Reuters jumped on the Wall Street job-cuts theme last night, forecasting more firings in months to come. From the story: "It's just the perfect storm: You've got zero rates which are unheard of, squashing net interest margins like never before in history; the greatest regulation ever limiting fees, raising costs, demanding more capital; and then you've got a brewing economic disaster in Europe," said [JPM Securities analyst David] Trone.

Felix Salmon suggests investment bank cutbacks aren't really news.

The payback: Timothy J. Mayopoulos was named Fannie Mae's next CEO, which should do little to ease tensions between the government-sponsored entity and Bank of America. Mr. Mayopoulos was fired from his role as BofA's general counsel in 2008. The two companies have been grappling over whether BofA will buy back billions in mortgages with faulty underwriting that it sold to Fannie.

Whale inquest: Officials from the Office of the Comptroller of the Currency, the Treasury Department and the Federal Reserve will testify at a Senate Banking Committee hearing today on trading losses in JPMorgan's chief investment office.

Whither Europe: Germany is working on a plan to recapitalize Spanish banks with European rescue funds without burdening Spain with the stringent economic reforms placed on bailed-out neighbors such as Greece and Ireland.

Trustees clash: Tensions were already high between Louis Freeh and James Giddens, the two trustees seeking to recover claims arising from MF Global's collapse last fall. Then Mr. Freeh, who's responsible for recovering funds for the parent company's bondholders, demanded $2.3 billion from MF Global's brokerage unit—a move Mr. Giddens said would force him to set aside funds that might otherwise go to MF Global customers.

Complaint box: Treasury Secretary Tim Geithner pressed bank executives to spell out specific objections to Dodd-Frank.

Gotcha: After burying its head in the sand for years when it came to a ponzi scheme that cost investors billions, the government appears to be tying up loose ends such as this one—a former Bernard L Madoff Securities employee named Craig Kugel pled guilty yesterday to tax fraud. On one hand, Mr. Kugel was aware that the firm paid salaries and benefits to people who did not actually work for the firm. On the other, Mr. Kugel "charged more than $200,000 in personal expenses, including luxury clothes, jewelry, and vacations for himself and his family, to a corporate American Express card but did not report it as income on his tax returns." Mr. Kugel faces up to 19 years in prison.

As a function of updated housing-market expectations, as well as “actual results from the first of the projection period that were substantially better than projected,” the Federal Housing Finance Administration (F.H.F.A.) released a report last week updating its projections of potential agency draws from the Treasury under conservatorship. The upside adjustment to the projections should be considered in context, however, given limited transparency of the modeling process supporting the new estimates.

Sam Chandan, Ph.D.

Some Better Housing-Market News

Earlier this month, the National Association of Homebuilders reported that its homebuilder confidence index jumped 18 points in September, the largest one-month increase since the short-lived improvements that coincided with the homebuyer tax credit. The overall increase reflects gains in current measures of home sales and homebuyer traffic and a larger rise in expectations of home sales six months from now.

The S.&P. Case-Shiller House Price Index was unchanged in the month of August, and 3.8 percent lower year-on-year, the best over-the-year reading since February. Similarly, the F.H.F.A. House Price Index was 0.1 percent lower in the month of August after posting modest increases in each of the previous four months, ending 4 percent lower year-on-year.

Existing home sales dipped in September, according to data from the National Association of Realtors released week before last. September sales were more than 10 percent higher than a year earlier but are also down by almost 10 percent from January’s high. The inventory of homes for sale has fallen more consistently than sales have picked up, but remains elevated by any historic norm.

New home sales rose 5.7 percent in September with gains in the two largest regions, the South and the West, offsetting a fall in the Midwest. At September’s sales pace, the supply of new homes on the market also tightened to 6.2 months, the lowest level since April 2010. However, house prices continued to fall in the Commerce Department report, with the median sales price for new homes down 3.1 percent in September and 10.4 percent year-on-year.

