etc.

        while it may seem to be “easier” for the court of appeals to remand for further fact finding, it really needs to supply the district court with a standard to apply (lamberth applied no standard, but simply said there is no judicial review of the “why”), which will not be easy.

        in a sense, the “easier” decision is just to reverse and hold NWS invalid on its face, since as olson said and ginsburg agreed during oral argument, you cant get to sound and solvent when you have to give every nickel you earn to treasury

        Liked by 1 person

      2. The remand could relate to 12(b)(1) – “lack of subject matter jurisdiction” or 12(b)(6) – “failure to state a claim upon which relief can be granted.” In a 12(b)(6) dismissal, the lower court is saying effectively “no need to determine the facts, because as a matter of law plaintiff loses no matter what the facts are;” in so determining the court must take the plaintiff’s allegations in the complaint as true. In a 12(b)(1) dismissal, the lower court is saying the court lacks subject matter jurisdiction, as in HERA says the conservator’s actions are not subject to judicial review.

        Insofar as 12(b)(1) is concerned, it is clear that the jurisdictional limit applies only so long as the conservator’s actions are within the authority of a conservator. If the actions were ultra vires, then the jurisdictional bar would not apply. How the lower court could make this jurisdictional determination without knowing the facts is beyond me. Here, the remand could say “allow discovery to determine whether the conservator had an intention to rehabilitate…the GSEs,or to bury them and salt the earth..”

        Insofar as 12(b)(6) is concerned, the issue is whether, if jurisdiction is met, the conservator / treasury violated HERA / APA… First of all, under APA, an administrative record is required – here the lower court essentially said “who cares, the facts don’t matter.” And, as for all of the other pleadings, the lower court said no matter the facts, there is no claim under any scenario, even taking the allegations as true. The remand could have very specific instructions in this regard. For example, HERA says that the conservator may not be subject to the direction or supervision of any other federal agency – the pleading alleged this, and it is beyond me, given that the pleadings must be taken as true for a 12(b)(6) dismissal, how the lower court could have said the facts don’t matter for this determination. A remand could say “if discovery shows treasury directed FHFA, you must reverse.”

        As a basis for reversal, let’s also not forget about the sunset provision. This came up for an instant in the hearing, and judge Millet said “let’s get to that later,” but it was never further discussed. No discovery seems would be required to reverse on this basis alone – the sweep was clearly tantamount to a new security under most analysis (and analogies to other treasury and sec regulations) – it happened 2.5yrs after treasury’s authority ended. The sunset would be a simple path to reversal, without the messy disclosures that the government seems worried about. On all other bases for reversal it seems that Olson conceded to Judge Ginsburg that the record was necessary – and that whatever it says it could help or hurt the plaintiffs’ case (though to me the fact that it is being withheld suggests strongly that it helps the plaintiffs)..


        1. agreed WB. part of me suspects that at some point in the process of deciding and opinion writing, the merits panel may want additional briefing or oral argument on the sunset provision. cleaner way to reverse than on the APA/conservator duty prong, that’s for sure.


  18. Tim,

    Thanks, Great credible analysis and informative article.

    Since you provide unbiased credible analysis and solutions, can you please write an article comparing all these nine essays summarizing the best and worst features?
    You seem to be a credible expert leader who should be advising and guiding conservatorship.
    Hope FHFA seeks your guidance on this matter to resolve these issues.

    About “longstanding Fed and Treasury policy objectives”?

    You have often written that conservatorship and post conservatorship treatment of FnF are result of “longstanding Fed and Treasury policy objectives”.

    For many reasons, this can not be “official” policy objectives of Fed and Treasury. If that were the case then Gov would have passed FnF reform laws (give away FnF business to WS friends) and FnF would have vanished long time back. May be there are practical difficulties and there are no good alternatives to get rid of FnF so easily and so quickly.

    At best or at worst case, these are the longstanding surreptitious agendas of of many in Congress/Administration/WS along with many in Fed and Treasury. The motivations are political ideologies besides helping themselves and helping WS friends. As judge pointed out, another motivation may be to avoid blame and criticism.

    On the other hand there are many principled, compassionate statesman/leaders in Congress/Administration and non gov organizations that are opposed to conservatorship and post conservatorship treatment of FnF. These people see FnF as giver of life time opportunities for many poor and middle class folks to own a home.

