Fannie and Freddie Hiding Over $100 Billion of Losses?

Fannie and Freddie Hiding Over $100 Billion of Losses?

Today, March 23, 2011, 3 hours ago | Yves SmithGo to full article

Bank expert Chris Whalen has a little bombshell in his current newsletter. It’s so obvious that it should not only have occurred to me but pretty much everyone on the real estate beat. And that begs the question why no one has even mentioned it.

One of the actors in the subprime/Alt A market was private mortgage insurers. For those of you lucky enough to be unfamiliar with this concept, PMI is insurance paid for by the borrower for the benefit of the lender. It is used to insure the property value on highly levered transactions. Lenders were quite happy to lend up to 80% of appraised value based on semi-decent income; it was considered unlikely before the crisis that home values would fall all that much in a specific geography even in a recession. But for the amount in excess of 80%, the lender wanted extra protection. In steps the PMI insurer. If the borrower wants to make only a 10% downpayment, he would need to get a PMI policy to insure against the possibility that the value of his house might fall below the 90% he had borrowed against it, down to the 80% risk that the lender was prepared to shoulder.

Given the prevalence of PMI insurance, their thin capitalization, and the big wipeout in home values, they should be as dead as the monolines. But they aren’t. That’s because they are engaging in insurance fraud, namely, refusing to pay out legitimate claims.

And perversely, as Whalen tells us, they are getting quite a bit of help from Fannie and Freddie not making claim at all. Why not? Well, if the GSEs did put in claims, the PMIs would quickly go bust and Fannie and Freddie would report losses. So the failure to put in claims is yet another variant of “extend and pretend”. But in this case, there’s good reason to believe the numbers are very large:

Both investors and Congress need a lot more details about the purchases of defaulted loans by Fannie and Freddie. We need to know exactly how many dud loans have migrated back to the GSEs, what their loan loss reserve is, how much of that loan loss reserve is “covered” by the MIs and how much “capital” the MIs have against these exposures. The GSE are letting dead loans sit on their books in part to avoid recognizing the losses, an event that would drive many of the MIs into bankruptcy. If you look at how slow the process of final loss recognition by Fannie and Freddie is proceeding, then you’ll understand why the publicly disclosed loss rates reported by Fannie and Freddie have been falling.

Instead of demanding insurance payments, the GSEs are doing everything in their power to keep the MIs looking like going concerns so that they can count the MI “receivable” as a good asset. This is why the GSEs direct LTV based LLPAs to the MIs, to keep some cash flowing their way, and…

If there was a proper mark-to-market on the MIs (like all proper insurance/reinsurance businesses do), then the MIs would be massively insolvent. The GSEs would have to take another huge amount of capital from Treasury. Geithner and the GSEs are trying to avoid it, and to date are getting away with it. Sad to say, nobody at the FHFA seems to have a clue about this issue. But we understand that a certain independent minded committee chairman on Capitol Hill is preparing for hearings on this monumental act of fraud against the taxpayer, not to mention the holders of GSE debt.

Now the losses on the underwater PMI (or MI as Whalen prefers to call it) are only one part of the picture. An even uglier part of the equation is the dead loans still being carried at face value:

As the GSE warehouse of delinquent and defaulted loans grows by billions of dollars each month, there is still no demand for payment from the MIs by the FHFA. As we noted in an earlier comment, we figure that there is as much as $200 billion in defaulted loans sitting on the books of Fannie and Freddie at cost — that is, close to par value

Loss severities are now running at 70%. They are only going to rise as housing prices are forecast to fall further in most markets and more borrowers are fighting foreclosure, which increases the cost of foreclosing. But if you take Whalen’s $200 billion top estimate and take a conservative 70% in loss severities, that gets you to $140 billion in unreported losses at the GSEs. So an estimate of north of $100 billion seems plausible.

Whalen also tells us how the latest round of stress tests are even more divorced from reality than the first iteration:

….we review the Fed’s latest stress test exercise and discuss what it means for the banking industry and the US economy. While the US central bank did not provide results for specific institutions, the assumptions in the Comprehensive Capital Analysis and Review (CCAR) are more instructive than the Big Media seems to notice. Indeed, a close reading of the CCAR document provides a compelling argument for why the Fed should not be supervising financial institutions.

For example, the Fed has a down 6% for housing prices in its “stressed scenario,” but that is about where we are now. Incredibly, the central bank also has a down 5% for HPI [housing price inflation] in 2012, again in a “stressed” scenario. This implies that the Fed’s “normal” estimate for HPI is positive for 2011-2012? Hello?

I’ve said it repeatedly, but it seems I can never say it enough:

the financial power that be have long ago ceased being in the business of anything remotely connected with reality. They honestly seem to believe if they can get enough people to believe their propaganda, reality will come to conform to it.

