I don't even know what my incentive is to pay my mortgage or my bills.
You'll go to hell if you don't pay your bills. It says so in Scripture. So if you're the sort who requires threat of punishment to keep up with the old Visa payment, I suggest one of the fruitier mega-churches. They will also supply you with the incentive to keep repressing your other libidinal impulses.
Is it possible to play the game with YSP to the advantage for the ordinary citizen ?
From yor example with Chevy Chase rate sheet: 30yr fixed loan at 7.5% gives 2.25 to the broker. What would stop me from finding a broker who would agree to split this YSP between him and me and pay off the loan completely next month if I have cash ?
what would you be concerned about seeing in their portfolios?
Runoff of the older higher quality stuff combined with acquisitions over-weighted to low credit high LTV. Changing the mix, in other words, in significant ways.
I don't assume that +$20B in each portfolio reweights it terribly, but I also don't assume right now that normal runoff will be replaced with comparable credits.
Subprime problems signal trouble ahead, research shows
America's love of spending money - especially on credit - could be bad news for the economy
By Shula Neuman
Sept. 17, 2007 -- If it seems as though sub-prime mortgage loans stirred up trouble in the financial markets, just wait until debt problems spill over onto household spending. According to economists Barry Cynamon and Steven Fazzari, America's love affair with consumption has been a big source of economic stimulus for a long time. But the party might be about to end. Americans' overextended wallets could trigger the most severe downturn in economic activity seen since at least the 1980s and possibly since the Great Depression.
[found a pointer at digg.com which went to physorg.com and then I news.google for the two authors]
What would stop me from finding a broker who would agree to split this YSP between him and me and pay off the loan completely next month if I have cash ?
Well, since that little trick has been known to happen a few jillion times, what stops it is "recapture" provisions in the broker agreements that force the broker to pay back the premium price if the loan pays off early. If the broker gave premium to you, and then has to refund it to the wholesaler, the broker is broken.
Runoff of the older higher quality stuff combined with acquisitions over-weighted to low credit high LTV. Changing the mix, in other words, in significant ways.
oh. what's so concerning about that if it's got juicy OAS (which i assume it would)?
what's so concerning about that if it's got juicy OAS
And just how juicy do you think our Mr. Bernanke is going to let OAS get?
I'm not saying credit risk is the only concern. I'm simply trying to follow the logic of having these portfolio caps in the first place. The idea seems to be that size, in and of itself, is a risk. If size limits force less than optimal credit risk concentrations, then I have some concern about portfolio caps (not necessarily portfolios).
Did that make any sense? I'm a little undercaffeinated.
I am on my first cuppa,but i fail to see how raising these caps will bail out homeowners in califiornia.the ones that aren't underwater would need their incomes to triple or quadruple to qualify for these loans.hmmm who makes grow lights? I'll buy their stock.
This is going to be like whack-a-mole isn't it; I've seen it when "tuning" predictive analytics algorithms - Past a certain point, change one parameter to improve one variables fit characteristics, another one ill-fits and the overall metric deteriorates.
We saw this in the Northern Rock rescue debacle ( thanks sterlinerl for the guardian newspaper links ) - first nothing, then a semi-secret organized bailout, then an official bailout, then a deposit guarantee, then "oops" - only guaranteeing previous accounts not new ones !
We are going to get this here - just the whiff of the GSE's buying this crap - they do say its to specifically buy the subprime don't they - and you have to wonder - why would anybody mark down their existing crap ? they'll just wait to offload - and when the belated realization sets in, will we see some statement about NEW subprime loans only ? or existing subprime loans only ? or or rollover existing subprime loans only ? or...
You start point solutions like this and you get "whack-a-mole".
Then there is the problem of "what would happen if they gave a party and nobody came ?" All those transmission mechanisms - the LENDs,NFI, OWNITs, virtual brokers are gone - quite apart from the tightening of appraisals, of low doc/no doc - and MOST of all house buyer psychology makes them cautious on taking on crappy loans.
This is going to be fun to watch if one sits in virtual non-US$ land. But at another level.. the INSANITY of this all !
If size limits force less than optimal credit risk concentrations, then I have some concern about portfolio caps (not necessarily portfolios).
well let me see if it makes sense...are you saying that if the risk characteristics drift worse on average because of the caps, it's a bad thing? i'm saying i assume, on a risk-adjusted basis, they'd have better returns based on what they could probably be out there buying (it would have been even better in august).
call me cynical, but i always thought the Fs wanted to lift the portfolio caps back in august not because they gave a F about helping anybody, but because they could get the fattest spreads that have been available in quite some time.
does their "optimal credit risk concentration" have something to do with anything other than maximizing risk-adjusted returns? (it might for them, i've never given it much thought).
