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The Federal Housing Finance Agency is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO), absorbing the powers and regulatory authority of both entities, with expanded legal and regulatory authority, including the ability to place government sponsored enterprises (GSEs) into receivership or conservatorship. [1]

"The Regulatory Reform Act replaces the conservatorship provisions previously applicable to the enterprise with conservatorship and receivership provisions based generally on federal banking law. The Regulatory Reform Act expands the grounds for which an enterprise may be placed into conservatorship, establishes the grounds for which an enterprise may be placed into receivership, and provides for appointment of FHFA as conservator or receiver.[2]

The enabling law establishing the FHFA is the Federal Housing Finance Regulatory Reform Act of 2008, which is Division A of the larger Housing and Economic Recovery Act of 2008, Public Law 110-289, signed on July 30, 2008 by President George W. Bush.

One year after the law was signed, the OFHEO and the FHFB shall go out of existence. All existing regulations, orders and decisions of OFHEO and the Finance Board remain in effect until modified or superseded. James B. Lockhart III, the director of OFHEO, is the director of the new FHFA.[3][4]

See HR 3221, signed into law as Public Law 110-289: A bill to provide needed housing reform and for other purposes.
Access to Legislative History: Library of Congress THOMAS: A bill to provide needed housing reform and for other purposes.

White House pre-signing statement: Statement of Administration Policy: H.R. 3221 – Housing and Economic Recovery Act of 2008 (July 23, 2008). Executive office of the President, Office of Management and Budget, Washington DC.

On the day of the law's signing, James Lockhart stated: "For more than two years as Director of OFHEO I have worked to help create FHFA so that this new GSE regulator has far greater authorities than its predecessors. As Director of FHFA, I commit that we will use these authorities to ensure that the housing GSEs provide stability and liquidity to the mortgage market, support affordable housing and operate safely and soundly."[5]

FHFA director Lockhart transmitted a "notice of establishment," for publication in the Federal Register on September 4, 2008. The notice formally announced the agency's existence and authority to act. FHFA “Notice of establishment sent to the Federal Register. (Press Release, September 4, 2008, Federal Housing Finance Agency, summarizing the Federal Register transmittal) Establishment of a new independent agency Federal Housing Finance Agency. (August 30, 2008). (Signed by James B. Lockhart III, Director, FHFA) -- The notice as transmitted to the Federal Register.

Administration efforts on reform of the GSEs

Today, the Obama Administration announced expanded opportunities for public engagement on the future of our nation's housing finance system, including Fannie Mae and Freddie Mac. These events, which will include a major conference in Washington, D.C., will help provide critical public input as the Administration continues its work developing a comprehensive housing finance reform proposal for delivery to Congress by January 2011.

"The future of our housing finance system is critical not only to our economic recovery, but also to millions of American homeowners in every corner of our country," said Treasury Secretary Tim Geithner. "Now is the time to build on the foundation we laid with the historic Wall Street Reform legislation President Obama signed last week and aggressively move forward to improve our nation's housing finance system. The Obama Administration is committed to delivering a comprehensive reform proposal that protects taxpayers, institutes tough oversight, restores the long-term health of our housing market, and strengthens our nation's economic recovery."

"The Obama Administration is committed to engaging stakeholders and the public as we consider proposals for reforming the housing finance system," said U.S. Housing and Urban Development Secretary Shaun Donovan. "The need for reform is clear and we want to listen to a wide range of views as we chart a course to a more robust and stable housing market that works for the benefit of the American people."

In the months ahead, the Administration will continue to gather input from a broad cross-section of stakeholders through a variety of events. On August 17, the Obama Administration will host a Conference on the Future of Housing Finance in Washington D.C. at the Treasury Department. This event will bring together leading academic experts, consumer and community organizations, industry groups, market participants, and other stakeholders for an open discussion about housing finance reform.

The Obama Administration has already begun the work of developing proposals for reforming our nation's system of housing finance. In early 2010, Secretaries Geithner and Donovan delivered testimony before Congress on the Obama Administration's ongoing work in this area, and the broad principles that would guide those efforts.

