Politics & MoneyMortgage

Trending Thursday: More research questions why Treasury snatched Fannie Mae

Plus interest rates, mortgage markets, appraisal volumes

Trending Thursday is a roundup of the stories shaping the week and what’s yet to come through the weekend — also taking into account social media reaction. Think of it as a mid-week Monday Morning Cup of Coffee, but with extra caffeine.

So you may have heard about this little spat between investors in the GSEs and the Treasury Department.

One of the big bones of contention, beyond the shareholder lawsuits out there, is whether Treasury should have forced Fannie Mae and Freddie Mac into conservatorship.

We’ve examined this before with the 27-page forensic accounting report conducted by some involved GSE investors, which was subsequently audited and found sound by an independent forensic accounting specialist named Larry Crumbley at the Department of Accouting, Lousiana State University.

Now, a new white paper analysis supports those initial findings, and goes a lot further.

The white paper analysis of the Treasury takeover of Fannie Mae, is titled a little plainly “A White Paper Analysis of the Treasury Takeover of Fannie Mae” (don’t judge, accounting, like science, is vanilla) and was authored by Adam Spittler CPA, MS; Mike Ciklin JD, MBA, MRE; and
 G. Stevenson Smith, Ph.D., CPA, CMA.

Here’s the summary:

Fannie Mae was taken over by the U.S. Treasury on September 6, 2008. Such a complete takeover of a company with private stock ownership is an action that had never been taken by the Federal government before. It was a controversial move made at the time when financial markets were experiencing a panic. Yet, the question remains was this takeover necessary?

This white paper reviews Fannie’s Mae financial statements to understand the financial viability of the company during the period from 2007 to 2014. A number of financial indicators and documents provide evidence that Fannie Mae was not in the dire straits reported as the justification for the takeover. It is likely that Fannie Mae could have survived the financial crisis without the intervention of the Treasury.

The U.S. Treasury has controlled Fannie Mae since 2008 through the Federal Housing Finance Agency. Today Fannie Mae is a cash-generating machine that sends billions of dollars in quarterly dividends to the Treasury. These business-generated cash flows provide the Treasury with monies to fund Congressional appropriations and delay the harsh reality of asking Congress for an increase in the legal debt limit which is a controversy in itself. Because of the terms of the takeover, Treasury can increase its dividend payments by simply making a managerial decision to increase their investment in Fannie Mae and thus increase its cash dividend payments.

Without complete funding for appropriations, the Administration can use the cash dividends along with other available revenues to fund appropriations it deems the most important to its interests and concerns. The result is that not all appropriations passed by Congress will be equally funded. Thus, without complete funding, such as obtained with an increase in the debt limit, certain Congressional priorities wind up curtailed. The cash dividends from Fannie Mae help support this thwarting of Congressional actions.

And the conclusion is pretty damning.

Fannie Mae could have survived the financial crisis of 2007-2008 without the intervention of the Treasury. The financial data indicates that Fannie was a going concern at the time the conservatorship began in September 2008. The reason for the takeover was that a financial panic had gripped the financial markets, not that the entities needed any sort of financial assistance to weather the storm. In order to alleviate everyone’s fears, the government had to take high profile measures to settle the markets. The U.S. Treasury decided that one such step was to nationalize Fannie Mae.

Today, Fannie Mae serves as cash-generating, petty cash machine for the Treasury that allows the Treasury more flexibility in requesting increases in the debt limit as well as providing discretionary spending authority.

In between the summary and conclusion is a host of supporting, falsifiable, tangible evidence, that should be the catalyst for some kind of major investigation by Congress or some federal authority, or at the very least an investigative series by one of the mainstream financial pubs.

If you want to read the whole thing, and you should, click here.

One of the best leading indicators of mortgage activity is the volume of appraisal activity and this week we see a doozy of a jump.

If this week’s report from a la mode, inc. shows anything, it’s that mortgage applications should continue rising as the did last week.

The National Appraisal Volume Index was up 14.1% for the week starting 9/13/15.  

“The strong numbers were probably caused by a mad rush to empty mortgage pipelines a head of the FED’s meeting last week,” says Kevin Golden, director of analytics for a la mode inc.

HousingWire is partnering with a la mode, inc., an appraisal forms software company which has tracked the appraisal volume throughout the country since 2006, to provide a weekly read on appraisal volume. Appraisal volume is an indicator of market strength and has a few advantages over mortgage applications, especially since fallout is less for appraisals since they are ordered later in the mortgage process after credit worthiness has been approved. 

Here’s the latest appraisal volume:

Last week the Federal Reserve announced it would once again delay liftoff from its zero interest rate policy.

During her press conference, Fed Chair Janet Yellen said that "[the housing market] remains very depressed."

Ed Pinto, co-director of the International Center on Housing Risk at the American Enterprise Institute, asks if the Fed missed the boat, and makes the case at Real Clear Markets.  

“July existing home sales were at a seasonally adjusted annual rate of 5.6 million, the highest level since the end of the peak of the housing bubble in December 2006. Home sales are up 23% from July 2012 — just before the Fed's announcement of its last round of quantitative easing known as QE3 in September 2012,” he says. “This strength has been more than fully reflected in the home loan market, a market dominated by FHA, Fannie Mae, Freddie Mac, and other government agencies.

“The spring home finance market has also been booming. Agency unit home purchase volume in August is up by double digits over the same months in 2013 and 2014,” Pinto says.

Further, he adds, this boom has been influenced by outsized gains for first-time buyers: up 26 and 20% over 2013 and 2014 respectively. In August, FTB accounted for 57% of primary owner-occupied home purchase mortgages with a government guarantee — representing healthy increases from both August 2013 and 2014.

In short, he says, the Fed needs to get on with a hike.

“The longer the Fed is stuck on zero, the greater the pricing distortions that will result. The Fed needs to get unstuck —the sooner the better,” Pinto says.

Speaking of Yellen, one report and common sense says that you shouldn’t expect much of a clue on when — and let’s be honest, if — there’s a rate hike coming in the foreseeable future. (Confounded Interest says don't bet on it in October.)

"There is just not a lot she can say about monetary policy and what the Fed can do; it is such an uncertain environment," Michael Moran, Daiwa Capital Markets America's chief economist, tells MarketWatch.

A client note from analysts says that the strong mortgage market we’ve seen in 2015 bodes well for housing as the year enters its final leg.

FBR & Co. says that heading into the fall, the health of the mortgage market in 2015 has trended in line with their initial expectations at the beginning of the year and above consensus estimates.

“This has largely been a result of a gradually improving purchase market and a renewal in strong refinancings as rates fell sharply in the first half of this year,” FBR syas. “The Mortgage Bankers Association estimates originations as of the end of September 30, 2015, of $1.1 trillion. This level would have largely met original investor expectations heading into the year, with three months remaining.

“The next step is where the industry heads from here. With TILA-RESPA set to come on line in the fourth quarter, we do not believe there will be a QM-sized disruption in the market,” they write. “Mid-tier originators should continue to show strong growth, as market share gains will likely continue as larger players remain cautious on credit standards and very small mortgage lenders struggle with implementation costs.”

Not everyone is impressed with today's sales numbers.

But at least they're happy in Boston.

Oh, and while oil prices being so low are good for the consumer, those in energy states are sweating. But CBRE says don't worry, be happy.

3d rendering of a row of luxury townhouses along a street

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