Sept 2008: Rep. Capuano asks Dir. Lockhart about shareholders

SEPTEMBER 25, 2008

Fannie Mae and Freddie Mac Takeover

Witnesses testified on the implications of the Treasury Department’s policies in regard to Fannie Mae and Freddie Mac. The hearing focused on the financial take over of Fannie Mae and Freddie Mac by the Federal Housing Finance Agency (FHFA) and the status of the two enterprises.

Capuano 2008

Representative Capuano asks Director Lockhart if common and preferred shares still have value.  Lockhart indicates risk exists, but indeed shares still hold value.

Full hearing 02:58:02

Here Comes The Sun


By George Harrison

Here comes the sun, here comes the sun
And I say it’s all right

Little darling, it’s been a long cold lonely winter
Little darling, it feels like years since it’s been here

Here comes the sun, here comes the sun
And I say it’s all right

Little darling, the smiles returning to the faces
Little darling, it seems like years since it’s been here

Here comes the sun, here comes the sun
And I say it’s all right

Sun, sun, sun, here it comes
Sun, sun, sun, here it comes
Sun, sun, sun, here it comes
Sun, sun, sun, here it comes
Sun, sun, sun, here it comes

Little darling, I feel that ice is slowly melting
Little darling, it seems like years since it’s been clear

Here comes the sun, here comes the sun
And I say it’s all right
Here comes the sun, here comes the sun
It’s all right, it’s all right

Is Executive Privilege Concealing 3rd Amendment Connection to HAMP?

HAMP – Home Affordable Modification Program administered by the Treasury Department

The conservatorships of Fannie Mae and Freddie Mac were an invention by Henry Paulson, James Lockhart, Ben Bernake and Timothy Geithner designed to assign blame away from government regulators and their big bank friends. The mechanism behind the government takeover was the Paulson Panic. Paulson’s leaked word of the pending government takeover of Fannie and Freddie was met with the companies’ stock being shorted which resulted in substantial stock devaluation. The lowered stock prices meant the companies suffered from an ability to raise capital at a time when they perhaps needed it the most. (1)

In full Paulson Panic mode, the Administration used hyperbole and fear mongering to force their solution on the problem they created. Congress went along with their plan, as did the senior management of Fannie Mae and Freddie Mac with the use of fear and intimidation.

NY Times: “Treasury didn’t arrange a full government takeover or even a bailout of the GSEs. Instead, Paulson marched in the chief executives of Freddie and Fannie and told them that they could either consent to or be forced into conservatorship.” (2)

That was in 2008.

Fast-forward to 2012 and we ask, “Why did the Administration implement the Third Amendment to the PSPAs?”

Was it as advertised at the time “To end the circular Treasury draws?” Nope, that’s been debunked. No one believes that it was to stop the circular lending because the GSEs had already stopped taking draws and it was evident at the time that they would return to profitability.

Was the Sweep Agreement, as some suggest, needed to establish a “time out” to allow for congress to pass reform? No. Congress can pass reform without a profit sweep and even without the forced conservatorships.

To help try to understand the timing of the Third Amendment, let’s review some history to put events into perspective.

Timeline of Key Events:

James Lockhart Director OFHEO/FHFA:  June 2006 – August 2009

Conservatorship Began:  September 2008

Obama Administration 1st Term:  January 2009

Geithner to DeMarco Letter:  July 2012

3rd Amendment to the PSPAs:  August 2012

Presidential Election:  November 2012

Edward DeMarco Acting Director FHFA:  September 2009 – January 2014

Obama Administration 2nd Term:  January 2013

Mel Watt nominated for Director FHFA:  May 2013

Mel Watt Director FHFA:  January 2014 – Present

The “Geithner to DeMarco Letter” mentioned in the above timeline is a letter in July 2012, that DeMarco received from Geithner and Michael Stegman outlining the Administration’s desire for FHFA to agree to mortgage principal reductions. (3)

DeMarco had been FHFA Acting Director since September 2009 and until he received the letter from Geithner and Stegman, he had been resisting the Administration’s call for principal reduction. So, why would the Acting Director resist implementing a plan that he did not think was in the best interest of the conservatorships from September 2009 to July 2012? Then, in August 2012 he agrees to the 3rd Amendment, which is far more detrimental to the goals of the conservatorships than principal reduction. That’s like asking, would you like to lower the companies’ profitability “some” or “all”? 

What would compel the Conservator to sign away all profits of companies he was charged with restoring? Was he intimidated in the same fashion like the senior management at Fannie and Freddie? Was he misled similar to members of congress?

One thing is clear – DeMarco resisted implementing something he did not agree with for three years and then within one month of getting a full court press by the Administration he hands everything over to Treasury. How does that make sense?

What would those secret Administration communiqués show? Would they reveal that members of the Administration lied about their intentions? Worse, would the documents reveal that certain members made intentionally false statements while testifying under oath? Would they expose certain individuals of securities fraud?

The secret documents could likely show that the Administration knew the GSEs were returning to profitability and perhaps feared they may loose the ability to use Fannie and Freddie to carry out their political agenda.

Would the emails and memoranda show that the Administration had an ulterior motive for taking control of Fannie Mae and Freddie Mac? That could explain the intent behind the 3rd Amendment.  By controlling the companies’ financial survival, Treasury would control the entire fate of Fannie and Freddie including the Administration’s pursuit of mortgage principal reduction.

Perhaps Treasury was fearful that with the GSEs returning to profitability it could create an environment where Fan and Fred could object to the losses associated with principal reduction. By Treasury taking control of the companies via seizing their profit stream it made it harder for Fannie and Freddie to object. When your captor has you bound and threatens your oxygen intake, you’re less likely to put up a fight.

Treasury was extremely concerned about the consequences of borrowers being underwater on their mortgages, i.e. homeowners’ ability and desire to repay a debt on an asset that is not worth the amount they are paying.

Jeffery Goldstein, then Treasury Under-Secretary for Domestic Finance, estimated in December 2010 that 11 million Americans were underwater on their mortgages at the time.

