Interesting Article on FN and FRE in the Washington Post

You have to ask yourself where the failure point is. If $36B in preferred is so important to the banking system then the officials charged with supervision have totally blown it.

Since the Brothers Linebacker have set the over/under on bank failure I will set the over/under on FN/FRE getting a sweet hit on Mother Treasury's Hooka Pipe - September 15 (my man in Havana says take the under)


The Washington Post
Treasury's Vigil On Fannie, Freddie
By David Cho and Jeffrey H. Birnbaum
Updated: Saturday, August 23, 2008

A top concern of Treasury Secretary Henry M. Paulson Jr. as he ponders whether to pull the trigger on a rescue plan for mortgage financiers Fannie Mae and Freddie Mac is the fate of its "preferred" shareholders, which include regional and community banks across the nation and central banks around the world, according to private analysts who closely follow the department.

Despite mounting financial woes, Fannie Mae and Freddie Mac have been paying an unusually generous dividend to owners of preferred stock -- which is issued to a select class of investors -- making the shares popular among banks. Treasury officials are worried that a sell-off of these shares poses serious risks to the broader financial system, the analysts said.

The value of the preferred shares, estimated to be worth $36 billion between the two firms, has taken a hit recently. Yesterday, Moody's Investors Service significantly downgraded some of them, saying their dividends could be at risk as the firms falter. The Fannie shares that were downgraded have dropped 26 percent this week, but rose 2.1 percent yesterday. The Freddie shares have declined 36 percent this week, but increased 2.1 percent yesterday.

The performance of the preferred shares is one market development Treasury is closely watching as it decides whether to inject government money into the two companies, which back about half of the $12 trillion in mortgages in the United States. The department is also monitoring the confidence of banks, financial firms and investors that lend to Fannie Mae and Freddie Mac on a daily basis.

Lenders have continued to buy their debt but only at higher rates. Any sign of panic or outright refusal to lend by these debt holders would spur Treasury to act, analysts who closely follow the Treasury said.

A big test is approaching. By early next month, the two companies will seek to refinance about $225 billion in mostly short-term loans that are coming due, according to a research note from Barclays Capital. Fannie Mae has about $120 billion of debt maturing through Sept. 30, while Freddie Mac has $103 billion.

"One trigger would be if they are unable to rollover their debt in a profitable manner," said Paul Miller, industry analyst for Friedman, Billings, Ramsey Group.

The perils facing Fannie Mae and Freddie Mac are different from those that brought down investment bank Bear Stearns in March, forcing the Federal Reserve and Treasury to help arrange an emergency sale to J.P. Morgan Chase. In the case of Bear Stearns, federal officials responded to a bank run that was threatening to render the firm bankrupt within hours.

As mortgage finance companies, Fannie Mae and Freddie Mac are not vulnerable to such a run. Instead, analysts said Paulson is intent on stepping in when he detects that confidence in either firm has been lost. They add that Paulson would ultimately have to make a judgment call.

With regard to equity, the dominant concern is about preferred stock rather than more widely held common stock. Preferred shareholders get paid in a bankruptcy before common stockholders and can receive large dividends. Because of the high dividend payment and the government's implicit backing of Fannie and Freddie, many banks considered them a very reliable source of capital.

Some investors have expressed concerns that under a Treasury bailout officials could take action rendering the companies' stock worthless or eliminating the dividends. This could leave banks undercapitalized. That is why Treasury is considering how to keep Fannie Mae and Freddie Mac as stock-based companies rather than having the government take them over outright, analysts said.

"There's a lot of internal lobbying of Paulson to try to maintain some value in those preferred shares," Miller said. "There would probably be some banks that fail if the preferred gets wiped out."

Other analysts who closely follow the Treasury said that no action appears imminent this weekend. Paulson has repeatedly said he has no plans to use the new authority that Congress granted him July 30 to lend or invest in the two companies.

Treasury has said very little in recent days, in an effort to contain market alarm over the two companies, analysts said.