Implications for the Performance of Fannie Mae and Freddie Mac

In its report from last Thursday, the regulator and conservator of the enterprises updated its projections of Fannie Mae’s and Freddie Mac’s financial draws from the Treasury Department. As of this month, the enterprises have drawn $169 billion under the terms of the Senior Preferred Stock Purchase Agreements, including funds drawn to meet the program’s dividend obligations. In part as a reflection of the updated housing-market outlook and better-than-expected delinquency trends over the past year, the F.H.F.A. now projects that total draws will range between $220 billion and $311 billion by the end of 2014. Given the size of the draws, it is widely understood that the agencies cannot return to profitability as long as the dividend payments are enforced.

While expectations of smaller agency losses are welcome news, the broadsheets’ coverage of the F.H.F.A. update belies the need for scrutiny of the methodologies supporting the conclusions. In particular, the estimates are the result of modeling exercises undertaken by the agencies themselves, incorporating scenarios provided by the F.H.F.A. but using internal models. In light of the failure of the agencies’ risk-management processes during the housing boom, it is altogether unclear that the results of this exercise should be treated as valid. Given the broad implications for public policy and the U.S. taxpayer, the F.H.F.A.’s statement, that credit-related expenses were calculated using “a statistical loan transition model [that] projects the unpaid principal balance (U.P.B.) of loans expected to default over the projection period” as well as other modeling processes, may not pass the litmus test of model transparency. The F.H.F.A. is correct in pointing out that “the projections reported here are not expected outcomes.”

The issue is exacerbated by the F.H.F.A.’s use of house-price scenarios and other inputs from Moody’s. While the scenarios may be valid, the F.H.F.A. does not substantiate the criteria used to evaluate the efficacy or reliability of these projections or the sensitivity of results to alternative projections. Absent a more rigorous disclosure of modeling approaches and assumptions, it is impossible to determine if the tests employed by the agencies 1) capture the risks of individual mortgages or mortgage pools with any degree of accuracy or 2) are unbiased in their assessments of each enterprise’s whole residential mortgage portfolio.

Agencies’ Continuing Role in Financing Apartments

The F.H.F.A.’s assessments of agency health and the related cost to taxpayers matter for the future of housing finance and, by extension, for the apartment sector outlook, which is impacted by the direction of housing-finance reform efforts. The recovery’s cardinal markets, including New York, Washington, D.C., and San Francisco, have seen the agencies’ share of financing diminish as a wider range of lenders have responded to improving fundamentals. Still, a degree of crowding out—where nongovernmental lenders lose deals to preferentially priced agency financing—remains a factor limiting the balance-sheet gains of some banks and life companies. Some of these institutions have turned to financing apartment development as conditions demand greater risk-taking.

Outside of the cardinal markets, where apartment occupancy rates and rents are also generally rising, a range of regulatory and balance-sheet constraints on regional and community banks, combined with an unpredictable C.M.B.S. market that has seen little multifamily conduit activity, have resulted in agency financing’s maintaining its position as the dominant source of mortgages for sales and refinancing. That may remain the case for some time, even as housing-finance reform sees progress in refashioning the governmental role in the apartment sector.

Competition among lenders, and the very low cost of agency capital, has pushed debt yields to historic lows. Some market participants will cite relatively wider cap-rate spreads or positive leverage as mitigating factors in the risk analysis. But these arguments ignore that some recent deals would not be viable if interest rates were even 100 basis points higher. Invariably, cash-flow growth will have to remain strong and sustained to offset the impact of higher borrowing costs at exit. In markets or submarkets where the apartment-supply response is relatively sharp, that cash-flow growth is not assured even if the demand curve continues to shift out along its current trajectory.

dsc@chandan.com

Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.

The Treasury Department and the Department of Housing and Urban Development last Friday released their proposals for the future structure of housing finance in the United States. In a clear indication of the administration's intent to address the structural deficiencies that facilitated the current crisis in housing, Treasury has proposed the ultimate elimination of Fannie Mae and Freddie Mac.

Conceding that U.S. housing markets have not yet recaptured a requisite degree of health--no changes to Fannie Mae and Freddie Mac are imminent--the administration has nonetheless demonstrated its resolve to bring the conservatorship of the government-sponsored enterprises to an end. The proposals themselves suggest that policy makers are on the cusp of a radical rethinking of housing market structures, including the role of government and quasi-governmental agencies in supporting mainstream multifamily finance.