First, what is principal reduction? Let’s say someone owned a house once worth $200,000 and they had a first mortgage for $150,000 and a second mortgage for $45,000. Then, the value of this home dropped by 15% and is now worth $170,000. These homeowners are now underwater by $25,000. Principal reduction is a write-off of a portion or all of that $25,000. If Fannie Mae and Freddie Mac were the largest owners of mortgages, then these private companies would have to write-down a significant amount of money under the Treasury’s HAMP program.

Here’s how President Obama described the plan at the time:

“And we will pursue the housing plan I’m outlining today. And through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages so they can afford — avoid foreclosure. And we’re not just helping homeowners at risk of falling over the edge; we’re preventing their neighbors from being pulled over that edge, too — as defaults and foreclosures contribute to sinking home values, and failing local businesses, and lost jobs.

But it will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everybody. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.

So here’s how my plan works: First, we will make it possible for an estimated 4 to 5 million currently ineligible homeowners who receive their mortgages through Fannie Mae or Freddie Mac to refinance their mortgages at a lower rate.

Today, as a result of declining home values, millions of families are what’s called “underwater,” which simply means that they owe more on their mortgages than their homes are currently worth. These families are unable to sell their homes, but they’re also unable to refinance them. So in the event of a job loss or another emergency, their options are limited.

Also right now, Fannie Mae and Freddie Mac — the institutions that guarantee home loans for millions of middle-class families — are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater or close to being underwater can’t turn to these lending institutions for help.

My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee.

And what this will do is it will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero. While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.” (4)

However, Gretchen Morgenson described the situation at the time in her March 24, 2012 article, A Bailout by Another Name:

“Stabilizing the housing market is a noble and desired goal, of course. And legions of borrowers hurt by the bust genuinely need help.

But what the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. The fact is, principal reductions by Fannie and Freddie are not the panacea that they may seem.

Still, the crowd clamors for widespread Fannie and Freddie write-downs, even though they would constitute a direct and sizable gift from taxpayers to the largest banks.

Here’s how: Many banks hold second liens on the same properties for which Fannie and Freddie either own the first mortgage or have guaranteed. If principal amounts on these first mortgages are reduced while leaving the second liens intact, those seconds become much more likely to be paid off over time. With no principal reduction, the banks would have to write off many of those second liens.

As such, principal write-downs are another backdoor bailout for the banks that brought you the mortgage crisis.”

So, would the communiqués being protected by the President’s Executive Privilege expose this backdoor bailout?

Morgenson’s article continues,

“Answering his critics, Mr. DeMarco has agreed to approve principal reductions at Fannie and Freddie, but only when Congress passes legislation enabling it. Writing a law to force taxpayers to bail out the banks in this way, however, might anger constituents. So it’s far easier for members of Congress to rail against the one supposedly intransigent man who is preventing the great American housing recovery.” (5)

Was DeMarco meant to be the fall guy? If so, what did he get in return for signing the 3rd Amendment? Surely there had to exist communication within the Administration – between the White House and the Treasury – on what would possibly motivate a conservator by doing the exact opposite of what he was supposed to do — not just supposed to do, but mandated by an act of Congress.  How could a government employee be persuaded to operate outside the law with apparent impunity?

It appears that the Administration thought they were going to get away with misappropriating the assets of two private companies by funding mass principal reductions that ended up being a backdoor bailout of the banks. Apparently, the Administration thought Congress would do as instructed and pass a wind-down bill.  If that happened, no need to worry about the misappropriation of Fannie and Freddie’s profits to fund principal reduction, right?

Could the secret documents also connect the dots to the bank settlements? Huge sums of money were transferred from the Treasury to the banks in various different forms. The Treasury “settled” with the banks by no one admitting fault and no one being charged with wrongdoing. The banks paid the fines in supposed reparations to Fannie and Freddie with the ultimate recipient of the money being… Treasury!

How could dozens of banks pay billions in settlements and not one bank executive be held accountable? Even Bernie Madoff’s administrative assistant received a six-year prison sentence (not to mention Bernie’s 150 year sentence). Could it be that no bank executive was sentenced with a crime because the whole Madoff-like Ponzi scheme was orchestrated by Treasury?  The recent announcement by the Justice Department stating they would pursue charges against wrongdoing is like OJ Simpson stating he would find the real killers.

Stuck between a rock and a hard place

It is clear the Administration is protecting someone. It is highly unlikely that the documents being shielded under Executive Privilege relates to national security. Rather, the communiqués would likely expose wrongdoing.

At this point, it appears too late for Congress to enact reform under the Obama Administration, meaning they have effectively painted themselves into a corner.

Secretary Lew made some interesting comments under oath during congressional testimony last week. He made the duplicitous statement that Fannie Mae and Freddie Mac’s profits were being used to “reduce the deficit” but that the companies were “not of the woods.”

Congressman Capuano’s response was quick and brilliant, “You won’t let them out! You won’t let them pay off their debt.”

As Forbes commented on the Third Amendment, “Seeing a golden political opportunity, Treasury re-wrote the rules to allow it to go beyond its dividend and instead lay claim to all of the profits generated by the GSEs. Such a move allowed the federal government to report lower deficits while also allowing it to declare its GSE intervention a rousing success. The only problem with this maneuver is that it contravenes the rule of law. Under the terms of a conservatorship the bondholders retain a stake in the company and, as a result, are entitled to be repaid.” (6)

ProPublica wrote: “It undermines the foundation of the capitalist economy,” said Phillip Swagel, a Bush Treasury official. “What separates us from [Russian Prime Minister Vladimir] Putin is not retroactively changing contracts.” (7)

“The administration launched the program…in early 2009, promising it would help three million to four million troubled American borrowers rework the terms of their mortgages. Amid widespread reports that servicers have been wrongly rejecting homeowners, losing paperwork, and otherwise breaking the program’s rules, it appears the program will fall far short. The Congressional Oversight Panel now estimates fewer than 800,000 homeowners will ultimately get lasting mortgage modifications.

The reason Treasury hasn’t changed them, Gordon said, is that Treasury is afraid servicers would drop out of the voluntary program, known as the Home Affordable Modification Program (HAMP), in the face of real penalties.