In April 2010, Treasury and HUD issued a set of questions for public comment on the future of the housing finance system, which received more than 300 responses from a broad cross-section of consumer groups, industry groups, market participants, members of the public, think tanks, and other stakeholders. These responses will help provide additional input and perspective as the Obama Administration moves forward to develop its comprehensive reform proposal.

To view these responses to the questions for public comment, please visit: here and here.)

Senate oversight

Senate Banking Committee hearing October 8, 2009, Future of the Mortgage Market and the Housing Enterprises

Watch this hearing live

Thursday, October 8, 2009, 09:30 AM - 12:30 PM, 538 Dirksen Senate Office Building, room 538

  • Mr. Edward J. DeMarco, Acting Director, Federal Housing Finance Agency
  • Mr. William Shear, Director, Financial Markets and Community Investment, U.S. Government Accountability Office
  • Mr. Andrew Jakabovics, Associate Director for Housing and Economics, Center for American Progress Action Fund
  • Dr. Susan M. Wachter, Worley Professor of Financial Management, Wharton School of Business, University of Pennsylvania
  • Honorable Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute

House oversight

10:00 a.m., Tuesday, March 23, 2010, 2128 Rayburn House Office Building

  • The Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury
  • Ms. Sarah Rosen Wartell, Executive Vice President, Center for American Progress
  • Mr. Michael Berman, President and Chief Executive Officer, CWCapital, on behalf of Mortgage Bankers Association
  • Mr. Mark A. Calabria, Ph.D., Director, Financial Regulation Studies, Cato Institute
  • Mr. Vincent O’Donnell, Vice President, Affordable Housing Preservation Initiative, Local Initiatives Support Corporation (LISC)
  • Mr. Robert E. DeWitt, President, Chief Executive Officer, and Vice Chairman, GID Investment Advisers LLC, on behalf of National Multi-Housing Council
  • Ms. Janis Bowdler, Deputy Director, Wealth-Building Policy Project, National Council of La Raza Mr. Anthony Sanders, Distinguished Professor of Real Estate Finance, School of Management, George Mason University
  • Mr. Vince Malta, Vice President and Liaison to Government Affairs, National Association of Realtors

FHFA updates Congress

More wishful thinking and generic talking points from the FHFA which will end up being the opposite of what will end up happening. In the meantime, still no update on proposed GSE regulation or why they are still not included in the Federal Budget. From Dow Jones:

WASHINGTON (Dow Jones)--The U.S. government "remains committed" to reducing the size of Fannie Mae (FNM) and Freddie Mac's (FRE) retained loan portfolios over time, the firms' regulator said Tuesday.

Edward DeMarco, acting director of the Federal Housing Finance Agency, said in a letter to House and Senate lawmakers that the two companies will be limited to holding no more than $810 billion in their retained portfolios by the end of 2010. Both firms are currently under that figure, which will be reduced by 10% annually.

"I am instructing each Enterprise to develop a detailed plan for how it will manage its portfolio to stay within those limitations," DeMarco wrote.

The letter outlines the steps the FHFA have taken with the firms since they were placed under government control, or conservatorship, in September 2008. While that process has worked thus far, DeMarco urged lawmakers to start discussing what role the companies should play in the mortgage finance market going forward.

"There are a variety of options available for post-conservatorship outcomes, but the only one that FHFA may implement today under existing law is to reconstitute the two companies under their current charters," he wrote. The letter comes as the Obama administration is wrestling with what to do with the two firms while also trying to push financial regulatory legislation through Congress. Officials had said an update would be provided with the fiscal 2011 budget, which was released Monday, but no details or information were released. Link for full letter

FHFA reports on the GSEs' financial condition

The Federal Housing Finance Agency has released its first Conservator's Report on the Enterprises' Financial Condition which provides an overview of key aspects of the financial condition of Fannie Mae and Freddie Mac (the Enterprises) during conservatorship.