Overall, the proposal suggests a public commitment to affordable rental options but little in the way of the historically broad support for middle-income rental markets. Instead, the public role is circumscribed, characterized as being "limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters and carefully designed support for market stability and crisis response."

Without being more specific, Treasury signals that the government-sponsored enterprises' multifamily role will reach its conclusion. In the meantime, however, the data suggest that the enterprises are maintaining their leadership positions in the rental sector, growing their balance sheets and their related securitizations.

The Long Road Out of Conservatorship

Two and a half years have passed since Fannie Mae and Freddie Mac were brought under the conservatorship of the Federal Housing Finance Administration (FHFA). In September 2008, the sheer weight of the government-sponsored enterprises' financial losses threatened the stability of the two institutions, as well as any modicum of their functioning in U.S. mortgage markets and the financial system.

Fearing that a collapse of one or both institutions might damage the economy and financial system beyond the government's capacity to repair, the Treasury Department undertook one of the government's most far-reaching interventions of the crisis. Policy makers may have anticipated that the government's operational role in the housing markets would run its course by late 2010. Instead, the unprecedented and protracted weakness of the national housing market has entrenched the government's role in buttressing residential mortgage finance.

Over the course of conservatorship, the enterprises' Preferred Stock Purchase Agreements with the Treasury have proven the essential mechanism for stabilizing the Fannie and Freddie. Through this channel, the FHFA has facilitated an extraordinary public investment in the enterprises, offsetting losses that otherwise have threatened the institutions with receivership.

Given the near-certainty of additional public investment, the FHFA released an analysis late last year quantifying the enterprises' cumulative draws under different scenarios for the housing market. Through 2013, the FHFA estimates that draws might range from $221 billion to $363 billion over the period from the onset of conservatorship through the end of the analysis period. Required dividend payments on the preferred investments account for $80 billion or more of this total.

Residential Mortgage Concerns Drive Proposals

In a statement issued last Friday, the chairman of the Mortgage Bankers Association, Michael Berman, wrote in support of the proposal's general thesis, saying that "we continue to believe that this is the most prudent approach, one that places the primary risk on private investors and ensures sufficient liquidity during times of economic stress in order to provide affordable mortgage finance in all types of mortgage markets."

But in a separate statement, Jeff Day, chairman of the Commercial Real Estate Finance Council GSE Task Force, spoke directly to the position of the rental market, offering that "with a pronounced need for rental housing, reforms in the multifamily sector should focus on providing a stable, countercyclical and affordable source of capital for both affordable and market-rate rental multifamily housing. This should be done in a way that minimizes taxpayer exposure and does not create a bias toward or against homeownership."

The proposals do include some indication of the government's objectives and potential dimensions of flexibility. In particular, the proposal offers a public role in "promoting a housing market that provides liquidity and capital to support affordable rental options. ... Private credit markets have generally underserved multifamily rental properties that offer affordable rents, preferring to invest in high-end developments. ... As we wind down Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding to this segment."

What that way will be is far from apparent at this juncture.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist of Real Capital Analytics and an adjunct professor at the Wharton School.

A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac.

Imagine if you had a $500,000 mortgage, and you got to settle it for $5,000 — that is the deal B of A appears to have gottem from Freddie Mac.

Ritholtz says these sweetheart terms support the notion that government ownership of Fannie Mae and Freddie Mac has enabled a "back door bailout of the banks." Could the government really get itself so deeply intertwined with a bank that's been hamstrung by its own mortgage mistakes? It's certainly possible.

mtaylor [at] observer.com | @mbrookstaylor

BofA said that it intends to take a fourth-quarter provision of about $3 billion as part of the agreement, and with that, the company believes it has "addressed its remaining exposure to repurchase obligations for residential mortgage loans sold directly to the GSEs." The company expects to take a non-cash goodwill impairment charge of $2 billion as a result of these actions.

Compared with the worst-case scenario, BofA got off pretty light. The company had pegged its exposure to the GSE putback claims somewhere around $6.5 billion in October. Sure, this settlement isn't the hand-to-hand brawl the bank had previously promised to investors, but the firm had already backed away from that hardline stance. And before we get carried away, there are still some problem areas remaining for BofA even in the wake of this announcement, per Bloomberg:

The agreements don’t cover loan servicing obligations, other contractual obligations or loans contained in private label securitizations.