The government’s oversight has also been hampered by a lack of transparency by Treasury itself. The department has kept its audits of servicers secret. It also does not have a written policy for how it would address rule violations by banks, an omission criticized in a Government Accountability Office report last year and not yet addressed. Treasury says it does have a process for dealing with banks’ noncompliance, just not a written one.

The lack of oversight has been particularly damaging, since mortgage servicers have little incentive to do modifications on their own.” (8)

Here is how FHFA OIG summed up the situation last week in a report:

“Absent Congressional action, or a change in FHFA’s current strategy, the conservatorships will go on indefinitely. The Enterprises’ future status is beyond their control. At present, it appears that Congressional action will be needed to define what role, if any, the Enterprises play in the housing finance system.

Congress and the administration appear to agree that the current housing finance system is not viable and that legislation is needed to address fundamental industry issues. At present, there is no indication that the final resolution of these issues will occur in the near term. FHFA’s current expectation is that the conservatorships will continue until legislation is passed and the Enterprises’ future is settled.” (9)

So, the Administration is punting to Congress. Even if Congress is able to pass a reform bill they move too slowly to get anything done while the Obama Administration is still in office.

That means the current Administration will hand this problem to the next Administration. Providing that they will take office in January 2017 and the GSEs are intentionally set to be depleted of all capital as of January 2018 that is an incredible burden to hand to a new President. The next Administration will not accept that burden lightly.

Recall how often and how long President Obama’s team blamed the previous Administration? One could assume that this next Administration will investigate and identify exactly what happened and why they inherited such a mess – one that could have been avoided. Along that line, we may likely see an overuse of preemptive Presidential Pardons – much like the overuse of Presidential Privilege – in Obama’s last days in the White House.










Obama’s Bizarre Executive Privilege Claim Over Fannie And Freddie

March 23, 2015
Senior Fellow, CEI

Last week was dubbed “Sunshine Week” by proponents of open government, and the administration that swept into office promising to be the “most transparent” in history got a surprise. The Obama administration was just judged by a major, mostly friendly, news service as least transparent of modern presidencies.

An analysis by the Associated Press found that “the Obama administration set a record again for censoring government files or outright denying access to them last year under the U.S. Freedom of Information Act.” The AP adds that the administration “also acknowledged in nearly 1 in 3 cases that its initial decisions to withhold or censor records were improper under the law — but only when it was challenged.”

But FOIA requests are just the tip of the iceberg for this administration’s secrecy, much of which has nothing to do with the legitimate exception of national security. In Dodd-Frank, the administration set up the Consumer Financial Protection Bureau and the Financial Stability Oversight Council — the constitutionality of both of which are now subject to a lawsuit from the Competitive Enterprise Institute and other parties — to be exempt from many open meetings and (especially with FSOC) open records requests.

But probably the most egregious example of this administration’s secrecy practices concerns its management of the government-sponsored housing enterprises (GSEs) Fannie Mae and Freddie Mac. As important as the role Fannie and Freddie play in the housing market, and  American Enterprise Institute financial scholar Peter Wallison’s new book Hidden in Plain Sight convincingly fingers them as the main culprits in the mortgage bust that led to the financial crisis, it is hard for anyone to argue that their actions somehow affect national security.

Yet when asked to produce documents in litigation by Fannie and Freddie’s shareholders, the Obama administration made the unbelievable claim of “executive privilege.”  According to New York Times financial columnist Gretchen Morgenson, “the government has invoked presidential privilege on 45 documents created either by officials at the Treasury or the F.H.F.A., the regulator charged with conserving Fannie and Freddie’s assets.”

Fannie and Freddie were chartered by Congress around 45 years ago as companies with private shareholders but lines of credit with the government. In September 2008, the Bush administration found that Fannie and Freddie were on the brink of failing. Under new powers from the Housing and Economic Recovery Act passed two months earlier, it took them into a “conservatorship” in which the government took 79.9 percent of the entities’ stock in exchange for bailing them out, a “conservatorship” that continues into the Obama administration  to this day.

The series of actions now being called “Fanniegate” began in August 2012, when then-Treasury Secretary Tim Geithner issued the “Third Amendment” to the GSE conservatorship. The Third Amendment, with no authorization from the HERA law, required all of the GSEs’ profits to be siphoned off to the U.S. Treasury Department in perpetuity — even after the GSEs paid back what they owed to taxpayers.

This arbitrary action has spawned more than 20 lawsuits from Fannie and Freddie’s private shareholders. The suits charge the administration with everything from violating the Administrative Procedures Act to unconstitutionally taking property without just compensation.

The Third Amendment has also raised concerns that the profit sweep is leaving Fannie and Freddie with very little capital reserves, furthering the chance for more taxpayer bailouts should something go awry with the housing market again. See this excellent paper by Cato Institute Director of Financial Regulation Studies Mark Calabria and former FDIC General Counsel Michael Krimminger on this point.

But the really amazing thing is that we know very little about what prompted Obama and Geithner to pursue this highly controversial policy, because according to the NYT’s Morgenson, the Obama administration “has fought every discovery request made by the Fannie and Freddie shareholders.”

Last year, one of these shareholder lawsuits — Fairholme v. United States — prompted Judge Margaret Sweeney to compel the administration to produce some of those documents in order to satisfy a discovery request from the mutual fund plaintiff. And a coalition letter, coordinated by the Competitive Enterprise Institute and signed by leaders of 17 conservative and free market organizations, calls for a key oversight subcommittee to spread a little sunshine by obtaining the documents and making them public. In the letter sent last fall to leaders of the House Financial Services Subcommittee on Oversight and Investigations, we wrote:

“Not only is this Third Amendment an unprecedented power grab that violates shareholder property rights, but the process used by the Treasury Department to develop the Amendment provided neither an opportunity for public comment nor the customary transparency safeguards that permit we the people to hold our government accountable. To this day, the Amendment’s provenance remains secret.”

We asked the heads of the subcommittee to “demand greater transparency and accountability on this matter by requesting that the Treasury Department turn over to your committee, or otherwise make public, any and all documents shedding light on the alleged need for and legal rationale justifying the Third Amendment, as well as all documents detailing the Amendment’s development and evolution, such as those customarily contained in the administrative docket for an agency rulemaking.”