The report will be released on a quarterly basis following the filing of the Enterprises' financial results with the Securities and Exchange Commission and includes information on:

  • Enterprise presence in the mortgage market;
  • credit quality of Enterprise mortgage purchases;
  • sources of Enterprise losses and capital reductions; and
  • Enterprise loss mitigation activity.

"FHFA initiated the Conservator's Report to enhance public understanding of Fannie Mae's and Freddie Mac's financial performance and condition leading up to and during conservatorship," said FHFA Acting Director Edward J. DeMarco.

Treasury's back door bailout for Fannie and Freddie

At a hearing last fall, U.S. Treasury Secretary Timothy Geithner told lawmakers that he and his team were working to put the $700 billion financial bailout fund “out of its misery.” But some in Washington now see a second, backdoor bailout in its place.

On Dec. 24, the Obama administration announced it was extending an unlimited credit line to mortgage finance agencies Fannie Mae and Freddie Mac, which would keep them afloat no matter how high their losses.

Representative Dennis Kucinich, an Ohio Democrat who was an early opponent of Obama in the 2008 presidential race, thinks the move is backdoor way to help banks, and a congressional subcommittee he leads is investigating the Treasury’s decision to cover unlimited losses at the housing finance companies.

“This new authority must be used responsibly and for the benefit of American families,” Kucinich said. It “cannot be used simply to purchase toxic assets at inflated prices, thus transferring the losses to the U. S. taxpayers and acting as a backdoor TARP.”

That’s exactly what Treasury is doing, says Dean Baker, co-director of the Center for Economic Policy Research in Washington.

“This looks like the original TARP,” Baker said, referring to $700 billion financial rescue fund, known officially as the Troubled Asset Relief Program.

The original bailout program, devised by former Treasury Secretary Henry Paulson, “was a plan to help the banks restore their capital position by buying bad assets at and above market price, and that looks like what Fannie and Freddie will be doing if they are incurring losses of this magnitude.”

The Treasury’s announcement said the unlimited credit line for the two government-controlled companies would be in place through the end of 2012, weeks after Obama would face voters if he seeks a second term.

The Treasury also said it was scrapping plans for the two agencies, which play a role in funding three-fourths of all U.S. residential mortgages, to reduce the size of their investment portfolios. The 2010 limits on their portfolios, in fact, would allow their investment holdings to grow.


Kucinich is not the only one on Capitol Hill up in arms. House Energy and Commerce Committee Chairman Henry Waxman, a California Democrat, said he doesn’t like the idea of a “blank check” for Fannie and Freddie.

And Darrell Issa, the top Republican on the House Oversight and Government Reform Committee, called it “a continuation of the bailout policies that have mortgaged away the future solvency of our country.”

As the financial crisis unfolded in 2008, Paulson announced that the mortgage agencies would get an explicit guarantee from the federal government: $100 billion each. The Obama administration doubled that in early 2009 to $200 billion each. Combined, Fannie and Freddie have so far tapped about $111 billion.

Until the 2008 announcement, investors had seen their congressional charter and existing line of credit with Treasury as an implicit guarantee of support from the federal government.

The Obama administration now hopes its new, unlimited and even more explicit guarantee will bolster investor confidence and bring private sector buyers back into the market to help hold down mortgage costs.

But mortgage rates are expected to rise in the coming months as the Federal Reserve ends its $1.25 trillion program to purchase mortgage-backed securities at the end of this quarter. Freddie Mac sees the average rate on a 30-year, fixed-rate mortgage rising to 6 percent by the end of the year.

Higher mortgage rates could smother any emerging rebound in the still-fragile U.S. housing market, and a further decline in home prices could likely create more foreclosures.

That would leave many banks with even weaker portfolios. Banks could dump their toxic mortgage assets onto Fannie Mae and Freddie Mac, since their portfolio loan limits are now capped at $810 billion by the end of this year.