On one of the threads from yesterday somebody posted a link to a BBC program on Google video entitled "A Century of Self". If you want to know why people vote the way they do, I'd suggest watching that video. It's in 4 parts, each one an hour long, and once I started, I went all the way through. It's very interesting and revealing. At least IMO.
May I say a kind word for religion? I'm rather in favor of it, all other options considered. Thanks.
Seems like any changes at all to the size or nature of the GSEs should be contingent on them producing reasonable financial documentation about themselves. But maybe I'm crazy.
It is horrid to think that someone might own a house worth less than what they paid for it. The government should stop this tragedy at once. I propose that a new GSE be formed, Big Brothers Mortgage Assurance Corporation, or Big MAC for short, designed to prevent such heinous events from ever occurring again. Big MAC will be able to make loans of up to $10 million per property in order to keep housing affordable in the pricey urban areas. Furthermore this limit will be doubled every five years to insure everyone has access to a bunch of credit forever. These loans will be dirt cheap with rates no higher than 5%. In addition they will allow LTVs of 125%. Especially important and timely will be a provision allowing any and all kinds of mods and an explicit prohibition on foreclosures (woohoo!) These loans will popular because the dollar is an awesome investment. The loans will be bundled in Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees or COLOSTOMY BAGS and sold to foreigners, pension funds and central banks.
Everyone will be rich! It will be sweet, dude! You dont have to suffer the indignity of poor judgment ever again! Call your Congress person now!
HA! LOL- everyone writes that, but I really did LOL!
The way you wrote that is just how I read it when Fannie, Freddie, or FHA (or any govt hack) talk about raising maximum loan amounts to "help make housing affordable".
does their "optimal credit risk concentration" have something to do with anything other than maximizing risk-adjusted returns? (it might for them, i've never given it much thought).
Quite possibly not.
But does the portfolio cap have anything to do with maximizing their risk-adjusted returns?
I cannot bring myself to believe that those who are all in favor of portfolio size caps are thinking that way because they want to increase the risk concentration (and thus risk-weighted returns) on the portfolios.
I cannot bring myself to believe that those who are all in favor of portfolio size caps are thinking that way because they want to increase the risk concentration (and thus risk-weighted returns) on the portfolios.
Heads they win, tails we lose? Is there any middle ground here? Based on your argument, it seems that the only alternative is to eliminate caps and allow the GSEs to buy.. well.. all the loans.
Based on your argument, it seems that the only alternative is to eliminate caps and allow the GSEs to buy.. well.. all the loans.
Uh, well, Mr. Market seems to have decided recently that the GSEs will buy all the loans, rather independently of what Mr. Lockhart or anyone else thinks.
I guess I'm trying to say that the "portfolio cap" thing is kind of a Pre-Turmoil preoccupation. Back from when the GSEs were not the buyer of last resort, the "private issue junk securities" were that. There were, of course, at the time plenty of people who claimed that the GSEs were the big buyers of junk, but surely the last several months have shown them the confusion of that thinking?
So now that the GSEs are suddenly back to their hisorical function, which is to take the risk no one else can or will take, in order to keep the home mortgage market functioning, we are still worried about their portfolio size relative to private holdings. You know, those private holdings that blew up.
Frankly, I see only two or three good reasons to have GSEs in the first place, and their ability to step up to the plate in a crisis is like number one. So I'm frustrated with people who want to worry primarily about their size right now.
On the other hand, I don't care to see them become the dumping ground for every stupid private lender's boo-boos. Reason number two, in my view, for having them around is that they can enforce some market discipline by refusing to buy certain things.
It's tough to balance these two needs, but that's what I want us to do. So I am more concerned at the moment with where their quality standards do or don't shift than I am with raw dollar amounts in the portfolio.
Going over their recent 10-Ks (FNM) I was struck by the massive increase in operating expenses and huge narrowing in interest margains.
2006 v 2005 v 2004:
Admin +45%, +28%
Credit related costs +83%, +18%
Net interest income -41%, -36%
This is not a formula for confidence going forward.
Well, Robert, a whole lot of that increase in operating expenses is paying for the Auditor Army trying to get their books back into shape.
