Why Fannie Mae and Freddie Mac Stock Jumped 11% Today

What happened

Shares of Fannie Mae (NASDAQOTH:FNMA) and Freddie Mac (NASDAQOTH:FMCC) are up by more than 11% as of 3:10 p.m. EDT, after six Democratic senators wrote a letter to Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mel Watt, asking them to address Fannie and Freddie’s low levels of capital. The senators wrote to ask that the officials consider allowing Fannie Mae and Freddie Mac to retain some of their earnings as a buffer against future losses, while leaving the door open for allowing the government-sponsored enterprises (GSEs) to exit conservatorship.

So what

The letter addresses the Preferred Stock Purchase Agreements between Fannie Mae, Freddie Mac, and the Treasury Department. Specifically, the letter details the senators’ shared concern that Fannie Mae and Freddie Mac, which insure trillions of dollars of residential mortgages, will soon operate without any cushion against losses due to these agreements.

Under the agreements, Fannie Mae and Freddie Mac send all of their income to the Treasury Department, ultimately “leaving two entities that back more than $5 trillion in mortgage debt with zero retained capital reserves beginning on January 1, 2018,” according to the letter.

Cardboard house on top of $100 bills

Fannie and Freddie are making billions by insuring American mortgages. Image source: Getty Images.

A little backstory may be helpful here. The U.S. government put Fannie Mae and Freddie Mac into conservatorship during the financial crisis of 2008. Initially, the U.S. Treasury injected capital into Fannie and Freddie via preferred stock, which would reward the U.S. Treasury for its investment with a regular fixed dividend.

That all changed in August 2012, when the terms of the investment were amended. Rather than pay a fixed rate of return on the U.S. Treasury’s preferred stock, Fannie and Freddie would be required to pay dividends based on their net worth. In effect, the new “net worth sweep” sent all the profits of Fannie and Freddie to the U.S. government.

The net worth sweep has made Fannie Mae and Freddie Mac incredibly profitable for the U.S. government, but since all the earnings are swept from the companies with regularity, Fannie Mae and Freddie Mac have little or no cushion should mortgage insurance profits turn into mortgage insurance losses. The mortgage insurance business is very much a “feast or famine” industry: Long periods of profits are earned when housing prices rise in a slow and steady pace, followed by massive losses when housing prices fall.

Right now, it’s more feast than famine, and the U.S. Treasury is taking all the profits out of Fannie and Freddie. However, it’s quite likely that at some point the fortunes of the industry, and the flow of money, will have to reverse, at which point the Treasury will have to send cash back to Fannie and Freddie to cover any losses. The senators characterize the future reversal of cash flows as a risk to taxpayers.

In some ways, this letter seemingly politicizes a relatively unimportant accounting issue. It essentially argues that if the government takes less money from the GSEs today, it won’t have to pony up as much capital in the future for losses. That’s kind of obvious, and it isn’t immediately clear to me why the senators think taking $3 now is so much better for taxpayers than taking $10 now with the knowledge you may have to return $7 at a later date, but that seems to be exactly what they’re arguing.

Now what

The senators write rather plainly that they only want Fannie and Freddie to be able to build up adequate reserves for losses, not to exit conservatorship. For shares of Fannie and Freddie to be worth anything at all, they would have to be allowed to exit conservatorship, something the government has largely opposed because…well, frankly, it really likes the profits that the GSEs are generating right now.

“We are simply requesting that the GSEs be permitted to build capital. We do not believe they should be released from conservatorship absent reform,” the senators wrote in their letter.

Of course, if you’re a Fannie Mae and Freddie Mac bull, you might take notice that the senators aren’t leaving out the possibility of privatizing Fannie or Freddie, since they say they oppose releasing the GSEs from conservatorship “absent reform.” This implies that they may support letting the GSEs exit conservatorship if they are reformed. But who knows what “reforms” might be necessary for them to support putting Fannie Mae and Freddie Mac back in private hands?

However, as has been the case in the past, when a government official leaves the door open (or even slightly cracked) to letting Fannie and Freddie out of conservatorship, shares of both go wild. Add today as yet another example.

Tom Kelly: Condo financing taking dead aim on renters – The Spokesman

The rising cost and scarcity of undeveloped land will continue to change how and where we live.

What we have long thought of as alternative housing is getting more consideration in many conventional neighborhoods. Traditional East Coast co-op apartments and more rural-based cohousing communities are sprouting up in common suburban environments. Developers now are promoting the financial logic of building up, not out.