CEI has long advocated ending the risk posed by the GSEs to taxpayers and the economy through an elimination of the taxpayer guarantee or an orderly liquidation of their assets, with no government-backed entity to replace them. Our new pro-growth congressional agenda, “Free to Prosper,” puts forth options on the most practical ways to move forward on such a phase-out.

As CEI founder and chairman Fred Smith urged Congressin 2000 — to mostly deaf ears — policy makers should “develop a divestiture or breakup plan for Fannie and Freddie.” And in such a plan, as in traditional bankruptcies, the rights of both taxpayers and private investors should be sacrosanct.

But in order to have real reform, first we need transparency. It’s time for the administration that promised to be the most transparent in history to open the books on its management of the two government-sponsored entities that play such a dominant role in housing and the economy. And it’s high time for Congress to investigate the violations of the rule of law that festered in Fanniegate.

John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.

2009: Rep. Grayson challenged Director Lockhart re: FNMA Takeover

As I was researching work on a forthcoming blog post, I reviewed the following exchange between Representative Alan Grayson (D, FL) and FHFA Director James Lockhart.  The conversation occurred on June 3, 2009 during a congressional hearing:  


There are many interesting points to review during this hearing. However, the questioning by Congressman Grayson asks what many others have asked over the years — was the government takeover necessary? Recall that the conservatorship began on September 6, 2008. Grayson states that he reviewed FNMA’s then-current (at the time of the takeover) 10-Q and asks how a $192 million loss created a $100 billion takeover.  Lockhart’s response was the answer could be found in 10-Q’s that were published after the takeover — September 2008, December 2008 and March 2009. So, if you listen to Lockhart’s response, he basically says “we used clairvoyance as a part of our decision process to seize the company.”  What it actually suggests is the future losses were accounting manipulations to serve the government’s other goals.

Further, Lockhart described the post-conservative losses as private label securities credit losses — the losses related to the bank settlements, i.e. not Fannie’s fault.  In fact, earlier in the hearing Lockhart said, “I do not think Fannie and Freddie were the cause.” 


Mr. Grayson. Thank you, Mr. Chairman.

I have here the Form 10-Q filed by Fannie Mae the month before it went broke. I actually went through it and read it myself personally, and I had some questions I want to ask you about that to try to get a sense of how this happened and what we can learn from it.

Specifically, on page 112, it says, “Risk Management Derivatives,” and there is a table there, and it indicates that between December 1, 2007, and June 30, 2008, Fannie Mae increased its notional balances for derivatives by $255 billion.

Can you give me some idea of the justification for a company like Fannie Mae increasing its exposure to derivatives at seemingly the worst possible time by a quarter of a trillion dollars?

Mr. Lockhart. Fannie and Freddie had many problems that surfaced over the last year. Certainly, in their June 10-K of last year, they mentioned many issues.

The derivatives have not been an issue that actually caused any significant problems at the two firms. The derivatives were used to hedge their mortgage portfolios.

What they do oftentimes as the market changes, is they add a derivative. Then rather than closing it out, they just buy one to counter the one that they had before. And so you get this piling up of derivatives. It is an issue that we have talked to them over the years about. Could they close these derivatives out rather than just buying a counter one?

Oftentimes, they buy it with the same counterparty, and so the actual exposure is not that large. It is an issue that we have been talking to them about before the conservatorship and after the conservatorship. As I think Congressman Garrett asked earlier, there are ways to lessen the exposure through exchanges and clearinghouses. And that is something we are looking at, at the moment.

Mr. Grayson. I wonder if it is really true that this had no effect on them. I mean, logically, having an exposure that as of June 30, 2008, totaled $1,141,000,000,000 is something that could conceivably have some effect on your operations, particularly since we are talking about a time just 2 months before it went broke.

Mr. Lockhart. Right.

Mr. Grayson. Why would they have such an exposure like that unless it were for a purpose? And for that purpose, couldn’t it easily have been something that went wrong?

The reason I am asking this question is because if you look at page 78 of this same 10-Q, what you see is that for nonperforming single family and multi-family loans together in their portfolio, which was almost a trillion dollars by itself, the amount of interest income that they lost because of nonperforming loans was only $192 million and going down–$192 million versus $255 billion—isn’t it more likely that they got into trouble over the $255 billion than they did over the $197 million?

Mr. Lockhart. I can tell you, in retrospect, they haven’t lost significant money in the derivatives area. They are using derivatives to hedge their mortgage-backed exposure.

The vast majority of those losses, the over $100 billion in combined losses in the two companies, has been not on their interest rate risk and their interest rate risk management, although there has been some there. Most of it has been in credit losses. And it is credit losses related to the private label securities, and credit losses related to their books.

When we did a very extensive look at the two companies in August, we worked with the OCC and the Fed. Also, Treasury had hired an investment bank as an advisor.

As we looked through all the issues in these two companies, the derivatives was an issue but nowhere near the top. The key issues really were they had a deferred tax asset and they had credit exposures in their private label securities. The three quarterly reports since then have shown that is where the big losses were.

Mr. Grayson. Well, again, let’s look at the information I just provided to you. If in fact the interest income that was lost—and interest income is defined in the 10-Q as, “the amount of interest income that would have been recorded during the period for on-balance sheet nonperforming loans had the loans performed according to their contractual terms.”

If those losses are only $192 million, how could a $192 million loss result in a $100-billion-plus loss to the taxpayers? How is that possible?

Mr. Lockhart. What has happened since then is they have had to put up reserves for loans that are in default. And they have also had to take other-than-temporary impairments on their private label securities. And they booked a lot of losses related to the credit.

The interest give-up is a very small issue. Under proper GAAP accounting, if you think you cannot recover, you have to take an other-than-temporary impairment. Or if it is a loan, you have to write it down to the value that you expect to recover. And that is what has happened.

Mr. Grayson. Well, I see my time is up. But let me just ask you this last follow-up question, and thank you, Mr. Chairman, for your indulgence.