Hence my belief that Lockhart is doing the right thing by changing the portfolio cap metric to something easier (UPB rather than GAAP). Fannie really doesn't need to hire six more auditors just to calculate GAAP on each month's portfolio additions for separate reporting.
But does the portfolio cap have anything to do with maximizing their risk-adjusted returns?
I cannot bring myself to believe that those who are all in favor of portfolio size caps are thinking that way because they want to increase the risk concentration (and thus risk-weighted returns) on the portfolios.
right, i'm not arguing that point, i'm saying is there really any increased systematic risk if the GSEs drift towards riskier portfolios b/c that's where they think the best returns are?
I seem to recall the portfolio caps coming in a part of the settlement over the accounting scandal between Fannie Mae and OFHEO. I quick google of this brings up:
"On the same day that OFHEO issued its report, Fannie Mae also into a settlement agreement with OFHEO and the Securities and Exchange Commission (SEC) agreeing to pay one of the largest fines ever imposed on a financial institution and certainly the largest on an enterprise created for a public purpose. Equally important, as a central condition of the agreement with OFHEO, Fannie Mae agreed to cap its investment portfolio at essentially current levels. This groundbreaking settlement clearly shows that Fannie Mae not only did not but does not have adequate control over the growth and risks of its investment portfolio business. "
OT but this is probably all your northern neighbours are discussing today.
China to carry loonie past US$, Mersch says
Jonathan Chevreau, Financial Post
Published: Thursday, September 20, 2007
"The loonie should hit US$1.05 within a few weeks, says Frank Mersch and could pass US$1.10 if the price of oil breaks US$100..."
i'm saying is there really any increased systematic risk if the GSEs drift towards riskier portfolios b/c that's where they think the best returns are?
Random possible answers to your question:
I have a lot less faith in the old "risk-return" or risk-based pricing models than I once had. Me and several million others, I think. So in that sense, yes, I think it's still a systemic concern.
Insofar as their current acquisition plans are supposed to be some answer to secondary market turmoil rather than a opportunity for them to pick up some nickels in their portfolios, then I really don't care if they end up with less than "optimal" risk-return. I want them to continue to enforce discipline by refusing to keep the market in toxics functioning. They're supposed to be keeping the markets in good clean paper functioning, plus taking some incremental extra risk to buy those refis of those toxic subprime loans.
Frankly I don't want them buying any subprime loans, unless they're doing so to get the borrowers away from noteholder/servicers who won't do reasonable workouts or waive prepayment penalties. And if that's what they're up to, they'd better be buying at a big discount. I assume they will. So sure, I don't object to them making any money off that. But buying subprime just to bring the yield up? Didn't we just have a real-life experiment that revealed some trouble with that kind of plan?
Is there any precedent or mechanism in place for enforcing GSE portfolio risk aside from portfolio caps and conforming loan limits?
If I'm not mistaken, the GSEs did agree to adhere to the Nontraditional and Subprime guidance issued by the Fed/OCC/CSBS/AARMR). Wouldn't adhering to this new guidance serve as a check against increased risk going forward?
groundbreaking settlement clearly shows that Fannie Mae not only did not but does not have adequate control over the growth
What I am asking, sk, is why it is important to control growth right now. Not whether it requires OFHEO to control that growth for the GSEs via the cap agreements.
In other words, is "growth risk" the biggest risk right now? And I ask this question as a taxpayer-citizen, not as a Fannie Mae shareholder. IF it can be shown that the best thing for all of us is for the GSEs' portfolios to grow a little right now, then "pre-turmoil" concerns with uncontrolled growth seem possibly misplaced.
After all, we seem to have spent all that time worrying about GSE growth and failing to notice that non-GSE growth in high-risk paper has Threatened Planetary Destruction (or at least a thorough-going financial crisis).
2. Insofar as their current acquisition plans are supposed to be some answer to secondary market turmoil rather than a opportunity for them to pick up some nickels in their portfolios, then I really don't care if they end up with less than "optimal" risk-return. I want them to continue to enforce discipline by refusing to keep the market in toxics functioning.
you don't think answering market turmoil WILL pick up nickels for their portfolio and provide BETTER risk-return? who said anything about buying anything toxic?
If I'm not mistaken, the GSEs did agree to adhere to the Nontraditional and Subprime guidance issued by the Fed/OCC/CSBS/AARMR). Wouldn't adhering to this new guidance serve as a check against increased risk going forward?