Condominiums now will shoulder much of the future city-dweller load. The condo market has resurged as all rungs of the housing ladder look to sample the size, safety, amenities and location of well-built condominium buildings.

But the big question behind condo and alternative housing is financing. Will lenders bend their conservative outlook toward condos to support growth? In order to obtain financing, the percentage of owners in many buildings must equal 50 percent.

That’s what Fannie Mae and Freddie Mac, the largest suppliers of mortgage money in the country, often require, and it is one of the main reasons condo associations are pushing for owner-occupants.

A court case, however, sent a message that condo associations should be careful on how owner-occupant ratios are achieved.

Several years ago, in the Shorewood West Condominium Association v. Sadri case, the court ruled that an association seeking to restrict a use in a bylaw must first amend its declaration.

In a capsule, Asghar Sadri and Dorothy Grazul purchased a unit with the consideration that they be able to lease it if they decided not to live there. Nearly a year later, the association passed an amendment to its bylaws stating no owner may lease a unit after that date. In addition, when any leased unit was sold, the new buyer must be an owner-occupant.

Sadri and Grazul then leased their unit and the association filed a complaint for declaratory judgment and injunction.

The trial court found that although the association had the authority to amend its bylaws to restrict leasing, the amendment was only valid as to those persons purchasing units after the amendment became binding. A state’s Court of Appeals reversed the decision, ruling that leasing restrictions was included under a “reasonableness standard” a year earlier when the couple signed their original deal.

The state’s Supreme Court, however, sided with Sadri, ruling that an association seeking to restrict a use in a bylaw must first amend its declaration if the original declaration allowed the use.

The reasons lenders are not ecstatic about extending loans in condo buildings that are heavily rented is because the mortgage default rate of absentee landlord-borrowers is higher than for owner-occupants. In addition, condo complexes primarily occupied by renters are often poorly maintained since absentee owners often vote against improvements and increases in maintenance fees.

Are renters really that much different than owners? What about the philosophy that people take better care of their investments than the roof over their heads?

Many Realtors who specialize in condo sales say that 80 percent to 90 percent of renters take less care of a condo than an owner does. They say about 10 percent take better care than owners, but very rarely do you have an investor taking better care of his investment property than his primary residence.

Most tenants take reasonable care of their unit. A very small percentage are absolutely terrible, the Realtors said. But they also pointed out that they rarely see renters doing the extra added things like picking up around the building or forming a work party to do some common-wall painting.

But what happens if/when the market changes and owner-occupants are forced to sell, not rent, in a down market?

Attorneys say when restriction works to the disadvantage of the owners, there are ways of taking away the restriction. The association could permit leasing in only two of the previous five years of ownership. Or, it could waive the restriction for a year.

Some condo buyers – like many single-family homebuyers in the country – are purchasing a lifestyle. Other people buy condos because they can’t afford to buy a house or don’t want the maintenance, worry and cost of owning a house, or want to be around neighbors with similar lifestyles.

They also want access to amenities, such as a view, swimming pool, tennis courts and recreation center – amenities few buyers can afford by themselves. Some condo buyers can’t maintain a house because of health, advanced age or lack of motivation.

But maintaining a condo as an owner brings different issues, mainly because of financing. Check the rules before you sign and think down the road. Would you ever be willing – or needing – to rent it out?

Fix for Mortgage Giants Fannie Mae, Freddie Mac Remains on Back Burner

Mortgage-finance giants Fannie Mae and Freddie Mac, which have been under government control since the financial crisis, don’t appear to be getting a new life as quickly as some had hoped might happen under a Trump presidency.

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Overhauling the two companies remains a back-burner issue for the Trump administration and Congress, crowded out by matters such as taxes, immigration and flood insurance. Moreover, prospects that the Senate will eventually pass a broad revamp of the companies also have dimmed, according to people familiar with the matter.

The delays leave in limbo hedge funds and distressed-debt investors which have bought up shares in the companies in the hopes they could score a large windfall. The funds are effectively betting that Washington is unable to come up with a plan that eliminates Fannie and Freddie. They instead want the government to allow the companies to build up capital and return to private control.

In the Senate Banking Committee Chairman Mike Crapo (R., Idaho) and Sen. Sherrod Brown of Ohio, the panel’s ranking Democrat, have held months of closed-door talks, yet their efforts to develop bipartisan legislation remain far from bearing fruit, these people said.

“It doesn’t feel like Brown and Crapo [negotiations] will come to a conclusion,” said a Republican official familiar with the discussions.