    Even the worst enemies of FnF are scared of thinking of another economic meltdown without the helping hand of FnF. This alone is holding them back from reforming FnF (give away FnF business to WS friends).

    Liked by 1 person

    1. A couple of quick responses. On the Urban Institute series, I haven’t yet determined the best way to discuss these papers. There are a few considerations. One is that the UI has requested several more of them–mainly on multifamily financing and what they call “affordability and access”– so the series now is scheduled to total at least 17 papers, with publication dates through the end of the month. Second, the UI initially talked about having some way for the authors themselves to interact on the papers, although I haven’t heard anything further about that. Finally, my travel schedule makes it unlikely that I’d do any major work on the subject until June in any event.

      On the “Fed and Treasury policy” objectives, that’s a very complex issue and not one I can adequately address in the length of a reply. What I call the Financial Establishment HAS tried to pass laws adverse to Fannie and Freddie in the past, but until HERA in July 2008 they’d been unsuccessful. I do not think it is any coincidence that Fannie and Freddie were nationalized six weeks after HERA was passed. But the FE still can’t agree on how to replace them (which is a good thing, because they ideas they’ve had so far would in my opinion have made the system less accessible, more expensive and potentially riskier). Part of that is a reluctance to make a mistake on an issue so important to the economy, but more of it probably is due to the near-impossibility of getting any important or complex legislation passed in the current political environment.

      Liked by 1 person

      1. Tim,
        Thanks. We hope you will continue to provide thought leadership to resolve these issues in the best of all.


    2. It is like having one set of laws & published public policies and also having another set of exactly opposite hidden agendas (policies) to undermine the laws & published public policies.

      This is exactly what happened with FnF conservatorship. Previous FHFA conservators harmed FnF with hidden agendas. Unfortunately Director Mel Watt has not undone these hidden surreptitious agenda (policy) decisions of Previous FHFA conservators .

      Many times this happens due to inter-agency rivalries, conflicting agency mission goals, overwhelming unbalanced powers of agencies or external influence.

      In FnF case FHFA (as regulator), FHFA (as conservator) and Tsy (as investor) have conflicting agency mission goals to safeguard the interests of housing finance system, private shareholder companies and Gov respectively. However in FnF case, all these three agencies are collaborating to safeguard the interests of Gov at the cost of housing finance system, private shareholder companies.

      This is despite HERA’s explicit mandates that FHFA regulator and FHFA Conservator act independently and prohibits other agencies from meddling in FHFA regulator’s and conservator’s functioning. Besides there is overwhelming unbalanced agency powers of Tsy and overwhelming external influence of vested WS private business interests.

      Courts should see this, and make sure that laws & published public policies prevail in the best interest of housing finance system, private shareholder companies and Gov.

      Liked by 1 person

    1. Just to be clear, the “zero capital” (at the end of 2017) provision comes from the Third Amendment to the SPSA, not the SPSA itself; the requirement for the companies to shrink their portfolios does come from the SPSA.

      But the author of this article is right to link portfolio shrinkage component of the SPSA with the zero capital provision. I think people too often overlook the significance of the portfolio shrinkage directive as an indication of Treasury’s intent with the companies–specifically, in assessing whether Treasury’s 2008 action was a rescue or a nationalization for policy purposes. At the time Fannie and Freddie were placed into conservatorship, they were losing money because of defaults on the loans they had purchased or guaranteed (i.e., from their credit guaranty business). Their on-balance sheet mortgage portfolios were making money, helping to offset the losses from the credit guaranty business. If Treasury really wanted to rescue Fannie and Freddie, why would it have forced them to reduce their money-making on-balance sheet portfolios by 10 percent per year, thus depriving them of a significant source of revenue?

      Of course, Treasury did NOT want to rescue Fannie and Freddie; it wanted to weaken and ultimately dismantle them. It had always opposed the portfolio business, and the 2008 financial crisis gave it the perfect opportunity to phase it out. But it struck me as odd, even at the time, that when Treasury announced the shrinkage requirement nobody said, “Why are they doing that? The portfolio’s not the problem; it’s a source of revenue helping to address the problem.” Yet nobody did– or if anyone did, none of the media paid attention to it. In my view, Treasury’s treatment of the portfolio business is a compelling piece of evidence countering its assertion that it took actions in an attempt to help the companies.