Yes. Exactly. And "flexibility" in that policy would worry me waaay more right now than "flexibility" in setting dollar caps on the portfolio.
Compare to the FHA situation: it's one thing to try to write some new rules that will help FHA insure more refis of toxic shit (i.e., "detoxifying" it by making it an FHA loan). What you want to watch for is those nutbags in the administration taking this as the opportunity to do their "modernization" plans that simply allow FHA to insure more loans that should never have been made in the first place. It's not dollars, it's dollars of what.
Well, and dollars of whose. The issue with refis is always that it means taking a problem off somebody else's books. So FHA doesn't go out and "buy" junk loans off some bank's books. It insures newly refinanced loans, if it can within whatever guidelines we're dealing with. The reality of the situation is you can't "detoxify" borrowers who were given terrible loans without also "bailing out" the lenders who currently hold those toxics. Not unless you force a serious discount in there someplace.
The thing I think we forget about an environment in which the GSEs are "the only game in town" is that that does give them the "pricing power." If you're worried about lender bailouts, you would want to bear in mind that raising the portfolio caps doesn't mean the GSEs have to pay whatever the loan sellers want.
Changing the cap doesn't faze me in the slightest. It's too early in the morning to discuss the euphemistic changing of Tanta's caps.
The only bailout issue would be if the rules were changed to decrease the QUALITY of the loans being purchased with the additional cap dollars.
subprime in and of itself isn't the problem -- they still have to state income and have a low DTI ratio. Subprime is simply a statement of your credit score and outstanding debts. I've got a 70k job .. if I moved to a house right now (Jesus himself would strike me down first, i'm in Baltimore..) I'd be a conforming subprime loan because of outstanding grad school debt.
That's the problem, isn't it? If those portfolio dollars don't get allocated to EA III and whatnot, what's the point from the "addressing the foreclosure crisis" perspective?
Lord knows I hope they pick up some nickels, and I assume they will. I just don't think the public interest in this is whether they make money or not; it's whether this is an "intervention" in the secondary market and if so, whether it's doing what we need it to do.
Paulson today tried to make it clear that there is no government financial support implied or otherwise for the GSEs. Is this claim as authentic as his strong dollar policy?
If GSEs take on additional risk, higher LTV & higher loan limits, at the market price peak without the financial backstop, GSE securities might end up following subprime securities march south on the ABX.
is 348 pages long with 125 occurences of the word "portfolio". So far, the reasons I can see are:
"A key political victory for Fannie Mae senior management was the inclusion in the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the 1992 Act) of
provisions that weakened OFHEOs authorities and subjected the agency to the appropriations
process. Those provisions helped Fannie Mae and Freddie Mac grow their retained mortgage
portfolios without impediment beginning in 1993."
So, based on that I have to go to BEFORE 1992 to answer why there were caps originally. Watch this space.
Another read on this is that it was payback. Sweet Revenge !
Other ways of looking at it is that it was to limit the risk ; their controls were so bad, increasing the portfolio when the CURRENT risk wasn't known ( and STILL isn't known )
What I am asking, sk, is why it is important to control growth right now.
Tanta,
I think Poole has a good justification (from another time, but I think it applies even more now) for limiting GSE portfolios:
banks and other financial firms, and many nonfinancial firms, hold large amounts of GSE obligations and GSE-guaranteed mortgage-backed securities. I believe that many risk managers simply accept that GSEs are effectively backstopped by the Federal Reserve and the federal government without ever thinking through how such implicit guarantees would actually work in a crisis. The view seems to be that someone, somehow, would do what is necessary in a crisis. Good risk management requires that the someone be identified and the somehow be specified. I have emphasized before that if you are thinking about the Federal Reserve as the someone, you should understand that the Fed can provide liquidity support but not capital. As for the somehow, I urge you to be sure you understand the extent of the presidents powers to provide emergency aid, the likely speed of congressional action and the possibility that political disputes would slow resolution of the situation.