At a private meeting in July, Mr. Brown remarked to Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) that he wanted to “put a wedge” between the pair as they developed a bipartisan plan with other members of the banking panel, according to a person in the room. Though the comments were said in jest, they were interpreted by some Senate staffers as a sign Mr. Brown may not be willing to commit to reshape the companies at this time, the person said.

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Messrs. Brown and Crapo, who are said to have a good personal relationship, have been bogged down by other issues, such as how to renew a federal flood-insurance program currently set to expire in December.

A spokeswoman for Mr. Brown said he and Mr. Crapo “are interested in results, and hope the Banking Committee can reach agreement on housing finance reform during this Congress.” Mr. Crapo said in a separate statement that he is working with Mr. Brown “to explore a number of options to fix the flawed system.”

The Trump administration, for its part, has its eyes on other issues — such as a tax overhaul — and has yet to outline its goals for a revamp of Fannie and Freddie. Treasury Secretary Steven Mnuchin on Thursday said the administration would focus on overhaul to the mortgage-finance system next year.

“Realistically this is a 2018 issue, but we’re going to fix it and when we fix it we want to make sure we never put the taxpayers at risk,” Mr. Mnuchin said, speaking at a conference hosted by Politico in Washington.

Fannie and Freddie shares jumped more than 16% Wednesday after Mr. Brown and a group of five other Democrats urged Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mel Watt to allow the companies to retain some of their earnings to protect against a short-term loss.

While such a move would benefit the hedge funds urging the government to allow the companies to begin to recapitalize, it conflicts sharply with a group of moderate lawmakers, led by Messrs. Corker and Warner, who oppose unilateral steps by the FHFA to allow the companies to retain their earnings.

The delays are a setback for some hedge funds and other investors that bought up the companies’ common and preferred shares over the past few years, some of which have seen the timeline for their investments in the mortgage firms extend.

Richard Perry’s Perry Capital was an early hedge-fund holder of Fannie and Freddie shares. It told its clients in September 2016 it was closing down, citing “industry and market headwinds.” The firm has returned 80% of clients’ money since then as it has wound down its hedge fund, according to people familiar with the matter, but it continues to hold shares of Fannie and Freddie.

William Ackman’s Pershing Square Capital Management LP, which had roughly $12 billion in assets under management when it disclosed nearly 10% stakes in Fannie and Freddie’s common shares in late 2013, has seen its size fall to $9.7 billion since. It is down more than 35% from its high water mark, or the point at which investment losses make up for gains, at the end of 2014, though the losses are due largely to Pershing Square’s bet on drugmaker Valeant Pharmaceuticals International Inc.

Still, Pershing Square is up on its investment so far.

The firm told investors in an April presentation that the share price of Fannie’s and Freddie’s common stock were up 4% and 7% from Pershing Square’s average buying cost; the share prices have increased since then. Mr. Ackman said at an investment conference in 2014 the companies’ common stock could increase 10-fold over several years.

Fannie and Freddie play critical roles maintaining the plumbing of the U.S. mortgage market. They purchase loans from lenders and repackage them as securities that are insured if the loans default. The firms’ regulator seized the companies through a process known as conservatorship during the George W. Bush administration, and the Treasury Department agreed to inject vast sums to support some $5 trillion in debt securities issued by the companies.

The companies have thin capital reserves under the terms of their 2008 government-backstop agreements, but they have access to a combined $258 billion in Treasury assistance. They are required to send most of their profits to Treasury in exchange for that support.

Write to Andrew Ackerman at andrew.ackerman@wsj.com and Juliet Chung at juliet.chung@wsj.com

(END) Dow Jones Newswires

September 15, 2017 16:58 ET (20:58 GMT)

Realtors® Relief Foundation Accepting Donations for Housing …

Sep 14, 2017, 16:39 ET

Preview: Pam Patenaude Right Choice for HUD Deputy Secretary, Say Realtors®

Real items

Coldwell Banker brings on associates; newcomer earns title

A host of agents recently joined one of the larger real estate companies in the Charleston area and will be based in the Goose Creek branch.

The sales pros affiliating with Coldwell Banker Residential Brokerage include Joe Swisher, Lisa Carter, Jennifer Dalling, Bethany Hooper and Heather O’Neill. Hooper also earned a Pricing Strategy Advisor certification.

A lifelong Connecticut resident, Dalling brings two years experience in real estate sales and more than 15 years in the home construction and remodeling industries to the Goose Creek office.

“My knowledge, networking tools, resources and recent experience relocating myself allows me to understand the stresses of such a drastic move and I will help make this transition a smoother, more stress free experience,” she says.