They had earlier been set to be 10 percent lower than 2009 year-end levels. Fannie said on December 28 its mortgage investments ended November at $752.2 billion, down 4.9 percent from the end of 2008. Freddie Mac’s mortgage investment portfolio shrank in November to $761.8 billion, a 5.8 percent decline for the first 11 months of the year, the company said December 23. December figures are not yet available.

Treasury officials have said their move to allow unlimited losses for three years is merely precautionary. But the Center for Economic Policy Research’s Baker said, “you only take precaution against conceivable events in the world.”

He adds that it is hard to imagine that Fannie and Freddie would have losses of more than $400 billion from mortgages originated before September 2008, suggesting the agencies are incurring losses on what they have bought since 2008, “which should raise a lot of eyebrows.”

The administration said it plans to lay out a vision for the future of the two agencies in the president’s fiscal 2011 budget proposal in February. But officials caution against expecting too much detail.

Conservatorship of Fannie Mae and Freddie Mac

On September 7, 2008, FHFA director Lockhart announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA. [6] [7]

The action is "one of the most sweeping government interventions in private financial markets in decades". [8]

U.S. Treasury Secretary Henry M. Paulson, appearing at the same press conference, stated that placing the two GSEs into conservatorship was a decision he fully supported, and said that he advised "that conservatorship was the only form in which I would commit taxpayer money to the GSEs." He further said that "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.".[9]

In the announcement, Mr. Lockhart indicated the following items in the plan of action for the conservatorship:

  1. On September 8, 2008, the first day of the conservatorship, business will be conducted normally, with stronger backing for the holders of Mortgage Backed Securities (MBS), senior debt and subordinated debt.
  2. The Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month, without capital constraints.
  3. As the conservator, the FHFA will assume the power of the Board and management.
  4. The present CEOs have been dismissed, but will stay on to help with the transition.
  5. Appointed as CEOs are Herb Allison, for Fannie Mae and David M. Moffett for Freddie Mac. Allison is former Vice Chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF. Moffett is the former Vice Chairman and CFO of US Bancorp. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally strong non-executive chairmen.
  6. Other management action will be very limited. The new CEOs agreed it is important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.
  7. To conserve over $2 billion annually in capital the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.
  8. All political activities, including all lobbying, will be halted immediately. Charitable activities will be reviewed.
  9. There will be financing and investing relationship with the U.S. Treasury via three different financing facilities, to provide critically needed support to Freddie Mac and Fannie Mae and the liquidity of the mortgage market. One the three facilities is a secured liquidity facility which will be not only for Fannie Mae and Freddie Mac, and also for the 12 Federal Home Loan Banks that FHFA also regulates.

GAO issues report on restructuring of Fannie and Freddie

The Government Accountability Office (GAO) released a report entitled, “Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises’ Long-term Structures”.

Last September, the Federal Housing Finance Agency placed the GSEs into conservatorship fearing that their deterioration would harm U.S. financial stability.

Since being placed in conservatorship, several proposals have been suggested as to how the GSEs should be restructured. In part, today’s report criticized the proposals for restructuring the GSEs. Those proposals include:

  • reconstituting the GSEs as for-profit corporations with government sponsorship but place additional restrictions on them to minimize risks;
  • establishing the GSEs as government corporations or agencies that would focus on purchasing qualifying mortgages and issuing mortgage backed securities but eliminate their mortgage portfolios ; and
  • abolishing the GSEs in their current form and disperse mortgage lending and risk management throughout the private sector.

In response to the proposal that would revamp the GSEs into for-profit corporations with government sponsorship, the report concluded that, “[c]ontinuing the enterprises as GSEs could present significant safety and soundness concerns as well as systemic risks to the financial system.” It went on to state, “[i]n particular, the potential that the enterprises would enjoy explicit federal guarantees of their financial obligations, rather than the implied guarantees of the past, might serve as incentives for them to engage in risky business practices to meet profitability objectives.” The GAO also feared that “[i]nvestors might be unwilling to invest capital in reconstituted enterprise unless the Treasury assumes responsibility for the losses incurred during their conservatorship.” The report stated that the GSEs might “face challenges retaining capable staff or become overly bureaucratic and unreceptive to market developments” if established as government corporations. Lastly, the GAO was concerned that, given the substantial financial assistance while in conservatorship, it would be difficult to “credibly privatize” the GSEs. The report found that, “the financial markets likely would continue to perceive that the federal government would provide substantial financial support to the enterprises, if privatized as largely intact entities, in a financial emergency.”