I think Pooles point is that GSE portfolio size is partly a function of poor risk management, that their growth as they exist now has been aided by an unreasoned faith in some mythical bailout. If investors actually thought through GSE risk, they would not continue to aid GSE growth. This is partially a problem of the government itself for not being forthright about GSE bailouts. The chief problem with increasing GSE portfolio size is implied guarantee. If Paulson and Bernanke hold a press conference and announce that under no circumstance will the federal government bailout the GSEs or their investors and that investors, were the GSEs to go bankrupt, might lose every penny, I think you might see a very different situation for the GSEs. At the same time congress would go berserk and instantly pass legislation federally guaranteeing a GSE bailout and simultaneously the president would fume about vetoing it. GSE portfolios should not be allowed to grow until the guarantee issue is explicit and in your face for market participants. This is a case of the government wanting it both ways: an institution that provides the benefits of a government agency with no one wanting responsibility for the liabilities.
As a tax payer, I want to know about the guarantee. If I am going to bail someone out, there had better be a damn good reason and one that is out in the clear and open to debate.
Personally I prefer my institutions to be small enough to fail, because institutions that are not have an incentive to be reckless and develop structural incompetence even when they are regulated, and those who deal with them have a tendency to make unwarranted assumptions on naïve faith. If there is a good argument for nationalizing the majority of mortgage market liabilities while privati
If there is a good argument for nationalizing the majority of mortgage market liabilities while privatizing the profits I would like to hear it, because that is the blunt fact of the matter when it comes to expanding GSE portfolios.
banks and other financial firms, and many nonfinancial firms, hold large amounts of GSE obligations and GSE-guaranteed mortgage-backed securities.
Correct. But GSE obligations (corporate debt) and MBS are not "portfolio." Portfolio loans are the ones the GSEs did not sell to some other investor.
We are confusing the MBS program, the debt the GSEs issue to fund their mortgage purchases, and their retained portfolios.
If you want growth of the retained portfolios to slow, then the GSEs must either 1) sell more MBS, which Poole thinks might be a problem or 2) purchase fewer loans in the first place.
Item number 2 is a bit of a problem these days, since nobody else is purchasing loans either (the market is locked up), and the GSEs are chartered to provide liquidity. (Anyone is free to dislike that part of the charter, but that's the charter.)
Thanks for pointing that out. Apparently I did not have enough coffee today, or maybe it was too much, something like that. I think I opt for 2) because there should not be any expansion of GSE MBS, GSE debt or expansion of retained portfolio until the guarantee notion is crushed publicly, not as an aside in a related speech or in response to questions, but as an unequivocal statement solely for the purpose of disabusing. And the too big to fail notion needs to be squashed as well. Perhaps they are too big to fail. Maybe that is part of the problem.
Smells like a bail out to me. As if interest rates weren't enough. I don't even know what my incentive is to pay my mortgage or my bills.
OT: http://www.tradingmarkets.com/.site/news/BREAKING%20NEWS/627387/
National Retail Federation Forecasts Sluggish Retail Sales Growth Of 4% For Next Holiday Season
(average for 10 years is 4.8%)
So maybe Lereah is forecasting for the National Retail Federation these days?
I don't even know what my incentive is to pay my mortgage or my bills.
You'll go to hell if you don't pay your bills. It says so in Scripture. So if you're the sort who requires threat of punishment to keep up with the old Visa payment, I suggest one of the fruitier mega-churches. They will also supply you with the incentive to keep repressing your other libidinal impulses.
what would you be concerned about seeing in their portfolios?
LOL. Thats Funny Tanta. I very may go to hell, but Im pretty sure it will be for something other than not paying my bills on time. LOL
Tanta,
Is it possible to play the game with YSP to the advantage for the ordinary citizen
?
From yor example with Chevy Chase rate sheet: 30yr fixed loan at 7.5% gives 2.25 to the broker. What would stop me from finding a broker who would agree to split this YSP between him and me and pay off the loan completely next month if I have cash ?
what would you be concerned about seeing in their portfolios?
Runoff of the older higher quality stuff combined with acquisitions over-weighted to low credit high LTV. Changing the mix, in other words, in significant ways.
I don't assume that +$20B in each portfolio reweights it terribly, but I also don't assume right now that normal runoff will be replaced with comparable credits.
OT:
Subprime problems signal trouble ahead, research shows
Subprime problems signal trouble ahead, research shows
America's love of spending money - especially on credit - could be bad news for the economy
By Shula Neuman
Sept. 17, 2007 -- If it seems as though sub-prime mortgage loans stirred up trouble in the financial markets, just wait until debt problems spill over onto household spending. According to economists Barry Cynamon and Steven Fazzari, America's love affair with consumption has been a big source of economic stimulus for a long time. But the party might be about to end. Americans' overextended wallets could trigger the most severe downturn in economic activity seen since at least the 1980s and possibly since the Great Depression.