Reach Dalling at 203-913-0076 or jennifer.dalling@cbcarolinas.com.

O’Neill says, “I am excited to provide the highest level of customer service to my customers and clients. I pride myself in putting their needs as top priority and making their experience smooth and enjoyable as possible, while giving them the best representation in every transaction,” she says.

Reach O’Neill at 757-406-0843, or Heather.oneill@cbcarolinas.com.

Coldwell Banker Residential Brokerage is a leading residential real estate brokerage company with 28 offices and more than 1,100 sales associates serving the communities of North and South Carolina. For more information or to view local properties, visit ColdwellBankerHomes.com. Coldwell Banker Residential Brokerage is a subsidiary of NRT LLC, the nation’s largest residential real estate brokerage company.

Swisher, Carter and Hooper each ” look forward to providing the best customer service and helping buyers and sellers achieve their needs” thanks to their area knowledge.

Contact Swisher at 843-819-7823 or joe.swisher@cbcarolinas.com, Carter at 843-557-7287 or lisa.carter@cbcarolinas.com and Hooper at 843-597-8427 or bethany.hooper@cbcarolinas.com.

Trina Woods, branch manager of the Goose Creek Office, says the company is “very happy” to welcome the five brokers the Coldwell Banker network and that their “knowledge of the area and commitment to excellent customer service leads to making customers for life.”

Meanwhile, Hooper gained a certification for her expertise in determining property values.

The National Association of Realtors recognizes the countrywide Pricing Strategy Advisor designation. It offers the PSA certification to Realtors to uphold skill and competence, make the best use of technology and commit to approach the assignment of pricing properties “from various prospectives,” the NAR says.

“The market demands accurate property value assessments, so NAR is excited to provide Realtors with enhanced tools, education and expertise to determine the most accurate value for a home and give their clients a leg up when buying or selling,” says NAR President Tom Salomone, broker-owner of Real Estate II Inc. in Coral Springs, Florida.

Hooper passed a required one-day course on “Pricing Strategies: Mastering the CMA” (comparative market analysis). The workshop provides Realtors with the experience to select appropriate “comparables” — recently sold nearby properties with similar characteristics to a particular residence or site — make “accurate adjustments, guide sellers and buyers through the details of comparative market analyses and the underlying pricing principles that inform them and interact effectively with appraisers,” according to the Realtors association.

In addition to completing the course, participants are required to view two online seminars. The certification equips Realtors “to guide clients through the anxieties and misperceptions they often have about home values,” the association says. Visit www.pricingstrategyadvisor.org.

Coldwell Banker Residential Brokerage describes itself as a “leading residential real estate brokerage company” with 28 offices and more than 1,100 sales associates serving  communities in South Carolina and North Carolina. It’ss a subsidiary of NRT LLC, the nation’s largest residential real estate brokerage company. For more, visit www.ColdwellBankerHomes.com.

Northrup teams up with major Charleston area real estate company

w/photo

A magazine backer and mother recently joined Carolina One Real Estate as an agent in its Mount Pleasant U.S. Highway 17 North office.

After raising three children in Pittsburgh, Lisabeth Northrop and her husband Bill relocated to Charleston in 2015 to start Mt. Pleasant Lifestyle, a luxury community publication. This year, “fulfilling a 30 year desire,” she obtained her real estate license and chose Carolina One Real Estate to begin her new career.

Carolina One Real Estate says it’s “happy to welcome” her to the East Cooper office’s team.

Northrup was born in Kinnelon, New Jersey, and grew up there. After high school graduation, she moved to St. Petersburg, Florida where she would graduate from the University of South Florida in Tampa with a social work degree.

In her leisure time, she enjoys home decorating, reading, bible study and competitive swimming, according to the Charleston-area agency.

Carolina One Real Estate Services showcase a full service mortgage division, around a dozen sales offices and departments specializing in commercial real estate, insurance, new homes, property management, relocation, title services and vacation rentals. Visit www.carolinaone.com.

A few tips for investment buyers

En esta imagen, tomada el 12 de septiembre de 2017, el presidente de Estados Unidos, Donald Trump, habla durante una reunión de su gobierno en la Casa Blanca, Washington. (AP Foto/Alex Brandon)

A few tips for investment buyers

En esta imagen, tomada el 12 de septiembre de 2017, el presidente de Estados Unidos, Donald Trump, habla durante una reunión de su gobierno en la Casa Blanca, Washington. (AP Foto/Alex Brandon)

Fannie Mae selling $2.43 billion in re-performing loans to Goldman …

Fannie Mae just announced the results of its fourth re-performing loan sale, and the winning bidder is a familiar name – MTGLQ Investors.

