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 midweek Monday Morning Cup of Coffee, but with extra caffeine.
National Review takes on #FannieGate today, and in a scathing argument they make the case that too many in the financial media prefer to dance around and obfuscate.
It’s s stunningly good read by two Yale legal scholars who don’t have a dog in the fight, and who don’t feel the need to serve as palace guards for the administration. Aem. It’s also an especially good summary for those who haven’t followed the #FannieGate saga so far.
Here’s a taste.
In a move that smacks of nationalization, the Federal Housing Finance Agency and the United States Treasury are pressing ahead with a plan that keeps two private companies — Fannie Mae and Freddie Mac — under government control at the expense of American investors. Now two shareholders have filed suit to hold the federal government accountable in a case that could have far-reaching implications for property rights. Filed in federal court in Delaware, Jacobs v. Federal Housing Finance Agency challenges the government’s 2012 decision to send all of Fannie and Freddie’s profits to the U.S. Treasury. The case is shaping up to be a major test of the limits of federal power, given that these moves appear to violate state laws as well. This lawsuit is the latest front in the battle over the two mortgage giants.
However, the arguement does incorrectly state, "Fannie and Freddie are privately owned mortgage-finance companies traded on the New York Stock Exchange."
Nonetheless, the authors mention the more important, and true, point:
They are highly profitable: The companies together generated net income of $21.9 billion last year. While they are commonly referred to as “government-sponsored enterprises” (GSEs), the companies have operated in private hands for decades. Like every major American financial firm, Fannie and Freddie faced acute financial distress during the financial crisis of 2007–08. Although the two companies were never deemed insolvent, the federal government stepped in to steady them. Congress passed the Housing and Economic Recovery Act of 2008 (HERA), injecting approximately $187 billion into the GSEs and naming the newly formed Federal Housing Finance Agency (FHFA) as their “conservator.”
And here, they get to the core, where the controversial sweep of the GSE profits proves to be a contentious hotspot:
Unsurprisingly, under basic corporate law, a conservator is meant to “conserve” the companies’ profits — not hand them over to the federal government. But, unlike the case with other companies that were bailed out, the government does not want to let go of Freddie and Fannie now that they are profitable again. In August 2012, soon after the two companies returned to profitability, Edward DeMarco, acting director of FHFA, and then–secretary of the Treasury Timothy Geithner unilaterally — without a congressional mandate and in violation of Delaware corporate law — amended HERA to “sweep” all of the companies’ profits back to the Treasury in the form of dividends then and forever, effectively wiping out millions of privately held shares. And while HERA had originally envisioned an arm’s-length negotiation between Fannie’s and Freddie’s independent boards and the Treasury, by 2012 the independent directors had been forced out and replaced with the director of the FHFA. The federal government was, in essence, negotiating with itself.
Read the whole thing here.
And it brings home the basic question at the heart of the whole FannieGate controversy — that is, leaving aside obfuscating, politically motivated legerdemain — how can the U.S. government in the form of the Treasury Department justify the blatant violation of due process and violation of the takings clause?
How, when Fannie and Freddie have paid back every cent in the government’s bailout (which was never necessary in the first place), can the government justify this absurd violation of the property rights of shareholders? (It doesn’t matter when they bought shares or what their motive was; they bought them.)
And how can the mainstream financial media continue to pretend the parrot isn’t dead?
Twitter got salty.
In other, non-parrot related news, the U.S. Census Bureau recently released the U.S. homeownership rate figure, which at 63.4% is a 50-year low. (h/t Confounded Interest)
And this comes despite the fact that mortgage applications are up 25% annually and the Fed keeping the Fed Funds Target rate at 0.25%.
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(Source: Confounded Interest)
So something’s happening here; what it is ain’t exactly clear. But it does make one skeptical at any exuberance about the health of the housing economy in general.
Are we headed to a rate hike or, for myriad other reasons, a new QE ship setting sail?
On a positive note, independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of 67 basis points ($1,522 on each loan they originated) in the second quarter of 2015, up from a reported gain of 60 basis points ($1,447 per loan) in the first quarter of 2015, according to the Mortgage Bankers Association’s Quarterly Mortgage Bankers Performance Report.
Marina Walsh at MBA says that the purchase share of total first mortgage originations by dollar volume was 62% in the second quarter of 2015, up from 51% in the first quarter of 2015. For the mortgage industry as a whole, MBA estimates the purchase share at 57% in the second quarter of 2015.
“For the period from the first quarter 2011 through the second quarter 2015, there were eight quarters when the purchase share was over 60% and ten quarters when the purchase share was under 60%,” Walsh said. “The net production income for those quarters when purchase share topped 60% averaged 32 basis points. The net production income for those quarters when purchase share was below 60% averaged 78 basis points.
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“For those quarters in which the purchase share exceeded 60%, the second quarter 2015 had the highest net production income, largely because average company production volume was also at the highest level of any quarter, as both purchase volume grew and mortgage pipelines from the first quarter’s refinance boomlet closed,” she said.
Concurrently, the Federal Deposit Insurance Corp. reported that FDIC-insured institutions earned $43 billion in the second quarter of 2015.
That was up $2.9 billion, or about 7.3% from the second quarter of 2014 and the highest quarterly income on record.
The increase in earnings was mainly attributable to a $3.6 billion rise in net operating revenue.
Of the 6,348 insured institutions in the second quarter of 2015, more than half —58.7% — reported year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable during the second quarter fell from 6.8% a year earlier to 5.6%, the lowest since the first quarter of 2005.
“Bankers generally reported another quarter of higher earnings, improved asset quality, and increased lending," FDIC Chairman Martin Gruenberg said. "There were fewer problem banks, and only one bank failed during the second quarter
"However," he continued, "the low interest-rate environment remains a challenge. Many institutions have responded by acquiring higher-yielding, longer-term assets, but this has left banks more vulnerable to rising interest rates and that is a matter of ongoing supervisory attention."
Finally for the investment minded, it looks like agency mortgage bond returns for August were in line with Treasurys.
“In August, agency MBS posted total returns of 0.1%,” said Chris Flanagan at Bank of America/Merrill Lynch. “Excess returns for Agency MBS was -0.2%, which was 0.1pp higher than -0.3% for Treasurys.”
Flanagan says that securitized credit performance was mostly in line with the broader credit markets and posted negative total returns in August.
“In the legacy non-agency space, Option ARM posted -2.6% returns due to heavy BWIC activities. Alt-A 5/1 WAC and subprime floaters posted -0.7% and -0.6% respectively, while fixed rate prime bonds returns were roughly flat on the month thanks to a higher carry,” he said.