[found a pointer at digg.com which went to physorg.com and then I news.google for the two authors]
What would stop me from finding a broker who would agree to split this YSP between him and me and pay off the loan completely next month if I have cash ?
Well, since that little trick has been known to happen a few jillion times, what stops it is "recapture" provisions in the broker agreements that force the broker to pay back the premium price if the loan pays off early. If the broker gave premium to you, and then has to refund it to the wholesaler, the broker is broken.
Runoff of the older higher quality stuff combined with acquisitions over-weighted to low credit high LTV. Changing the mix, in other words, in significant ways.
oh. what's so concerning about that if it's got juicy OAS (which i assume it would)?
If the broker gave premium to you, and then has to refund it to the wholesaler, the broker is broken.
Screw the broker, I guess. It is a payback time
what's so concerning about that if it's got juicy OAS
And just how juicy do you think our Mr. Bernanke is going to let OAS get?
I'm not saying credit risk is the only concern. I'm simply trying to follow the logic of having these portfolio caps in the first place. The idea seems to be that size, in and of itself, is a risk. If size limits force less than optimal credit risk concentrations, then I have some concern about portfolio caps (not necessarily portfolios).
Did that make any sense? I'm a little undercaffeinated.
I am on my first cuppa,but i fail to see how raising these caps will bail out homeowners in califiornia.the ones that aren't underwater would need their incomes to triple or quadruple to qualify for these loans.hmmm who makes grow lights? I'll buy their stock.
Tanta,
The christian church used hell to make good serfs.
An outlaw was a serf who left the manor.
Even worse anyone who stole from the hoarders to feed their kids.
Religion is the opium of corrupt society.
There are already radio adds.
The whisper at the end is something about underwriting standrads, 10 seconds after they said they have been delegated authority to approve the loan.
GSA's cannot meet GAAP standards any better than the defense department.
It is all backed by the faith and credit of the printing press.
This is going to be like whack-a-mole isn't it; I've seen it when "tuning" predictive analytics algorithms - Past a certain point, change one parameter to improve one variables fit characteristics, another one ill-fits and the overall metric deteriorates.
We saw this in the Northern Rock rescue debacle ( thanks sterlinerl for the guardian newspaper links ) - first nothing, then a semi-secret organized bailout, then an official bailout, then a deposit guarantee, then "oops" - only guaranteeing previous accounts not new ones !
We are going to get this here - just the whiff of the GSE's buying this crap - they do say its to specifically buy the subprime don't they - and you have to wonder - why would anybody mark down their existing crap ? they'll just wait to offload - and when the belated realization sets in, will we see some statement about NEW subprime loans only ? or existing subprime loans only ? or or rollover existing subprime loans only ? or...
You start point solutions like this and you get "whack-a-mole".
Then there is the problem of "what would happen if they gave a party and nobody came ?" All those transmission mechanisms - the LENDs,NFI, OWNITs, virtual brokers are gone - quite apart from the tightening of appraisals, of low doc/no doc - and MOST of all house buyer psychology makes them cautious on taking on crappy loans.
This is going to be fun to watch if one sits in virtual non-US$ land. But at another level.. the INSANITY of this all !
-K
at 9:24 EST this morning, One $CDN was equal to 1.0001 USD.
Bear Stearns profit plunges 62%.
If size limits force less than optimal credit risk concentrations, then I have some concern about portfolio caps (not necessarily portfolios).
well let me see if it makes sense...are you saying that if the risk characteristics drift worse on average because of the caps, it's a bad thing? i'm saying i assume, on a risk-adjusted basis, they'd have better returns based on what they could probably be out there buying (it would have been even better in august).
call me cynical, but i always thought the Fs wanted to lift the portfolio caps back in august not because they gave a F about helping anybody, but because they could get the fattest spreads that have been available in quite some time.
does their "optimal credit risk concentration" have something to do with anything other than maximizing risk-adjusted returns? (it might for them, i've never given it much thought).
Religion is the opium of corrupt society.
No, religion is the opium that allows the GOP to get the votes of people who would vote Democratic if they knew what their real interests were.
hey James,
On one of the threads from yesterday somebody posted a link to a BBC program on Google video entitled "A Century of Self". If you want to know why people vote the way they do, I'd suggest watching that video. It's in 4 parts, each one an hour long, and once I started, I went all the way through. It's very interesting and revealing. At least IMO.
does their "optimal credit risk concentration" have something to do with anything other than maximizing risk-adjusted returns?
that is one ugly sentence. well done, me.