U.S. ends cap on Fannie, Freddie lifeline for 3 years

The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion lifeline. Treasury Department officials said they didn’t expect the companies to need assistance beyond what is available under the current caps, barring significant deterioration in the economic outlook.

Today’s announcement “should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis,” the Treasury said in a statement in Washington.

Portfolio Size

The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolios of mortgage assets. Previously, the companies were instructed to reduce their portfolios at a rate of 10 percent a year. Now, they will be required to keep the value of their portfolios below a maximum limit, currently $900 billion, that will go down by 10 percent a year.

This means they will not need to take immediate action to trim their holdings and could allow them to rise. Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies.

“Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary,” the Treasury said.

Fed Program

The change in the portfolio limits may ease investor concern that the companies could be forced to shrink their portfolios at the same time that the Federal Reserve ends its $1.25 trillion mortgage-bond purchase program. That could have exacerbated pressure on mortgage rates caused by the end of the Fed program, Laurie Goodman, an analyst in New York at Amherst Securities Group LP, said this month.

The Treasury said today that it is ending its mortgage- backed security purchase program as of Dec. 31, after about $220 billion in purchases. The government also is eliminating a short-term credit facility for the two companies and the Federal Home Loan Banks that was never used.

Also today, the companies disclosed in regulatory filings that Fannie Mae Chief Executive Officer Michael Williams and Freddie Mac CEO Charles Haldeman Jr. are each eligible for compensation of as much as $6 million this year.

Executive Pay

Pay at the mortgage-finance companies, which were seized by the U.S. in September 2008, added to debate over salaries for executives at companies dependent on government bailouts. Compensation must be sufficiently high to “attract and retain” top talent, their regulator, the Federal Housing Finance Agency, said in a statement.

In addition to the CEO pay, 10 additional executives at the two companies are eligible collectively for $30.1 million in compensation for this year. Overall, pay for top executives of the mortgage-finance companies is down 40 percent from before they were seized, the regulator said.

Brian Faith, a Fannie Mae spokesman, and Michael Cosgrove, a Freddie Mac spokesman, declined to comment on the executive compensation and didn’t immediately return messages on the later Treasury announcement.

The Obama administration is still developing its long-term plan for Fannie Mae and Freddie Mac. In today’s statement, the department said it expected to release a preliminary report on the companies as part of the 2011 budget, due in February.

‘Prudent’ Policy

Recent announcements from the companies and the Federal Housing Administration “demonstrate a commitment to prudent housing finance policy that enables a transition to an environment where the private market is able to provide a larger source of mortgage finance,” the Treasury said.

The Treasury and Federal Housing Finance Agency seized control of the mortgage-finance companies almost 16 months ago amid fears the two were at risk of failing. The government- sponsored enterprises, or GSEs, own or guarantee about $5.5 trillion of the $11.7 trillion in U.S. residential mortgage debt.

Officials set up the Treasury lifelines, which were expanded in May, to keep the companies solvent. If the two firms exhaust that backstop, regulators will be required to place them into receivership.

Treasury officials weren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said in an interview last week.

GSE Losses

Washington-based Fannie Mae has lost $120.5 billion over the past nine quarters and McLean, Virginia-based Freddie Mac has recorded $67.9 billion in cumulative losses over the past nine quarters amid a three-year housing slump.

The companies are an integral part of President Barack Obama’s housing-relief plan and have been pushed by the government to help more homeowners renegotiate their mortgages to stay out of foreclosure.