The private-label segment of Bank of America's putback exposure is a hazy risk area, even by the bank's own reckoning. The putback apocalypse hasn't entirely faded with the passing of 2010, but Bank of America appears to at least be getting proactive about the situation in the new year.

Well, the Christian holidays. Fannie Mae and Freddie Mac, the federally sponsored lenders, announced that they will hold off on foreclosures for the two weeks surrounding Christmas this year, according to CNN. Chanukkah came early this year, so no luck for Jewish homeowners.

"If the property is occupied, our foreclosure attorneys will suspend the eviction to provide a greater measure of certainty to families during the holidays," Anthony Renzi, executive vice president of single family portfolio management at Freddie Mac, told CNN. Tell that to the Rothsteins, pal.

Meanwhile, many of the big banks, such as Wells Fargo and Bank of America have been following suit, though not entirely out of the goodness of their hearts:

A spokesman for Chase Mortgage, a division of J.P. Morgan Chase, said its robo-signing-connected moratorium makes an additional holiday freeze moot; it will still be several weeks before it starts to evict borrowers again.

Bah, humbug.

mchaban@observer.com

The Wall Street Journal reports:

Freddie Mac took the rare step of removing loan files after an internal review raised "concerns about some of the practices at the Stern firm," a Freddie spokeswoman said.

"We have begun taking possessions of all files on Freddie Mac mortgages simply to protect our interest in those loans as well as those of the borrowers," the Freddie spokeswoman said. A Fannie spokeswoman declined to elaborate.

Florida Attorney General Bill McCollum has been investigating the law firm, whose foreclosure processes have wrought for its namesake attorney a Bugatti, a yacht and other fancy things. Amid reports of fraud and forgery in the Florida foreclosure document industry, Citigroup has stopped sending paperwork toward the Stern law offices. Citing people familiar with the matter, The Journal says Freddie Mac has charged the Stern business with handling around 10,000 foreclosure documents.

mtaylor [at] observer.com | @mbrookstaylor

For instance, the survey finds that 91 percent of underwater homeowners are happy with their mortgages. Who in their right mind would be happy to owe the bank more for their house than what it's currently worth? Also, only 6 percent of underwater borrowers think it's okay to simply stop paying their mortgage, vs. 10 percent of the general population.

At his new NetNet blog, John Carney -- who typically can offer some kind of answer to any question related to finance -- doesn't quite know what to make of this:

Wouldn't you expect the self-interest of underwater homeowners to push them toward support for strategic defaults? And wouldn't you expect people who aren't in that position to be less sympathetic to walking away?

What's going on here?

The phenomenon has been discussed before in The New York Times. One academic attributes it to the naivete of homeowners, who think that they're simply not allowed to act in their financial interest, no matter how good defaulting on their loans would be. The Times offers some other, potentially more compelling, explanations for homeowners' behavior, if not their attitudes, but ultimately is still confused.

Morality aside, there are other factors deterring "strategic defaults," whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one's home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower's credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.

One would certainly expect people to behave altruistically toward just about anyone besides the bank that is charging them more for their house than the amount it's currently worth. One would think borrowers would see such banks as jerks who deserve to get screwed. Perhaps there is some sort of ingrained consciousness among Americans that it is a true dishonor to fail to pay your debt. Although somehow we don't think that view is shared by everyone.

Tasked by Congressman Barney Frank with providing guesses as to the potential budgetary impact of the government-sponsored entities, the CBO used different accounting methods to try to determine the fiscal value of the companies. 

The Congressional Budget Office also recommended that, because "the government operates them to fulfill the public purpose of supporting the housing and mortgage markets," the government should incorporate Fannie and Freddie into its budget. The CBO thinks that the government stands to gain $8 billion by 2020 by buying preferred stock and taking dividends from the GSEs, but before we ring the victory bell, the agency warns:

That budgetary treatment, however, does not reflect the governmental nature of the GSEs' activities, nor does it capture the full cost of the risks associated with them.