"We continue to communicate with the companies and their regulators and are staying on top of the situation," said Treasury spokeswoman Michele Davis, declining to elaborate.

The powers granted to Paulson were broad enough to give him several options. He could buy bonds from the firms, essentially giving them a loan, or create a special class of preferred shares that would require the firms to refund the government's money before that of other shareholders in the case of a bankruptcy, analysts said.

Some of the banks with the biggest exposure include Regions Financial, which has an estimated $200 million, M&T Bank with $161 million, and Astoria Financial Corp. with $83 million, according to Fox-Pitt Kelton, an investment bank.

"If the preferred is wiped out, that hurts the entire banking system," said Howard Shapiro, an industry analyst for Fox-Pitt. "There are numerous banks that have a fair amount of exposure. This is just another difficulty that the banks, who are short of capital, will have to overcome."

But Len Blum, managing director at Westwood Capital, said that may be unavoidable.

"It's absolutely ridiculous that Fannie and Freddie are still paying out dividends," he said. "And it's ridiculous that you would have a company where shareholders make all kinds of money when the housing market is good and taxpayers have to shoulder all the costs when the housing market is bad. How is that good for the nation? I think it's only fair to taxpayers that the preferred shareholders get wiped out."

Instead of trying to prop up the value of preferred shares, regulators should be encouraging community and regional banks to raise capital to replace those investments, he added. "We have to be realistic about what things are worth," Blum said.

The yield, or return on preferred stock dividends, yesterday reached 19.1 percent for shareholders in Fannie and 20.2 percent for those invested in Freddie.

Any cut to those payouts would make it more difficult for the mortgage firms to raise money through the issuance of preferred shares as investors will be less willing to buy diluted stock that pay low dividends.

Common shares, which have also been falling precipitously in recent weeks, are not nearly as important to Treasury officials, though their low levels are an indication of a lack of confidence in the companies by debt holders, an official with one of those companies said, speaking on condition of anonymity because he was not authorized to talk about the firms.

Shares in District-based Fannie rose 15 cents, or 3.1 percent, but have lost more than 90 percent of their value over the past year, while those of McLean-based Freddie dropped 35 cents, or 11 percent, and are down nearly 96 percent over the past year.

You Have To Love Whitlock

Jason Whitlock is one of the better sports writers going because he has not totally sold out to the Four Letter.

Click on the link above for the article

"John Paulson Please Pick Up The Red Phone"

First word out of Paulson's mouth had to start with S and end with it.

S&P Lowers Some Fannie,
Freddie Securities Ratings

By JAMES R. HAGERTY
August 11, 2008 5:13 p.m.

Standard & Poor's Ratings Services lowered ratings on certain securities of Fannie Mae and Freddie Mac, a move that may further complicate their efforts to raise capital.

The ratings agency cut ratings on preferred stock and subordinated debt for both companies to A minus from AA minus. It left their senior debt ratings at AAA.

The AAA rating reflects the belief that the U.S. government would have to back the senior debt of the two mortgage companies in a crisis. But there is less assurance that the government would protect holders of preferred stock and subordinated debt. The companies' new regulator "has receivership powers that would place the non-senior creditors … at a greater risk of nonpayment," S&P said, adding that this applies especially to dividend payments on preferred stock.

Fannie and Freddie were chartered by Congress to assure a steady flow of money for home mortgages. As defaults on home mortgages soar, they have recorded combined losses of about $14 billion over the past four quarters.

The downgrades will put "negative pressure" on any new issues of preferred by the companies, Federal Financial Analytics Inc., a Washington research firm, said in a report. The firm said that banks outside the U.S. that already hold the affected securities will have to adjust their risk-based capital holdings as a result of the downgrades.

Freddie has said it plans to raise at least $5.5 billion of capital, likely through offerings of common and preferred stock, but is waiting for market conditions to improve. Fannie raised $7.4 billion through common and preferred offerings in May but said last week that it may need to raise more capital eventually.