As part of today’s announcements, made ahead of a Dec. 31 expiration of some of the Treasury’s authority, the department said it would delay setting certain fees connected with the assistance program until the end of next year. The Treasury also made technical changes that affect the definition of mortgage assets and other accounting issues.

Fannie requests another $15B from govt

Fannie Mae (FNM) posted a narrower third-quarter loss but reported $22 billion of credit-loss provisions and foreclosed-property costs as it continues to deal with spiking delinquency rates.

The mortgage financier, placed under conservatorship 14 months ago to prevent its potential implosion, requested another $15 billion of aid as part of the $200 billion package extended to it. Fannie has received $44.9 billion so far.

The company admitted in its quarterly report, filed late Thursday with the Securities and Exchange Commission, that it will likely need more money from the Treasury Department in the future and reiterated "we are dependent on the continued support of Treasury in order to continue operating our business."

Fannie shares fell 5 cents to $1.07. The stock through the close was up 47% this year.

Loss reserves jumped 20% during the quarter to $64.72 billion; the prior-year figure was $15.53 billion.

The serious delinquency rate--loans at least three months past due or awaiting foreclosure--rose to 4.72% from 3.94% in the second quarter and 1.72% a year earlier.

Meanwhile, Fannie's loss narrowed to $18.87 billion, or $3.47 a share, from $28.99 billion, or $13 a share, a year earlier. The prior year had a $21.4 billion charge to write down the value of potential offsets to future income taxes.

Revenue jumped 47% to $5.95 billion.

To deal with souring loans, the company said it modified 56,816 loans, nearly double the second-quarter figure. Meanwhile, foreclosed-property acquisitions more than doubled to 98,428.

Looking ahead, Fannie trimmed its 2009 home-price drop forecast to 6% from 7% to 12%.

Dealers urge government to maintain "explicit" backstop for mortgage market

Today, in response to the Obama administration’s request for public input on reform of the housing finance system, the Securities Industry and Financial Markets Association (SIFMA) issued a release in which it declared its support for “some form of continued government support for the mortgage finance industry.” The release was accompanied by a comment letter submitted by SIFMA to the Treasury Department spelling out the association’s positions in greater detail.

SIFMA recommends that policymakers decide on the desired benefits of a mortgage market before undertaking reform of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac or the mortgage finance system in general. Once these objectives have been decided, SIFMA said, policymakers should consider the following issues when determining the form of a secondary mortgage market: “how liquid secondary markets for loans and MBS [mortgage backed securities] would be, the breadth of products that would be offered to consumers, the capacity of lenders to extend credit, whether national lending markets could be sustained or if regional pricing differentials would reappear, and, ultimately, the cost and affordability of credit to consumers.” In particular, SIFMA urged policymakers to focus on “preserving the simplicity and homogeneity of the GSE MBS markets” to preserve the markets’ liquidity.

SIFMA cautioned that “the urge to ‘slay the dragon’ should not cause collateral damage that would eliminate or make impossible the beneficial impacts and legacy of the old system that developed around the GSEs.” Additionally, the association argued that a government back stop was likely required to make mortgage markets function properly: “Some form of an explicit government guarantee on MBS will be required to maintain the liquidity of the TBA MBS markets. Purely private sector solutions cannot accomplish this important goal.”

The association acknowledged that “the resolution of the conservatorships of the current GSEs will clearly be a challenge,” but warned that “bifurcation of the markets into pre- and post-reform markets should be avoided.” Instead, the association reiterated its support for continued government support, which, in SIFMA’s view, is a superior alternative to terminating the existing market, which it believes “would have serious and long term consequences for the global flow of capital to the United States.”

Fannie and Freddie delisted from NYSE

The mortgage finance giants Freddie Mac and Fannie Mae were ordered to delist from York Stock Exchange by the federal agency that oversees the two companies.

The regulator for the companies, the Federal Housing Finance Agency, said the decision to delist from the stock exchange was no reflection on their performance.