I still don’t have a clear understanding from you about how a relatively tiny amount, like $192 million in unpaid mortgage interest on what is a trillion-dollar portfolio, how that possibly lead to the taxpayers having to shell out $100 billion plus.

Mr. Lockhart. They have had a lot more missed payments since then. It has spread throughout not only their lower quality book, but even to some of their prime loans. They have had to put up reserves. They have built the reserves very dramatically since June because of the deterioration in the mortgage market and the deterioration in the economy.

We would be happy to go through those numbers with you, and meet with you and show you what really happened, and go through not only the June numbers but the September, December, and March numbers, and how these losses have unfortunately marched through their financial statements.

Mr. Grayson. Well, that would be great. Thank you very much for doing that because, as we know, those who don’t understand history are doomed to repeat it.

Wolf: Tyranny in our Time

Washington Times

Americans Must Repudiate the Political Class

Dr. Milton R. Wolf

May 24, 2013

Americans are beginning to recognize the disturbing similarities between President Obama and the fallen Richard Nixon, but the comparison that may matter more is between Mr. Obama and King George III.

“He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance,” in the words of the Declaration of Independence.

King George’s assault on the Americans’ natural freedoms was oppressive, intolerable and deserving of a revolution. The truth is, the intrusion, restriction and outright harassment that our government subjects us to today is far beyond what the colonists faced from their tyrannical king. If it was tyranny in 1776, then, by God, it is tyranny today.

Consider the enormous coercive power of the Internal Revenue Service and its lust to wield it. The IRS admits to systematically identifying and harassing political dissidents who dare to disagree with the political bosses. The IRS created what could be considered an enemies list starting with conservative Tea Party groups. It targeted any group calling itself “patriot” or daring to teach the Constitution or Bill of Rights.

The scope of its abuse is only beginning to unfold. I have also faced its wrath. Mr. Obama’s White House urged my editor at this newspaper to drop me. Consider that. Facts or opinions weren’t challenged and I wasn’t challenged in the arena of ideas — the White House just wanted me gone. How dare the president’s own cousin criticize him!

Credit The Washington Times for defending the Constitution against the White House’s attack on it. It gets worse. Or is it just a coincidence that around this same time, the IRS inexplicably put a hold on my tax return for several months without ever explaining why? The arbitrator could only say it was “very strange” and “unusual.” Indeed.

This abuse is not limited to the IRS. Mr. Obama’s appointee to the Environmental Protection Agency likened himself to a Roman conqueror ready to wield his government power to arbitrarily “crucify” — his word — energy companies just to keep them obedient and fearful. His forced resignation fails to hide what we’re learning today, that even in his absence, the EPA routinely waives burdensome fees for politically acceptable groups but imposes them to their fullest on adversaries.

This is not simply picking winners and losers — it is something so much more. This is a government declaring friends and enemies among fellow Americans, and it goes all the way up to the Oval Office. In 2010, it was Mr. Obama himself, who declared to a roaring crowd, “We’re gonna punish our enemies and we’re gonna reward our friends.” Chilling.

Punishing enemies and rewarding friends will be the sad, pathetic and enduring legacy of the Obama presidency. The stimulus failed to create jobs — there are 3 million fewer today than when Mr. Obama took office — but it did succeed at its real purpose: rewarding political friends and connected crony donors. The IRS witch hunt unleashed a culture of intimidation.

“Obamacare” is poised to force everyone else to get in line. Consider this: The IRS has demanded that conservative groups report the content of the prayers and reading clubs report the content of the books. The same IRS agent who ran this witch hunt has now been put in charge of enforcing Obamacare.

“After we win this election, it’s our turn. Payback time,” warned Valerie Jarrett, Mr. Obama’s longtime senior adviser. “Everyone not with us is against us, and they better be ready because we don’t forget. The ones who helped us will be rewarded, the ones who opposed us will get what they deserve. There is going to be hell to pay.”

This is not simply a scandal, as some call it. A scandal implies a failure of the system. This is the system. This is a political class wielding the goliath power of the most intrusive and most feared government agencies at their disposal in order to intimidate, silence and control the citizenry. It is an unmasked assault on the First Amendment, on the Constitution and on America itself, and it must not stand.

Americans find this kind of naked tyranny repulsive right down to a cellular level. It’s in our DNA. We fled a continent and faced unknown mortal dangers to escape it. We fought a revolution to remove it from our shores. Foreign or domestic, we will surely fight it today.

Make no mistake, however. Both parties have luxuriated in the drunken power of government, at our expense. Mr. Obama did not build the IRS, nor did Richard Nixon, but both wielded it as a weapon. Now the IRS is poised to become the hammer of even our health care. Democrats are furiously converting the welfare state into an authoritarian state right before our eyes, and most in the GOP establishment are too seduced or intimidated to stop them.

America’s Founders had a dream of freedom, and this is not it. It is “we the people” who must save America now, just as it has always been. Let us once again pledge to each other our lives, our fortunes and our sacred honor, and let us stand undivided and undeterred against tyranny in our time.

Ralph Nader: May 2013 Letter to Secretary Lew

May 23, 2013

The Honorable Jacob J. Lew
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue
NW Washington, D.C. 20220

Dear Secretary Lew:

As you know the Housing and Economic Recovery Act of 2008 authorized the U.S. government to place government-sponsored enterprises (GSEs) in a conservatorship.

On September 7, 2008, the Federal Housing Finance Agency (FHFA) established a conservatorship for Fannie Mae and Freddie Mac and assumed control of these two GSEs. Common shareholders lost their voting rights, dividends on preferred and common stock were suspended, and annual shareholder meetings were canceled.

Under the conservatorship, the government has received warrants to buy up to 79.9 percent of GSE common stock for $0.00001 per share. The non-government common stockholders are, in essence, zombie stockholders with no rights and no remedies against the GSEs or the FHFA.1 The government, however, does not want to own even 80 percent of the stock, because the government does not want the GSEs’ assets and liabilities on the government’s books.