S&P cited an "uncertain appetite" for Freddie's preferred stock as a concern.

On the New York Stock Exchange Monday, Freddie shares fell to 5.1% to $5.60. Fannie was down 7.2%% to $8.40.

Best freaking race - EVER!

Hilarious

Check out Long or Short Capital for a good hoot!

Taylor Rule vs. The Fed - What would have worked better??

Hello, McFly!

Source: The Wall Street Journal

August 6, 2008, 1:20 pm

Housing Market Deals With Reality Gap

By any measure, 2008 has been tough on home prices and most economists expect further declines, but it appears somebody forget to tell homeowners.

A survey by real-estate Web site Zillow.com found that 40% of homeowners think that the value of their house increased in the past year and 22% think it stayed the same. However, according to Zillow, 77% of homes saw a drop in value over the past year, while just 19% increased. The South had the highest misperception, with 48% of respondents believing their property had appreciated and just 28% seeing depreciation. That compares to 69% of houses actually seeing drops and 26% rising in value.

“We attribute this gap to a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others, but not them,” said Stan Humphries, Zillow vice president of data and analytics.

The disparity between perception and reality has the potential to extend the correction period for home prices. That could be exacerbated by unrealistic expectations. Three out of four homeowners in the Zillow survey expect their home value will increase or stay the same over the next six months, with just 25% expecting a decline.

However, optimism appears to stop at the doorstep and doesn’t extend to one’s neighbors. Some 42% of respondents expect values in their local market to drop and 58% think values will increase or remain the same. –Phil Izzo

Most Positive Thing I have Heard In A While

One point for JM

Source: Bloomberg

McCain Embraces Deficit Critic Walker as Truth Teller (Update1)

2008-08-06 15:28:43.650 (New York)

(Adds Walker comments starting in third paragraph. For a special report on the campaign, see {ELEC }.)

By Lorraine Woellert

Aug. 6 (Bloomberg) -- John McCain said that if elected president he would tap former U.S. Comptroller David Walker to help balance the federal budget, calling the deficit hawk someone who could help convey the ``truth'' to the public.

``He is the most articulate person on this issue of the debt that we've laid on future generations of Americans,'' McCain, the presumptive Republican nominee, said last night. ``We've got to communicate more directly to the American people and tell them the truth.''

According to Walker, who has been traveling the country this year on a ``fiscal wake-up tour'' to sound the alarm about runaway federal spending, neither McCain nor Democratic rival Barack Obama has made deficit reduction a priority.

``Neither one of them has really addressed the issue of fiscal discipline,'' Walker said in a phone interview last night.

He said he has talked with both candidates' fiscal advisers and is politically neutral.

``What is pretty clear is that the math doesn't work for both,'' Walker said in a July 21 interview. ``Neither has a plan to get us out of this hole.''

Telephone Town Hall

McCain's embrace of Walker came in response to a question during a ``telephone town-hall'' meeting with Pennsylvania voters. The Arizona senator took questions from a hotel in Huntington, West Virginia. The caller said he was concerned about Social Security and Medicare and asked whether McCain would be ``up to bringing in someone like David Walker,'' who also headed the Government Accountability Office.

``It's funny you mention David Walker,'' McCain said. ``I'm not a friend of his or anything, but I saw his great work when he was head of the GAO.''

Walker, an assistant secretary of Labor in the Reagan administration, was appointed by President Bill Clinton in 1998 to lead the GAO. A celebrity among fiscal conservatives, he left government to lead the Peter G. Peterson Foundation, which helps fund the nonpartisan Concord Coalition, a deficit watchdog group.

McCain, 71, and Obama, 47, both bill themselves as fiscal disciplinarians. With the White House forecasting a record $482 billion budget deficit next year, analysts say neither candidate has a plan to control runaway federal spending.

Both candidates now must show they are making deficit reduction a priority, Walker says.

