View more on these topics

Rhetorical question of mystery losses

What’s going on across the Pond

Paul Muolo
Paul Muolo

Sometimes it’s the job of a columnist to ask rhetorical questions, never expecting a decent answer from anyone. So here I go. As you all know Fannie Mae and Freddie Mac are America’s government-chartered mortgage investing behemoths.

Their goal is to buy residential loans from originators in the secondary market, replenishing the pool of mortgage money that’s available to consumers.

And as you all also know, the Treasury Department took control of these two enterprises in the autumn of 2008 after it was determined they were headed for insolvency. The last thing that the US government wanted – George W Bush was in the White House at the time – was the linchpin of the housing market going belly-up.

Before the credit crisis, the two bought about half of all loans originated here – a ratio that has since grown to almost 70%. Without them, there would be no mortgage market and thus no economic recovery, if that’s what we’re in.

As for their future, the Obama White House hasn’t yet figured out that unsolvable puzzle, but it promises to unleash some type of plan early next year. We shall see.

Anyway, there’s something that’s been bugging me about Fannie and Freddie lately. Bear me with me, because it’s going to get a bit complicated.

Over the past few months, the two have been jamming loan buybacks down the throat of the mortgage industry.

With all the buybacks and insurance policies, Fannie Mae and Freddie Mac losses should be minimal

A loan buyback occurs when Fannie or Freddie, or any secondary market investor for that matter, forces the lender that originally funded the loan – or sometimes the current servicer – to buy it back because it has gone delinquent.

In some cases, the two even force buybacks on current loans – but that’s a column for another time.

During the second half of 2009, the government-sponsored enterprises forced the nation’s mega-banks and others to repurchase roughly $30bn in residential loans. And that’s just the second half.

The way I see it, we have all of 2010 and next year left. It’s going to be a loan buyback storm from here on.

I assume that when either Fannie or Freddie asks Bank of America, Wells Fargo, JPMorgan Chase, or Citigroup to repurchase a mortgage, they say, “Yes, right away, sir.” If they don’t, the GSEs will stop buying their newly originated loans.

Then there’s the mortgage insurance industry to consider. America’s seven mortgage insurance firms insure the first 25% of losses on loans sold to the GSEs. From what I’ve heard, the insurance firms have paid out somewhere in the range of $30bn to $50bn in claims.

In theory, most of that money should have gone to Fannie and Freddie.

And then there’s bond insurance on all the crappy mortgage-backed securities that Wall Street sold to the GSEs. Some of that bond insurance money should be flowing back to them.

One last thing – what about the legal rights of the GSEs? If they were sold crap by the Street – sub-prime mortgage-backed securities being at the top of the list – can’t the GSEs sue the Street for financial damages?

Shakespeare had it wrong. It’s not ’First, we kill all the lawyers’, it should be ’First, we hire all the lawyers’.

Principal writedown plan
Anyway, what I’m getting at is that Fannie and Freddie have lost $130bn or so over the past two years. Uncle Sam has pumped about the same amount of cash into them, keeping their net worth positions above zero.

But with all these buybacks, with all these mortgage insurance policies, with all the bond insurance they have, shouldn’t their losses be minimal?

I know this sounds crazy – but someone has to pay. Yet it seems that the government-owned enterprises are trying to make everyone pay. So why shouldn’t their losses eventually be compensated? What am I missing?

I told you I had some rhetorical questions to ask. One of these days I hope to have some answers for you.

At the time of going to press Bank of America, the nation’s largest servicer of home mortgages, had unveiled a plan to consider principal writedowns for certain struggling mortgagors instead of cutting their note rates.

In some cases, the principal will be reduced to 31% of a consumer’s household income. But Bank of America mortgage chief Barbara Desoer warns that the new principal reduction effort would be limited in its scope and will be available only to certain eligible loans and borrowers.

The mega-servicer is targeting troubled loans it inherited via its 2008 acquisition of Countrywide Financial. Bank of America says it will consider principal reductions on certain negative amortising payment option adjustable rate mortgages and will convert some of these loans to fully amortising products.

The announcement is significant because even though the bank is cutting these principal reduction deals to settle legal claims against Countrywide, the move could open the door to other large servicers doing the same. Stay tuned.



Tailor your advice to suit debt group

A growing debt net has been created by recession and job losses, and more consumers are being dragged into it than before. The net has widened to include greater numbers of higher earners and shows that those struggling with debt come from varied walks of life. We have looked at debt patterns across the UK, […]


A few simple words of warning

A mandatory repossession warning on all credit products would help level the playing field between mortgage lenders and consumer credit providers, says Paul Walshe, head of lender services at Moore Blatch


The parts even the NHS cannot reach

The world recently saw a landmark change for the US, with President Barack Obama getting his controversial healthcare reform bill passed. The bill challenges the way health insurance firms operate and opens up healthcare to 32 million uninsured Americans. Whether they support it or not, this will make a huge difference in the way Americans […]


Low mortgage rates are temporary blip

What would the average person – or indeed a mortgage professional – say the average Bank of England base rate has been over the past 35 years? My guess would be around 5%, and I bet many borrowers may think it was even lower than that. In fact, the average base rate between 1975 and […]

Retirement fund - thumbnail

What price (more) freedoms?

George Osborne will make his last Budget speech of the current parliamentary term this week, and the early media briefings suggest that pensions will again feature heavily in that statement. So what are we able to learn from the weekend’s coverage?


News and expert analysis straight to your inbox

Sign up