MTGLQ Investors is a “significant subsidiary” of Goldman Sachs, and over the last few years, Goldman Sachs has used MTGLQ Investors to buy up loans from both of the government-sponsored enterprises by the truckload.

In this latest sale, Fannie Mae is selling more than $2.43 billion in re-performing loans to MTGLQ Investors.

Fannie Mae initially announced the sale last month, originally stating that the sale would include a pool of about 11,000 loans totaling nearly $2.5 billion in unpaid principal balance.

The final sale was slightly smaller, with MTGLQ Investors buying 10,683 loans totaling $2.43 billion in UPB.

Each of the loans sold in this deal are re-performing, meaning they are mortgages that were previously delinquent, but are performing again because payments on the mortgages have become current with or without the use of a loan modification.

The terms of Fannie Mae’s re-performing loan sales require the buyer to offer loss mitigation options designed to be sustainable to any borrower who may re-default within five years following the sale. In addition, the loan buyers must report on loss mitigation outcomes. 

This sale was conducted in three pools, and MTGLQ Investors was the winning bidder for each pool.

Pool #1 included 4,200 loans with an aggregate unpaid principal balance of $984,619,405. The pool’s average loan size was $234,433, with a weighted average note rate of 4.54%. The loans in Pool #1 carry a weighted average broker’s price opinion loan-to-value ratio of 109.61%.

Pool #2 included 2,001 loans with an aggregate unpaid principal balance of $461,732,787. The pool’s average loan size was $230,751, with a weighted average note rate of 4.36%. The loans in Pool #2 carry a weighted average BPO loan-to-value ratio of 97.54%.

Pool #3 included 4,482 loans with an aggregate unpaid principal balance of $988,847,948. The pool’s average loan size was $220,626, with a weighted average note rate of 4.35%, and a weighted average BPO loan-to-value ratio of 89.37%.

According to Fannie Mae, the cover bid price (the second highest bid) for the three pools was 91.51% of UPB and 83.37% of BPO, meaning that MTGLQ Investors’ bid exceeded those amounts.

The loan sale is expected to Oct. 26, 2017.

Fannie Mae Offers Relief Options for Homeowners and Servicers in …

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Fannie Mae increases economic growth predictions for first time in …

After the Bureau of Economic Analysis increased the second quarter gross domestic product to 3%, Fannie Mae pushed up its full-year growth forecast for the first time in 2017.

The company increased its growth forecast to 2.2% for 2017, up from its previously forecasted 2%, according to the Fannie Mae Economic and Strategic Research Group’s September 2017 Economic and Housing Outlook.

“For the first time in 2017, we have increased our full-year growth outlook,” Fannie Mae Chief Economist Doug Duncan said. “The upgrade reflects economic activity gaining momentum at the end of the second quarter, though we see a great deal of uncertainty surrounding the forecast.”

“The list of uncertainties now extends beyond the geopolitical and legislative, as the effects of Hurricanes Harvey and Irma will require time to untangle,” Duncan said.

This increase is despite the rising economic uncertainty caused by Hurricane Harvey which hit South Texas and parts of Louisiana and Hurricane Irma, which swept through Florida. Geopolitical and trade uncertainties also pose downside risks to economic growth.

Goldman Sachs recently explained the hurricanes could have a significant downward pull on GDP, but that it would quickly bounce back from the drop.

And Fannie Mae cited similar data, saying while the storms may lead to near-term declines, economic activity will quickly rebound.

“Historically, natural disasters that hit heavily populated areas led to substantial near-term declines in economic activity but meaningful rebounds in subsequent quarters due to rebuilding efforts,” Duncan said. “Thus, economic growth in the second half of 2017 could still average a slightly stronger pace than the first half.”

The group explained the increase is due to greater strength in consumer spending and nonresidential investment in the second quarter as well as investment in business equipment.

Housing, however, saw a rough start to 2017 as existing and new homes sales reached year-to-date lows, and could only continue to decrease.

“Unfortunately, we continue to expect home sales to be flat during the second half of the year compared to the first half due to strong home price appreciation and lean inventories,” Duncan said.

But despite these weaknesses, Fannie expects the Federal Reserve will announce it will begin to taper its balance sheet at its September meeting. And while the ESR Group continues to predict a third rate hike in December, it explained there is a growing possibility the interest rate hike will have to hold off until next year.