Mandate Needed

``While I don't think it's realistic for them to be too specific about what they need to do, I do think it's important that they talk about the issues enough to have a mandate if elected,'' he said last night.

McCain's tax cuts alone would increase the debt by $5 trillion by 2018, compared with $3.4 trillion for Obama, according to the Tax Policy Center, a nonpartisan group.

Concord Coalition Executive Director Robert Bixby said Walker would be an asset to an administration trying to cut spending.

``David would be a good man for the job. The question would be whether anyone would listen to what he would say,'' Bixby said in an interview. ``The question is whether McCain is ready to address those key imbalances in our economy and our budget.''

McCain last night said he would ``argue that we need some other people'' to help address budget woes, and he mentioned former e-Bay Chief Executive Officer Meg Whitman and former Hewlett-Packard CEO Carly Fiorina, one of the Republican Party's top fundraisers, as examples. Both women are advisers to his campaign.

``We need to go out and tell the American people the truth, that we've got to stop handing off these burdens to the next generation of Americans,'' McCain said. ``It's not America. It's some kind of selfishness that I don't believe Americans know we are practicing.''

Not Good for the WB (Wachovia)

Article from the WSJ which details rising problems with option arms which just so happens to be the main product from the Golden West portfolio.

FirstFed Grapples With Fallout
From Payment Option Mortgages

By RUTH SIMON
August 6, 2008

LOS ANGELES -- Like many mortgage lenders, FirstFed Financial Corp. is struggling with rising losses. The bank posted a loss of nearly $70 million in the first quarter -- reversing years of profit. Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast. The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.

But FirstFed isn't another bank grappling with the fallout from subprime mortgages that went to less-creditworthy borrowers. In fact, FirstFed was ranked last year as one of the top five banks in the nation by a trade publication, partly because it appeared to have pared back on risky mortgage loans. Yet this year, the Los Angeles bank is on the front lines of what could be the next big mortgage debacle: payment option mortgages. These loans went mainly to people with good credit, but they are likely to experience defaults that are nearly as high as -- in some cases higher than -- those for subprime.

Barclays Capital estimates that as many as 45% of option ARMs, as they are often called, originated in 2006 and 2007 could wind up in default. Another analysis, by UBS AG, suggests that defaults on option ARMs originated in 2006 could be as high as 48%, slightly higher than its estimate for defaults on subprime loans. Both studies looked at loans that were packaged into securities.

Option ARMs typically carry a low introductory rate and give borrowers multiple payment choices, including a minimum payment that may not even cover the interest due. Borrowers who make the minimum payment on a regular basis -- as many do -- can see their loan balance rise, known as negative amortization. Monthly payments can increase by 60% or more once borrowers begin making payments of principal and full interest. That typically happens after five years or earlier if the amount owed reaches a preset amount, typically 110% to 125% of the original loan balance.

FirstFed's experience highlights the challenges lenders face as option ARMs recast. That is happening earlier at FirstFed than at some other banks because it set a 110% cap on many of its option ARMs, while many other lenders have higher caps.

FirstFed is a relatively small lender, with just $7.2 billion in assets. Babette Heimbuch, FirstFed's chief executive, says that option ARMs were "a very good loan for the borrower and the bank" for more than 20 years. But that changed, she said, when investment-banking firms entered the industry and set lower lending standards, which FirstFed and others followed.

For most of the product's history, Ms. Heimbuch says, the introductory rate on an option ARM was one to two percentage points below the actual interest rate on the loan. As long as interest rates were flat or falling, the minimum payment was enough to cover the interest due, making the option ARM equivalent to an interest-only loan in the early years of the mortgage.