In my entryway, I have some Rockwell Kent prints, namely, his Apocalypse series, on display (yes, I’m sure readers will regard that as fitting). One, which didn’t strike me as particularly apocalyptic when I bought them, is called “Degravitation” and shows Wall Street people flying to the sky. Maybe I can sell copies to the Fed and Treasury as motivational pictures, since it does seem to depict the business they are really in.

13 Responses

  1. Mary

    Absolutely correct. And now seeing default debt servicers — reporting the 2 mortgages!!! Why?? they are being investigated — and they do not know what to report to cover themselves!!.

    Prior trusts are not paid off — by you — in a refinance. They are “satisfied” by insurance.

    Foreclosures should not be in name of second trust – by refinance (not that they should be in name of ANY trust at all).

    SEC — believe is aware — and not doing anything. “Investors” not paid off due to the fraud. But, what do we expect from a system that is determined to keep all undercover???

    This is not even about accounting gimmicks — it is about outright fraud — and securities fraud for which homeowners were the patsy.

    Sec — you blew getting Madoff — are you going to blow this too??

  2. Page 2

    Who pays the Premiums?
    In securitized transactions, the insurance premiums for the MI policies are generally paid from the excess interest available from the underlying pool of mortgage loans.

    What excess interest? When it’s suppose to be a Lender Paid Policy?

  3. Wells Fargo Funding (originator) does not record ‘loan#’ transactions in MERS system – footnote #2.

    Wells Fargo & CO/MN – Norwest – GMAC does not either.

    One would be MBS and other CMBS.

    During origination consumer charged to 2 Title Policies out of net-funding.

    Now take a complaint for foreclouse.

    There was a MERS nominee for the 80/20 (2nd).

    The default event 90 days.

    The MERS MIN# servicing ID Active for the 2nd.

    The Complaint for Foreclouse FIled and no mention of the 2nd.

    The MERS ID now inactive.

    An audit was requested of the Settlement Agent when the loans were current. The attorney revealed he keeps the originals so he does not get screwed out of his money.

    Did the 2nd loan get paid off by insurance already?

    The first loan, the Credit Risk Manager for Wells Fargo Bank NA whose client /investor is LEHMAN BROTHERS began tracking the foreclosue event under same loan# and will file a claim once the foreclouse complete.

    Could part of the bubble be the slowdown in foreclosures due to foreclosure gate.

    SouthStar Fundings LLC
    Bear Stearns
    Lehman Brothers
    AIG (bailed out)
    Goldman paid $3B was that after the bail out?

  4. The banks have pass-thru-agencies and don’t report short-term retail transaction details – for example as related to MERS.

    Footnotes of R.K.Arnold presentation to Senate

    MERSCORP, Inc. and its subsidiary, Mortgage Electronic Registration Systems

    MERS President and CEO R.K. Arnold Appears Before U.S. Senate

    Washington, D.C., Nov. 16—R.K. Arnold, president and CEO of MERSCORP, Inc., testified today before the United States Senate Committee on Banking, Housing and Urban Affairs. To download a copy of his testimony, please click here. For questions, please contact Karmela Lejarde at 703-761-1274.

    1 MERSCORP, Inc. is structured as a privately held stock company. Its principal owners are the Mortgage Bankers Association, Fannie Mae, Freddie Mac, Bank of America, Chase, HSBC, CitiMortgage, GMAC, American Land Title Association, and Wells Fargo. MERS is headquartered in Reston VA.

    2 Members tend to register only loans they plan to sell. Wells Fargo and JP Morgan Chase are the principal members in this regard. They service most of the loans they originate themselves, so registering their retail business on the MERS® System is of less practical value to them. However, when these institutions purchase loans from others, known as their correspondent business, they do require that those loans be registered on the MERS® System.

    3 MERS makes its money through an annual membership fee (ranging from $264 to $7,500) based on organizational size, and through loan registration and servicing transfer fees. MERS charges a one-time $6.95 fee to register a loan and have Mortgage Electronic Registration Systems, Inc. serve as the common agent (mortgagee) in the land records. For loans where Mortgage Electronic Registration Systems, Inc. will not act as the mortgagee, there is only a small one-time registration fee ($0.97). This is known as an iRegistration. Transactional fees (ranging from $1.00 to $7.95) are charged to update the database when servicing rights on the loan are sold from one member to another.

    4 The originating lender may be the servicer in some cases.

    5 A copy of a sample mortgage document can be found in Attachment One. A short summary of MERS prepared by the Mortgage Bankers Association can be found in Attachment Two.

    6 This action tells the world that there is a lien against the property. This is done to protect the lender’s interest. The recording of the mortgage puts future purchasers on notice of any outstanding claims against the property.