Meanwhile, bankers are urging the government to put Fannie and Freddie out to pasture. The regulators in charge of Fannie and Freddie are clawing at banks for refunds over bad mortgages the GSEs bought. And Fannie and Freddie have racked up $150 billion in government support.

(h/t Reuters)

The F.H.F.A.'s move followed a notification from the exchange that Fannie Mae had fallen out of compliance with its minimum trading price guidelines. The GSEs' stocks have continued to trade since they were seized by the federal government following a plunge in their share prices two years ago. In the time that has followed, Fannie Mae and Freddie Mac have received $145 billion in public support in the form of Treasury investments in senior preferred shares.

What Does the Delisting Mean?

In reporting on the implications of de-listing for the future of the GSEs, The Financial Times intimated that it would "pav[e] the way for a broad overhaul of the large government-controlled US mortgage finance companies." But the F.H.F.A.'s own characterization of the delisting suggests something less than a watershed event. In last Wednesday's press release, the acting director of F.H.F.A., Edward DeMarco, stated that the agency's directive "does not constitute any reflection on either Enterprise's current performance or future direction."

In stating that the delisting decision was "related to stock exchange requirements for maintaining price levels and curing deficiencies," Mr. DeMarco does concede that the government does not view a cure as sustainable. Alternatively, the government does not view the required expenditure of resources as being in the public interest. And so the delisting "simply makes sense and fits with the goal of a conservatorship to preserve and conserve assets."

As for common shareholders who stand to lose from the delisting, investment in the GSEs during conservatorship and concurrent with their extraordinary losses was necessarily fraught with market and political risk. This outcome was fully anticipated by a wide range of investors and market analysts, who have assumed that the net worth of the GSEs would remain negative until a fundamental restructuring wiped out legacy shareholders.

The F.H.F.A.'s signaling error in allowing the shares to trade during the conservatorship would only allow the most risk-seeking shareholders to assume an implicit guarantee of value.

What Does It Mean for Multifamily Financing?

The GSEs' multifamily portfolios continue to perform, exhibiting measurably lower default rates than securitized and bank multifamily pools. In part, this reflects the supportive risk-sharing arrangements of programs like Fannie Mae's DUS. The serious delinquency rate for Fannie Mae's multifamily loans was 0.8 percent as of March 31, up from 0.6 percent in the previous quarter and 0.3 percent a year earlier.

While increasing, the absolute measure is still only a fraction of the default rate for bank and CMBS multifamily loans. At Freddie Mac, the 60-day delinquency rate was 0.2 percent as of March 31. The 90-day delinquency rate was less than 0.2 percent.

Given the exceptional performance of Fannie Mae's and Freddie Mac's multifamily businesses, one might expect that these activities will remain untouched. Add to that, the GSEs are unique as a class of lender in consistently making new multifamily mortgages over the course of the credit crisis.

Even in the first quarter of this year, the GSEs' multifamily mortgage holdings increased by $20.1 billion at a seasonally adjusted annualized rate. Agency- and GSE-backed mortgages pools accounted for another $3.3 billion annualized increase. Otherwise, private pension funds increased their annualized net lending by $1.1 billion; all other groups were essentially unchanged or retreating.

Apart from the relative health of the GSEs' multifamily lines of business and the important role that the GSEs play in supporting credit availability outside the largest markets-in the largest markets, such as New York, there is evidence of inefficient and undesirable crowding out of bank lenders-the broader context for Fannie Mae and Freddie Mac remains a function of their single-family business losses. These losses are expected to persist, necessitating an extended period of conservatorship or other form of support. And as long as the issue of the GSEs' long-term structure and mandate remains in flux, the question of their ultimate role in the multifamily business remains unanswered.

The pending delisting of the GSEs may, in fact, help to ease some of the near-term challenges that they currently face in being answerable to both public policy makers and to stockholders. Inasmuch as the delisting allows them to focus on satisfying the specific goals laid out for them by policy makers, it offers an additional degree of freedom to focus on those goals while working toward long-term viability under some new structure.

As for what that new structure will be and how it will impact the giants' multifamily activities, the delisting offers no new insights except in further clarifying that public shareholders will certainly not be party to the decision-making process.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.