But around 2003, as home prices accelerated, lenders began pushing mortgages that made payments more affordable. As competition increased, lenders dropped the introductory rate on option ARMs to 1% or even lower and made more loans to borrowers who didn't fully document their income or assets. FirstFed was initially reluctant to follow the crowd. But as mortgage brokers took their business to other lenders with easier terms, FirstFed's mortgage originations declined to $366 million in the second quarter of 2003, from $389 million a quarter earlier. At the same time, its existing borrowers refinanced into new loans at other banks that offered easier terms. "The fear was that at the rate loans were paying off we were going to have to close the company down," says FirstFed President James Giraldin.

Rather than shut its doors, FirstFed joined the crowd and business boomed. But as the Federal Reserve boosted short-term rates, the gap between the introductory rate, used to set the minimum payment, and actual rates swelled to as many as 7.5 percentage points. That meant that borrowers making the minimum payment weren't covering even the interest due.

FirstFed started to pull back in mid-2005 and, as a result, didn't see a big jump in delinquencies until loans began recasting in the second half of 2007. Others lenders are seeing borrowers fall behind even before recasts.

Now, as loans are recasting, FirstFed is scrambling to modify the loans of borrowers who can't afford the higher payments. As of the end of June, nonperforming assets climbed to 8.2% of total assets, compared with 0.85% a year earlier.

Instead of waiting for borrowers to fall behind, the company sends borrowers letters as their loan balances swell, offering them a chance to modify their mortgages. From January through June, the company had modified 705 loans totaling $345 million.

There have been unexpected hurdles. Many borrowers took out home-equity loans with other lenders after getting an option ARM from FirstFed. These borrowers account for 25% of FirstFed's mortgage loans but represented nearly 50% of its delinquencies in the third quarter of 2007, the company says. It is harder to modify the terms of these loans because FirstFed often needs the approval of the holder of the home-equity loan.

In addition, many borrowers submitted loan applications that overstated their financial condition, making it more likely that they won't be able to afford even a modified loan. FirstFed figured that some borrowers had fudged their incomes and tried to protect itself with tighter credit standards. "But we were shocked by the magnitude of the lies," Ms. Heimbuch says. "You expect a 20% fudge. You don't expect 500%."

Dien Truong, a 35-year-old, water deliveryman, pulled out $156,000 in cash when FirstFed refinanced the $628,000 mortgage on his Richmond, Calif., home in 2005. Mr. Truong used the money as a down payment on another home and turned the FirstFed home into a rental property. But the $2,500 a month he collects in rent is no longer enough to cover his mortgage payments, which have climbed to roughly $5,100 from $1,618.

FirstFed offered to refinance him into a new loan with payments of roughly $4,250 for the first five years, but Mr. Truong says he can afford only to pay the $2,500 in rental income. Because he has been making the minimum payment, his loan balance has climbed to more than $690,000, which is more than the home is worth.

"I've been a good customer," says Mr. Truong, who hasn't made a loan payment since March. "This time my credit will be screwed up for good." His loan application shows that Mr. Truong and his wife earn $165,000 a year, more than double their actual income, says Katrina Vizinau, a housing counselor with Community Housing Development Corp. of North Richmond. Like Mr. Truong, she says, many borrowers say they didn't read the application until later.

Frederick Cannon, an analyst with Keefe, Bruyette & Woods, believes the company should be "well enough capitalized" to absorb the losses.

Favre and Greenbay

Is it just me but is anyone else wishing that Brett Favre wins the starting job in Greenbay and gets tattooed by Jared Allen in Week 1? Missing the next game(s) and killing the starting streak as karmic payback would be classic. It would be like scene from The Natural (the book) if he is goes out like he came in (replaced on injury just like he replaced the Majic Man).

Ok I'm a bad person.

Housing and Congress - 535 Reasons Why It Got Out of Hand

If you want to add another culprit to housing's woes don't forget the Congress of these United States. Housing was as sacred as motherhood and apple pie and almost as sacred as earmarks. Look no further than the line in the article about the congressman screaming at the official to get a sense of the incentive system operating through all of this.

Think about this as all the bailouts add up. Maybe Congress needs a new regulator!

Addendum:
534 - Ron Paul is the exception