February 27, 2008
JustQuotes: What The OFHEO Are They Thinking?
"U.S. regulators removed limits on the combined $1.5 trillion mortgage portfolios of Fannie Mae and Freddie Mac, enabling the companies to increase financing for the slumping housing market.
The asset caps, imposed in 2006 after the two largest mortgage finance companies revealed $11.3 billion of accounting errors, will end on March 1, the Office of Federal Housing Enterprise Oversight said in a statement today. The agency will still require the companies to set aside reserve capital that is 30 percent more than the usual minimum.
Unconstrained by portfolio limits, the government-chartered companies may buy more loans and bonds, replacing buyers who fled the market amid the collapse in subprime mortgages."
"Ofheo lifted the constraints after Fannie Mae and Freddie Mac met a demand that they resume timely reporting by the end of the month. Fannie Mae today posted a fourth-quarter net loss of $3.55 billion, as record home foreclosures increased credit losses."
∙ Fannie Mae, Freddie Mac Portfolio Caps Will Be Lifted [Bloomberg]
First Published: February 27, 2008 1:40 PM
Comments from "Plugged In" Readers
As I predicted before, FNM is showing huge (and growing) losses. Furthermore, even they themselves predict the 2008 numbers will be WORSE than 2007. So how smart is it to let them buy larger, riskier loans at this point? The first rule of holes is: when you're in one, stop digging.
Posted by: Dude at February 27, 2008 2:16 PM
Even OFHEO finally caved to the substantial pressure to let FM/FM buy more mortgages. It is no coincidence this happened at the same time that the size of the loans they can buy is also rising. The Bush administration is opposed to a new gov't housing corporation to buy mortgages (or a change in bankruptcy laws) but there is too much political pressure to do nothing. So, enter FM/FM.
None of this is going to do any good if the jumbo loan rates don't start dropping.
Posted by: anono at February 27, 2008 2:40 PM
I'm no expert in this area, but it seems like the heightened reserve limits would be a bigger damper on liquidity than the portfolio caps, which, as I understand it, weren't being bumped up against anyway.
Posted by: Trip at February 27, 2008 2:46 PM
so if the portfolio caps are lifted as of March 1, when will new "super-conforming" loans be actually available to consumers?
[Editor's Note: Current speculation is July 1st.]
Posted by: cy at February 27, 2008 3:00 PM
I'm hardly the expert either, but my understanding is that the caps have not been the limiting factor (they haven't been hitting the caps), so this may be a non-event. It was obviously done to appease the congress while not accomplishing anything at all.
"Even without a removal of the limits, Fannie Mae and Freddie Mac ``could grow their portfolios by about $100 billion for the next six months and not hit our constraints, so we have not been constraining them through this year,'' Ofheo Director James Lockhart told the Senate Banking Committee on Feb. 8 [
The removal of the portfolio limits ``does not help the credit markets,'' Doug Dachille, who oversees $7 billion in fixed-income investments as chief executive officer of First Principles Capital Management LLC in New York, wrote in a note today. With Fannie Mae and Freddie Mac reporting rising credit losses, ``the binding constraint to the growth of the portfolios is not the Ofheo caps but'' the Ofheo requirement the companies set aside 30 percent more reserve capital than normal.
Ofheo said it won't lift the reserve capital mandate until it's satisfied with the companies' finances.
Fannie Mae's loss for the fourth quarter was its second in a row. Freddie Mac is likely to report a loss tomorrow, according to the average estimate of 12 analysts surveyed by Bloomberg."
Just how soon do ya figure OFHEO will be satisfied with their finances when they are losing money hand over fist? What a joke. Congress is just dying to keep the populace satisfied before the elections so they don't "throw the bums out" so they'll do exactly what we demanded the Japanese stop doing when their bubble popped.
OFHEO, in their wisdom, just threw congress the most worthless bone possible while keeping a tight rein on FM/FM, who are basically the new robber barons of the modern housing bubble economy. The congress could care less, but OFHEO takes their responsibility to the public seriously.
Posted by: tipster at February 27, 2008 3:09 PM
Thanks tipster - this is good, right? I mean we don't want anymore gov't programs and, to the extent that we're stuck with these GSE's, we want them to lend responsibly, right?
Posted by: FSBO at February 27, 2008 4:28 PM
Actually, I've read some analysis that showed that OFHEO didn't really have a choice about removing the restrictions.
Back when the restrictions were levied, they were termed something like "these last until Fannie/Freddie can post timely financials"
The 2 GSE's are now finally filing timely financials (although they still haven't completed all their past restatements), so the restrictions are lifted. the contract has been fulfilled.
nothing OFHEO could do about it.
But again, before people get all excited about the new conforming limits
1) home prices across SF are falling by both OFHEO and also Case Schiller data. OFHEO will use that falling data to come up with SF's new conforming limit
2) the GSE's are bleeding money, bigger losses than they've ever had before. Thus, they may not be in a great position to lend against a high risk market (SF bay area is considered high risk now)
3) even if they do decide to lend in force here, it is highly unlikely that the new "conforming jumbos" will have a rate as low as the "conforming non-jumbos"
4) we still don't know what the eventual rates may be. The GSE's may lend, but the rates very well could be in the 7-9% range. (we've discussed this ad nauseum, how the Fed can drop the Fed Funds Rate, and the 10 year treasury may fall, but that mortgage rates may still rise due to the risk premium)
If you read Fannies last statement, it is SCARY. Specifically, it's not just the losses that are bad,it's that they predict (macro for the US, not SF specific)
-a bad 2008
-a bad 2009
-little possible recovery until 2010
-counterparty risk (they're worried that their servicers and lenders will go BK which would hurt Fannie... specifically: Countrywide mortgage)
That said, I fully expect some mortgages to be done by Fannie/Freddie... it's in their charter: to provide liquidity when nobody else will.
They will then go bankrupt
And we will all bail them out.
Posted by: ex SF-er at February 28, 2008 5:39 AM