Many prudent investors, including the undersigned, purchased Fannie Mae and Freddie Mac common stock because these stocks were considered safe investments. Shareholders who might otherwise have been apprehensive about keeping their Fannie Mae and Freddie Mac stock, even as the financial crisis was mushrooming, were led to believe these two prominent GSEs were financially sound. Even the most risk-adverse, prudent investor was comfortable relying on statements from knowledgeable high- ranking government officials who publically claimed Fannie Mae and Freddie Mac were rock-solid companies.

1. On July 10, 2008, OFHEO Director James B. Lockhart said:

“OFHEO has been monitoring and continues to monitor closely Fannie Mae, Freddie Mac and the mortgage and financial markets. As one would expect, we are carefully watching the Enterprises’ credit and capital positions.

As I have said before, they are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums. They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.”

2. On July 10, 2008 former Chair of the House Financial Services Committee Representative Barney Frank said that Fannie Mae and Freddie Mac are important financial institutions that are basically strong and are “well capitalized.”3

3. On July 13, 2008 former Senator Christopher Dodd, who chaired the Senate Banking Committee said: Fannie and Freddie were in “good shape.”

“They have more than adequate capital, in fact more than the law requires,” Dodd, a Connecticut Democrat who is chairman of the Senate Banking Committee, said on CNN’s “Late Edition” today. “They have access to capital markets. They’re in good shape. To suggest somehow they’re in major trouble is not accurate,” Dodd said.

4. On July 15, 2008 Senator Dodd also said: “In considering the state of our economy, in particularly turmoil in recent days, it is important to distinguish between fear and facts. In our markets today, far too many actions are being driven by fear and ignoring crucial facts.

One such fact is that Fannie Mae and Freddie Mac have core strengths that are helping them weather the stormy seas of today’s financial markets. They are adequately capitalized. They are able to act as the debt markets. They have solid portfolios with relatively few risky subprime mortgages. They are well-regulated and they have played a vital role in maintaining the flow of affordable mortgage credit, even during these volatile times.”5

5. On July 15, 2008 former Treasury Secretary Henry M. Paulson said: “Our proposal6 was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac. OFHEO have reaffirmed that both GSEs remain adequately capitalized.”7

6. On July 16, 2008 Ben S. Bernanke, the Chairman of the Federal Reserve told the House Financial Services Committee:

“Let me just say a word about GSEs, because you raised that. The GSEs are adequately capitalized. They are in no danger of failing.”

Unfortunately, shareholders were adversely affected because of their reliance on misleading statements about the financial strength of the GSEs made by many high-ranking government officials prior to the imposition of the conservatorship in September of 2008.

The abuse of Fannie Mae and Freddie Mac common stockholders by the FHFA knows few bounds. On June 16, 2010, the FHFA directed Fannie Mae and Freddie Mac to delist their common and preferred stock from the NYSE. The Exchange did not demand this move. Fannie Mae’s stock price had dropped slightly below the $1 per share threshold stipulated by NYSE rules, but the Big Board is quite flexible with time either to get back over $1 or to allow companies to offer a reverse stock split. Freddie was over the $1 level. The delisting took the shares down to the range of 30 cents, wiped out billions of dollars in shareholder value, and chased away many institutional holders.

FHFA 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.”

On September 15, 2010, Acting Director DeMarco said:

“The statutory purpose of conservatorship is to preserve and conserve each company’s assets and put them in a sound and solvent condition. The goals of conservatorship are to help restore confidence in the companies, enhance their capacity to fulfill their mission, and mitigate the systemic risk that contributed directly to instability in financial markets.”

Acting Director DeMarco’s action in delisting Fannie Mae and Freddie Mac do not seem to comport with his understanding of the statutory purpose of the conservatorship.

Regulators should adhere to the stated purpose of the conservatorship. Fannie and Freddie have the potential to become solvent. A May 9, 2013 news release from Fannie Mae states:

“Based on net worth of $62.4 billion at March 31, 2013, the company’s dividend obligation to Treasury will be $59.4 billion by June 30, 2013. After the June payment, we will have paid an aggregate of $95.0 billion in cash dividends to Treasury since conservatorship began.”

Similarly a May 8, 2012 news release from Freddie Mac states:

“Based on our Net Worth Amount at March 31, 2013, our dividend obligation to Treasury in June 2013 will be $7.0 billion. We paid dividends of $5.8 billion in cash on the senior preferred stock during the three months ended March 31, 2013, based on our Net Worth Amount at December 31, 2012. Through March 31, 2013, we have paid aggregate cash dividends to Treasury of $29.6 billion, an amount equal to 41% of our aggregate draws received under the Purchase Agreement.”

In sum, Fannie and Freddie received a total of approximately $188 billion from the U.S. Government, and will have paid the government about $132 billion in dividends by next month. Moreover, it is fair to assume that Fannie and Freddie will be able to fully repay the U.S. Government.

A variety of proposals have been advanced regarding the structure of Fannie and Freddie. It is time for Congress, the Treasury Department and the FHFA to seriously embrace a structure that will protect the already financially injured common shareholders. Options put forth by former Treasury Secretary Paulson and the GAO are rarely mentioned by Treasury officials or members of Congress. A September 9, 2009 Congressional Research Service Report suggested that Congress may consider the following options:

  • Return Fannie Mae and Freddie Mac to their stockholders with little or no change to their congressional charters;
  • Eliminate their GSE status and convert Fannie Mae and Freddie Mac into private corporations;
  • Eliminate their GSE status and convert Fannie Mae and Freddie Mac into a government agency
  • or Make supplementary changes to support the secondary mortgage market such as providing government reinsurance of MBS or encouraging the use of covered bonds.Regardless of the final outcome of the deliberations on the structure of these GSEs, Fannie and Freddie common shareholders deserve a chance to recover some of the value of their stock. As you know, the Federal government provided funds to help stabilize AIG ($69 billion) and Citigroup ($45 billion). Other funds and guarantees were also made available to these companies. AIG and Citigroup shareholders benefited from the recovery of these companies. Similarly, Fannie Mae and Freddie Mac common stockholders should be allowed to participate in the recovery of the value of their stock just as was the case with AIG and Citigroup investors.