In a statement, the Federal Housing Finance Agency said its decision was based on Fannie Mae’s share price falling below the Big Board’s required minimum of $1 a share. The share price sank in September 2008, and since then has hovered around $1. Tuesday’s close was 92.4 cents a share.

Once the delisting is completed, the regulator said, each company’s shares will be quoted on the Over-the-Counter Bulletin Board.

“F.H.F.A.’s determination to direct each company to delist does not constitute any reflection on either enterprise’s current performance or future direction, nor does delisting imply any other findings or determination on the part of F.H.F.A. as regulator or conservator,” the agency’s acting director, Edward J. DeMarco, said.

“A voluntary delisting at this time simply makes sense and fits with the goal of a conservatorship to preserve and conserve assets,” Mr. DeMarco said.

Fannie derivative exposure

Table showing derivative holdings and exposure of Fannie Mae on June 30, 2009. As of June 30 FNM had a balance sheet of $900 billion. Against that position they bought and sold over the counter derivative contracts totaling $1.2 Trillion. On average $100 billion per day. Source: FNM 10Q 2Q09 Derivative Instruments XBRL

FHFA subpoenas issuers of mortgage-backed securities

A federal regulator said it sent 64 subpoenas to issuers of mortgage-backed securities and other entities in an effort to probe whether the firms misled Fannie Mae and Freddie Mac, two of the biggest investors in privately issued bonds.

The subpoenas, issued on Monday by the Federal Housing Finance Agency, which oversees the government-backed mortgage titans, could lead the government to recoup some of the billions of dollars that Fannie Mae and Freddie Mac lost when they scooped up mortgage-backed securities issued by Wall Street banks during the housing boom.

The FHFA didn't disclose its targets. But the top private issuers of mortgage securities included Bear Stearns Cos. and Washington Mutual Inc., which were taken over by J.P. Morgan Chase & Co., as well as Countrywide Home Loans and Merrill Lynch, which were taken over by Bank of America Inc. Deutsche Bank AG and Morgan Stanley were also among the top issuers. All the banks declined to comment.

The probe focuses on the "private label" securities based on subprime and other risky loans that were originated by mortgage companies, packaged by Wall Street firms, and then sold to investors. Many of the mortgage securities were made up of subprime loans and mortgages requiring little or no documentation of a borrower's income, which deteriorated most rapidly during the housing meltdown.

Fannie and Freddie couldn't purchase those loans directly, but they were allowed to invest in slices of those securities that carried triple-A ratings. Fannie and Freddie were among the largest investors in those securities, and held nearly $255 billion at the end of May.

At the end of the first quarter, Freddie said it held $97 billion in mortgage securities backed by subprime and Alt-A loans, and that it forecast unrealized losses of $30 billion on those loans. Fannie reported holdings of $44 billion in subprime and Alt-A securities which had losses of $16 billion.

Private-label securities have been among the poorest performing mortgages. They accounted for just 10% of outstanding mortgages by the end of the first quarter but represented 27% of all mortgages that were 90 days or more past due.

The custom in the private securities world was to "gather those assets, structure them into a security, and then try to paint the most positive picture you possibly can," said Ted Jadlos, chief executive of Berlos Capital, a mortgage advisory firm. "You're going to find plenty of areas where the true risk of the asset being marketed was understated."

Issuing subpoenas marks the first step in any effort to rescind those mortgage security purchases. If the regulator can find loan files or other documents that show that the loans underlying the securities didn't match the materials used to market those investments, then it could force the issuers to take back the securities, potentially costing them billions.

The FHFA said that it had opted to issue the subpoenas after being rebuffed in earlier efforts to collect loan files. "By obtaining these documents we can assess whether contractual violations or other breaches have taken place leading to losses for the [companies] and thus taxpayers. If so, we will then make decisions regarding appropriate actions," said Edward DeMarco, the agency's acting director, in a statement.

Fannie Mae and Freddie Mac were taken over by the government in September 2008 through a legal process known as conservatorship, and the government has injected $145 billion to keep the firms afloat.


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