      I’m not sure I understand what you’re getting at with your question about “what happened to the previously held MBS estimated at $5.1T by FNF”? Those are the current combined mortgages held in portfolio (around $700 billion for both) and guaranteed MBS (the rest) for the two companies. At the time they were put into conservatorship, they had combined mortgage portfolios of $1.6 trillion, out of a total book of business of around $5.6 trillion. So you can see that since the conservatorship their total book of business has decreased and– because of Treasury’s directive to shrink their on-balance sheet portfolios– those portfolios now make up 14% percent of their total business, compared with twice that percentage pre-conservatorship.


    1. I think it’s much too early to speculate on that. The Washington Federal case is far down in the queue, and would be one of the last to be adjudicated. How it might end, or be settled, almost certainly would be dependent what happened with the rulings, settlements or trial outcomes of the other Fannie and Freddie cases that preceded it.


    1. Yes, particularly if it’s a ruling on the APA violation– FHFA acting outside the bounds of the statute. I’m less clear on the implications of a favorable ruling on the breach of contract claims, but based on what I’ve read from Hamish Hume, counsel for the firm that brought them (Boies, Schiller & Flexner), those may bring more benefit to preferred than common shareholders. Perhaps other readers have a different, or a more informed, opinion on this, however.

      Liked by 1 person

      1. What are your thought on releasing the equity in these two giants and not paying any dividends? I think it would be far better for the country to pay the P-share holders in commons and let the stock run. The equity burst alone would stimulate the economy, bring in $100’s billions in tax revenue, and create many jobs.


      2. the remedy that might be imposed for a breach of preferred contractual claims or common fiduciary duty claims are hard to predict. i am not sure even a capable attorney like hume can gainsay


  19. Great analysis Tim. You or ruleoflawguy can answer this. If Perry is remanded for more fact finding (i.e. producing an admin. record from fhfa) do you think they settle because they don’t want anyone seeing their record? Also, fhfa, i thought, said they didn’t even have an admin. record. what happens than if they need to produce one?



    1. No, I don’t think the government would settle for that reason (although it may settle for other reasons). Much of the record already has been produced (and shared with plaintiffs in all of the Fannie and Freddie cases), although it remains under seal. The administrative record FHFA should have produced would have documented the deliberative process they underwent before agreeing to the net worth sweep. I doubt there’s much of a record on this at all, since I suspect what happened is that Treasury said, “we’re going to sweep all of Fannie and Freddie’s profits so they can’t build any capital,” and FHFA said, “okay.”

      Liked by 3 people

      1. Thanks for the reply Tim. What would happen if Hume wins? on breach of K and all those things? Does Treasury than have to make a payout to preferred and commons than?


        1. I don’t have the legal expertise to be able to make even an informed speculation on this. Part of the problem is that there are so many cases currently being contested, under different theories of law (APA violations, breach of contract, regulatory takings, violation of Delaware state law). If the only thing at issue was breach of contract, I could see how a remedy might be for Treasury to have to retroactively pay junior preferred dividends before it could pay itself the senior preferred sweep. But even if the breach of contract claim gets the first favorable ruling, the existence of claims under these other theories of law makes it hard (for me at least) to assess what the correct remedy might be, and what implications that might have for other claimants.


  20. Tim–Once again, “Yay You” for making this sometimes complicated set of issues easier to understand for your many fans.

    I know it has little appeal to you, but someone with your substantive knowledge, experience, and good sense should be in the next White House or Treasury.

    Liked by 3 people

    1. Bill,
      Very good suggestion. We need people like Tim with knowledge, experience and willingness to serve the people.


  21. i’ll jump in on washington federal with tim’s indulgence.

    there are two “problems” with wash fed:

    first, it is stayed pending perry/fairholme developments, so the fact development that it would need (going back to 2008, which no other existing case has done) would require a long time frame to get done…and this assumes that wash fed will survive a motion to dismiss, which it will if the perry appeals court reverses lamberth’s holding that the anti-injunction bar prevents any judicial inquiry into the merits of the NWS (one of the themes that needs to be recognized is that as a corollary to a remand of perry, all other cases would benefit from the holding that lamberth’s reading of the anti-injunction bar is invalid); and

    second, it is repped by (a very good) class action law firm, so the tendency for this kind of case (law firm invests its own money for a piece of the damage award or settlement amount) is for it to settle before the law firm has invested a lot of capital into the case.

    to me, wash fed become an important bargaining chip if the govt wishes to engage Ps in settlement discussions, rather than a case that will be actually litigated on the merits.

    on the merits, look for perry appeal to be remanded as tim discussed in the post, and for hindes/jacobs to continue to the merits, as it would be the beneficiary of a perry holding that the anti-injunction bar does not eliminate jurisdiction to review (such holding from perry would have persuasive rather than binding effect, but the dc cir ct app is a highly regarded bench, so the persuasive effect is important).