    The common shareholders have been in a financial limbo far too long. It is unfair to punish the common shareholders who have held their Fannie and Freddie stock, in the hopes of recouping some of their losses. Fannie Mae and Freddie Mac should be relisted on the NYSE and their conservatorships should, over time, be terminated.

    What steps do you intend to take as Secretary of the Treasury to ensure that the legitimate concerns of Fannie Mae and Freddie Mac common stockholders are addressed?

    I look forward to your response. Sincerely,

    Mr. Ralph Nader

    cc: Mr. Edward DeMarco, Acting Director Federal Housing Finance Agency (FHFA) Mr. Donald H. Layton, CEO, Freddie Mac Mr. Timothy J. Mayopoulos, CEO Fannie Mae

FHFA Director Watt at the Goldman Sachs Housing Finance Conference

Prepared Remarks of Melvin L. Watt Director FHFA at the Goldman Sachs Housing Finance Conference


Remarks as Prepared for Delivery

Melvin L. Watt, Director

Federal Housing Finance Agency

Goldman Sachs Housing Finance Conference

New York, NY

March 5, 2015

It is a pleasure to be here with you this afternoon. Thank you for the opportunity to discuss the work underway at the Federal Housing Finance Agency (FHFA) to fulfill our statutory mandates, which include ensuring the safety and soundness of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and ensuring liquidity in the housing finance markets.

It feels to me like I’ve been on the job as Director of the Federal Housing Finance Agency for a lot longer than one year. It probably feels that way to me because we’ve been really busy this past year, and I believe our work is moving things in the right direction. But, I also know we have a lot more to do. My remarks today focus on Fannie Mae and Freddie Mac (the Enterprises) and on some of the challenges in the housing finance market, how we’ve approached confronting some of those challenges in my first year on the job, and how we plan to approach them going forward.

The annual Conservatorship Scorecard is FHFA’s mechanism for laying out our priorities and expectations for the Enterprises and our means of providing transparency to the public about what we expect. While it took us a lot longer to release the 2014 Scorecard, FHFA released the 2015 Scorecard early in January of this year. The 2015 Scorecard continues to be structured around the same general goals we had in 2014: Maintain, Reduce, and Build.


Under our first major goal, Maintain, there are no surprises in 2015. On the single-family side, we simply want to continue two objectives:

  • Maintaining, promoting and expanding access to credit in a safe and sound manner; and
  • Continuing to improve the Enterprises’ loss mitigation and foreclosure prevention activities.

On the first objective, FHFA and the Enterprises made a lot of progress last year on improving access to credit. We did this by updating and clarifying the Representation and Warranty Framework used by the Enterprises to ensure that the loans they purchase meet their underwriting guidelines. We also updated the foreclosure timeline and compensatory fee methodology under which mortgage servicers are held accountable for meeting loss mitigation and foreclosure process standards. We believe that providing lenders greater certainty about when and under what circumstances they would be required to repurchase or take loans back onto their books and providing servicers updated guidelines about when they would be required to pay compensatory fees has moved the availability of mortgage credit in the right direction. We expect the Enterprises to continue these efforts in 2015.

We’ve also turned our attention to another important effort, updating and enhancing the Enterprises’ counterparty standards for mortgage servicers. Changes in the servicing industry have resulted in the growth of nonbank servicers and increased levels of mortgage servicing transfers. While FHFA and the Enterprises do not regulate servicers, it is extremely important for the Enterprises to clearly define and communicate their Seller/Servicer eligibility requirements.

To this end, FHFA recently released proposed minimum financial eligibility standards the Enterprises will require servicers to meet. The standards set minimum net worth requirements for all servicers who work with the Enterprises, as well as capital and liquidity requirements targeted specifically for nonbank servicers.

Strengthened Enterprise servicer counterparty standards will help improve access to credit by reducing market uncertainty about Enterprise expectations for mortgage servicer counterparties. Consistent with our normal process, FHFA is collecting extensive stakeholder feedback on the proposed guidelines, and we expect to be able to finalize these requirements in the second quarter of this year and have them become effective six months after they are finalized.

Under the Maintain portion of the Scorecard, we also want the Enterprises to continue to improve their loss mitigation and foreclosure prevention activities in 2015. Again, we made progress in 2014, and – in a number of ways – the housing and foreclosure crisis has evolved. However, meeting mortgage obligations and staying one-step ahead of foreclosure continues at crisis levels for many individuals and families across the country and in many neighborhoods. There are still many borrowers who have been delinquent on their loans for extended periods of time – sometimes more than two or three years. In fact, over half of all delinquent loans held or guaranteed by the Enterprises are at least one-year delinquent. As of the third quarter of last year, this subset of delinquent loans totaled almost 300,000 loans with an unpaid principal balance of approximately $54 billion.

Consequently, we have directed the Enterprises to make significant efforts in 2015 to reduce the number of severely delinquent loans they hold and to do so in a responsible way. The sale of non-performing loans (NPLs) is one of the key tools we believe the Enterprises can use to meet this Scorecard priority. By engaging in NPL sales, the Enterprises are able to transfer pools of severely delinquent loans to new buyers and servicers. When done in a responsible way, these new buyers and servicers will have the capacity, self-interest and track records to successfully provide foreclosure alternatives to borrowers who are seriously delinquent. While NPL sales will not prevent foreclosures in every instance, we do expect NPL sales to produce better outcomes for borrowers, on the whole, than the status quo.

In recent months, FHFA has been vigorously working to define and test requirements for future NPL sales that will set the right balance of supporting positive outcomes for borrowers and neighborhoods while also supporting positive financial outcomes for the Enterprises. Standards that encourage successful foreclosure alternatives – including loan modifications, short sales and deeds in lieu of foreclosure – will not only be better for borrowers but will also yield better economic outcomes for the Enterprises and for taxpayers compared to keeping seriously delinquent and non-performing loans on the Enterprises’ books.

Earlier this week, FHFA released new requirements for future NPL sales by Freddie Mac and Fannie Mae. These requirements build on FHFA’s review of two pilot NPL transactions conducted by Freddie Mac in recent months. These transactions involved approximately $1 billion in loans with average delinquency rates of more than two and a half years.