    7 The promissory note is not (and never has been) recorded or stored with the county land records office. The note is a negotiable instrument that can be bought and sold by endorsement and delivery from the seller to the note purchaser. This activity is governed in all fifty states by the Uniform Commercial Code (UCC) Article 3.

    8 The MERS® System is the database; MERSCORP, Inc is the operating company that owns the database; and Mortgage Electronic Registration Systems, Inc (“MERS”) a subsidiary of MERSCORP, Inc., which serves as mortgagee in the land records for loans registered on the MERS® System. For discussion purposes, “MERS” may be used in this testimony to refer to all three entities unless specifically stated otherwise.

    9 The design of the MERS® System always anticipated and required that borrowers would be able to access the system to determine the servicer of their loans. Providing such information to MERS is a requirement of membership and loan registration.

    When Congress acted last year to require that borrowers be told when their note is sold and the identity of the new note-owner,

    MERS established, within a matter of weeks, a new service called Investor ID. Of the 3,000 members of MERS, 97% agreed to disclose the identity of the note-owner through the MERS® System. Fannie Mae opted to be disclosed. Freddie Mac chose not
    to be disclosed.

    10 The issue of whether transfers of residential mortgage loans made in connection with securitizations are sufficient to transfer title and foreclosure rights is the subject of a “View Point” article entitled “Title Transfer Law 101” by Karen Gelernt that appeared in the October 19, 2010 edition of the American Banker. A copy can be found in Attachment Three.

    11 A 1993, 36-page white paper entitled “Whole Loan Book Entry Concept for the Mortgage Finance Industry” addresses the concepts underlying MERS and the problems it was designed to address. It is available upon request.

    12 The essential elements of the legal principles underlying MERS can be found in “MERS Under Attack: Perspective on Recent Decisions from Kansas and Minnesota,” an article by Barkley and Barbara Clark in the February 2010 edition of Clark’s Secured Transactions Monthly. A copy of this article can be found in Attachment Four.

    13 On loans originated by correspondent lenders or brokers (where MERS is not the mortgagee), the costs of preparing assignments and the associated filing fees are listed on the HUD-1 and paid directly by the borrower.

    14 Individual states handle real estate foreclosures differently. In some states the foreclosure process is judicial, and in some states it is non-judicial. Under both systems, time frames and terms vary widely from state to state. A brief, general, description of both processes prepared by the Mortgage Bankers Association can be found in Attachment Five.

    15 Some important recent cases upholding the rights of MERS include:

    16 A review of the use of MERS in all fifty states was done by Covington and Burling in 1996 and 1997 as part of the due diligence associated with the creation of MERS. It is available upon request.

  5. Why do I get the feeling like Wall Street is trying to pawn off the derivative black hole losses off on American homeownership and Public Service retirement. We all know that all this was no accident. So what was the underlying reason for the set up, what were they covering up?

  6. Here is another problem — find out what prior “loans” were purged from system.

    Fannie/Freddie — how were those records for loan purged?? And, Why??

  7. Double the pleasure with my loan. My transaction history shows 6.228 interest rate. The PSA shows 7.263 rate. A .49 for LPMI and .49 for additional LPMI. Two policies for the price of one home. Heck! I had over 20% down. It should have stated NO PMI and NO LPMI. Chap. 49 Homeowners Protection act states you must inform borrower of LPMI since it would cause the borrower to pay a higher interest rate. NEVER HAPPENED.

    Makes you think about all the 80/20 loans. Two loans. Two LPMI policies.

    I asked my lender about the LPMI and they wrote back saying no premiums were add to my loan. How can I verify that when my mortgage states premiums are added in the escrow account balance?

    And that 1% one year Teaser Rate. NEVER HAPPENED. But the PSA shows it did.Talk about your SEC FRAUD.

  8. “What this all means is that if the GSEs are forbearing in making claims on their PMI policies, it not only hides the GSEs’ losses. It also means we’re seeing another quiet bailout of the banks.”

  9. Fannie, Freddie, BoA, Wells, Citi, States, Counties, Cities….they are all insolvent and until someone is willing to admit it …well, as this blog so aptly puts it we are Living Lies

  10. Notes don’t qualify as securities.

    See Reves v. Ernst & Young, 494 U.S. 56, 65, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990) “[T]ypes of notes that are not securities include the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on … assets, the note evidencing a `character’ loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open-account debt incurred”. Id. (quo. omitted)

    Maybe that’s the real reason why none of them ever made it to any of the pools or trusts.

  11. Well — now getting somewhere.

    F/F allowed false defaults (orchestrated by false application of insurance premiums) — and then sold collection rights elsewhere — and invested in the default debt FALSE securities.

    If you had a F/F loan prior to refinance — demand to know — when and how it was “PAID”/”Satisfied” — at time of your refinance.

    And, remember, “satisfied’ does not mean PAID by you!

  12. How about , the banks start again and charge PMI because you are under water ?

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