    Liked by 1 person

    1. “Rule of Law Guy” has much more knowledge about the intricacies of these legal matters than I do, and I welcome his insights and contributions. I have nothing to add to what he said, and no disagreement with any of it.

      Liked by 3 people

      1. Rule of Law:
        Everyone agree that WF (Washington Federal Vs Us) is a slow case but other lawyers don’t see the “problems” that you mention as an obstacle.
        Judge Sweeney ordered discovery including several months of 2008 , maybe assuming that it is
        necessary for WF.
        The fact that the law firm may be interested in a settlement doesnt mean that they will lose the case.
        All what happened after they filed the original complaint reinforce their position. every day there is more and more evidence that the conservatorship is illegal and that the GSEs did’t need the bailout.
        The theory of “fog of war” cannot be used because , as Tim says in his Amicus at Jacob Hindes, the take over was well planned in advance.
        Also they are claiming the amount equal to the market capitalization lost from Sep 7 2008 to Sep 10 2008 and they put it at 41 Billions. But after they filed the complain a lot of new facts proved that the plan was in place since 2007 and a lot of people with insider info shorted the stock. So many think that they are going to amend the amount that they claim big time and it will be a headache for Treasury.
        Experts don’t see any jurisdiction problem because from Paulson’s book it is very clear that was Treasury not FHFA who took all the decisions regarding the c-ship. So the Court of Federal Claims is the right one.
        The plaintiffs are institutions and retired people that owned the stock before the C-ship , so they did not buy cheap to make a killing. On the contrary most of them pay the face value of preferred and about $ 50- $70 for the commons. it is difficult to find a reason to dismiss this claim.
        Also, even if the C-ship was illegal but necessary to the financial markets , the terms that gave 80% ownership to Treasury and 10% interest on SP are abusive and cannot be justified.
        WF can render the PSPA invalid and then the whole history would have to be re-written

        Liked by 1 person

  22. I have sent a number of your posts to Senator Kaine from Virginia and spoke in person to one of his staffers. I have encouraged him to part ways with Warner’s incorrect viewpoint. I sure hope it helps. I knew 18 years ago F&F were not the problem. I was a loan officer doing mortgages for a bit. We did mostly sub-prime. If a person I talked to had a conventional loan we couldn’t touch it, I told them so, I explained that our part of the market was to get them back to the point where they could get a conforming loan. F&F were for the good credit people, lower DTI, LTV’s etc. Were and always have been, So I have thought all along, if F&F have the choice credit people how could they possibly been responsible for the systems issues and failures? It never made sense to me until I started reading a few years back. Now that I have learned I have bought Fannie shares as I simply cannot believe that the government will get away with what they have done.
    Thank You for adding your blog to the information out there on F&F.

    Liked by 2 people

  23. Even if the courts ultimately decide on one of the two options crediting the GSEs the difference in cash or as a reduction to the loan/investment, what effect will that have on HERA mandating that their reserves be brought to 0 by 2018 and the wind down of their portfolios?


    1. HERA is not the basis for either the reduction in the companies’ capital reserves to zero at the end of 2017, or the requirement for them to shrink their portfolios to $250 billion. The ‘zero capital reserve’ provision was part of the Third Amendment to the Senior Preferred Stock Purchase Agreement (the SPSA, or the net worth sweep), and would be voided if the sweep were invalidated. The requirement for the companies to shrink their mortgage portfolios is in the SPSA itself, and would remain in force unless the SPSA is challenged and amended or overturned.

      Liked by 3 people

      1. Also, Mark Calabria’s arguments seem to vary depending on the audience and who his client is. Moving to receivership is a joke. But, for the 3rd Amendment they would have over $100 billion of book equity capital on their balance sheet.


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