The new requirements will necessitate substantial outreach by the Enterprises to identify bidders who are willing and able to meet established modification and loss mitigation standards, which include evaluating borrowers who have pre-2009 loans for the alternatives to foreclosure offered through the U.S. Department of the Treasury’s Making Home Affordable program and having foreclosure as the last alternative in the loss mitigation waterfall. We are also requiring winning bidders to track and report what happens with borrowers so FHFA and the Enterprises can monitor and document the success of the program.


Our second 2015 Scorecard objective is to continue to Reduce risks to the taxpayers by increasing the role of private capital in the mortgage market. 2014 was a breakthrough year for the Enterprises’ single-family credit risk transfer program. What began as a handful of transactions during the second half of 2013 has evolved into programs of regular debt issuances that have gained broad market acceptance. These programs are known as STACR for Freddie Mac and CAS for Fannie Mae. The ability and willingness of the Enterprises to provide historical loan performance data has greatly enhanced the ability of the market to achieve pricing that both serves the interests of investors and allows the Enterprises to meet their financial objectives.

FHFA tripled the credit risk transfer requirement in the 2014 Scorecard compared to 2013, requiring each Enterprise to transfer a portion of credit risk on single-family mortgages with an unpaid principal balance of $90 billion compared to the $30 billion requirement in 2013. Both Fannie Mae and Freddie Mac significantly surpassed last year’s benchmark by executing credit risk transfer transactions on mortgages with a combined UPB of over $300 billion.

The Enterprises also made significant progress last year in refining their risk transfer transactions. In May 2014, Fannie Mae completed the first transaction providing credit protection on mortgages with loan-to-value ratios from 80 percent to 97 percent, and Freddie Mac completed its first transaction with LTVs between 80 to 95 percent in August 2014. Prior to that, both Enterprises had conducted transactions only for loans with LTVs between 60 to 80 percent.

In 2014, the Enterprises also offered transactions that targeted private capital in the insurance and reinsurance markets. Freddie Mac completed three reinsurance deals, and Fannie Mae completed one.

Building on this success, FHFA again increased the credit risk transfer requirement in the Enterprises’ 2015 Scorecard. Subject to market conditions, we expect Fannie Mae to complete transactions on single-family mortgages with an overall UPB of $150 billion, and Freddie Mac to complete transactions with an overall UPB of $120 billion. The 2015 Scorecard also imposes some different obligations in the risk transfer space:

  • First, we also want the Enterprises to continue to refine and innovate in their existing credit risk transfer structures. For example, Freddie Mac completed a STACR transaction earlier this year that transferred the first loss piece of credit risk to investors. This differs from other structured debt issuances where the Enterprises have held on to the first loss while transferring intermediate layers of credit risk to investors.
  • Second, we want the Enterprises to continue to develop methods of conducting credit risk transfers that involve working with different kinds of market participants. We think there is significant value in exploring different approaches and investors, because it could provide the Enterprises with a greater ability to transfer credit risk during changing market conditions.
  • Finally, we also want the Enterprises to increase their attention to diversity and inclusion in risk transfer transactions by engaging with minority-, women-, and disabled-owned businesses.

You can see that there should be multiple opportunities for private sector involvement in the risk transfer space in 2015. So, I hope I can count on many of you and the companies and investors you represent to take advantage of these opportunities to put more private capital to work. We welcome your input on how we can continue to make this happen and be mutually beneficial to you, the Enterprises and taxpayers.


Finally, let me spend the balance of my time talking about the Build component of the Enterprises’ 2015 Scorecard in which our objective is to continue to make progress on building a new securitization infrastructure for the Enterprises that is adaptable for use by other secondary market participants in the future. This means continuing our progress on the Common Securitization Platform (CSP) and on moving toward a Single Security. Both of these multi-year initiatives are highly interrelated. While we are making significant strides on both the CSP and the Single Security, I’d like to focus my comments today on the Single Security.

Last year was the first time that FHFA included the development of a Single Security as part of our conservatorship priorities for the Enterprises. Our objective in adding this multi-year project to the agenda is to improve overall liquidity in the market, which will not only be beneficial to the Enterprises and other market participants, but will also benefit borrowers. It would also benefit taxpayers by reducing Freddie Mac’s costs that result from the trading disparity between Freddie and Fannie’s securities.

During the past year, FHFA and the Enterprises have been engaged in a transparent process about a Single Security structure. To get feedback from stakeholders, FHFA released a Request for Input in August of 2014 in which we proposed certain features, disclosures, and processes to define how a Single Security could operate and how the transition to this new structure could take place. Since August, FHFA has been reviewing the responses we received and continuing conversations with stakeholders – including investors, trade associations, lenders, and regulators – about FHFA’s proposal and related issues.

As we move the process forward in 2015, a high priority will be to provide increasing levels of detail about the Single Security. In the feedback we received in response to our Request for Input and in our conversations with stakeholders, we heard the strong message that additional information and greater clarity is needed about security features and disclosure standards, about transitioning legacy securities to the Single Security, about the counterparty status of commingled re-securitizations, and about a range of other potential issues.

We heard these concerns, and we will provide more details in an update report that we expect to release in the second quarter of 2015. While the Single Security remains a multi-year initiative, we believe this update report will be a significant milestone in defining the structure and processes necessary to successfully transition to a Single Security in the future.

FHFA has also required the Enterprises to develop preliminary plans about how to implement the Single Security in the market. We expect this to be a particular focus for the Enterprises during the second half of the year. Just as we have approached the rest of our efforts on the Single Security, these implementation plans will not be developed in a vacuum. Instead, FHFA and the Enterprises will gather feedback and input from market participants as these plans develop and evolve.


What I have tried to do today is to provide some highlights just about the priorities included in the 2015 Scorecard. Of course, this just “scratches the surface” of the work we are doing at FHFA as regulator and conservator of Fannie Mae and Freddie Mac and as regulator of the 12 (soon to be 11) Federal Home Loan Banks. I’d be happy to take questions or comments about the things I have spoken about or about the other work we are doing. Thank you for the invitation to be with you today, and I look forward to your questions.