May I say a kind word for religion? I'm rather in favor of it, all other options considered. Thanks.
Seems like any changes at all to the size or nature of the GSEs should be contingent on them producing reasonable financial documentation about themselves. But maybe I'm crazy.
Cheers,
prat
It is horrid to think that someone might own a house worth less than what they paid for it. The government should stop this tragedy at once. I propose that a new GSE be formed, Big Brothers Mortgage Assurance Corporation, or Big MAC for short, designed to prevent such heinous events from ever occurring again. Big MAC will be able to make loans of up to $10 million per property in order to keep housing affordable in the pricey urban areas. Furthermore this limit will be doubled every five years to insure everyone has access to a bunch of credit forever. These loans will be dirt cheap with rates no higher than 5%. In addition they will allow LTVs of 125%. Especially important and timely will be a provision allowing any and all kinds of mods and an explicit prohibition on foreclosures (woohoo!) These loans will popular because the dollar is an awesome investment. The loans will be bundled in Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees or COLOSTOMY BAGS and sold to foreigners, pension funds and central banks.
Everyone will be rich! It will be sweet, dude! You dont have to suffer the indignity of poor judgment ever again! Call your Congress person now!
JS-
HA! LOL- everyone writes that, but I really did LOL!
The way you wrote that is just how I read it when Fannie, Freddie, or FHA (or any govt hack) talk about raising maximum loan amounts to "help make housing affordable".
does their "optimal credit risk concentration" have something to do with anything other than maximizing risk-adjusted returns? (it might for them, i've never given it much thought).
Quite possibly not.
But does the portfolio cap have anything to do with maximizing their risk-adjusted returns?
I cannot bring myself to believe that those who are all in favor of portfolio size caps are thinking that way because they want to increase the risk concentration (and thus risk-weighted returns) on the portfolios.
I cannot bring myself to believe that those who are all in favor of portfolio size caps are thinking that way because they want to increase the risk concentration (and thus risk-weighted returns) on the portfolios.
Heads they win, tails we lose? Is there any middle ground here? Based on your argument, it seems that the only alternative is to eliminate caps and allow the GSEs to buy.. well.. all the loans.
(cont.)
At the least, at that point, you wouldn't be able to argue that the risk profile is materially greater, or less, than the entirety of the market.
JS,
Great!!
Halp! Does anybody know CPR?!?
Anyone know what a borrior is?
Based on your argument, it seems that the only alternative is to eliminate caps and allow the GSEs to buy.. well.. all the loans.
Uh, well, Mr. Market seems to have decided recently that the GSEs will buy all the loans, rather independently of what Mr. Lockhart or anyone else thinks.
I guess I'm trying to say that the "portfolio cap" thing is kind of a Pre-Turmoil preoccupation. Back from when the GSEs were not the buyer of last resort, the "private issue junk securities" were that. There were, of course, at the time plenty of people who claimed that the GSEs were the big buyers of junk, but surely the last several months have shown them the confusion of that thinking?
So now that the GSEs are suddenly back to their hisorical function, which is to take the risk no one else can or will take, in order to keep the home mortgage market functioning, we are still worried about their portfolio size relative to private holdings. You know, those private holdings that blew up.
Frankly, I see only two or three good reasons to have GSEs in the first place, and their ability to step up to the plate in a crisis is like number one. So I'm frustrated with people who want to worry primarily about their size right now.
On the other hand, I don't care to see them become the dumping ground for every stupid private lender's boo-boos. Reason number two, in my view, for having them around is that they can enforce some market discipline by refusing to buy certain things.
It's tough to balance these two needs, but that's what I want us to do. So I am more concerned at the moment with where their quality standards do or don't shift than I am with raw dollar amounts in the portfolio.
Going over their recent 10-Ks (FNM) I was struck by the massive increase in operating expenses and huge narrowing in interest margains.
2006 v 2005 v 2004:
Admin +45%, +28%
Credit related costs +83%, +18%
Net interest income -41%, -36%
This is not a formula for confidence going forward.
Well, Robert, a whole lot of that increase in operating expenses is paying for the Auditor Army trying to get their books back into shape.
Hence my belief that Lockhart is doing the right thing by changing the portfolio cap metric to something easier (UPB rather than GAAP). Fannie really doesn't need to hire six more auditors just to calculate GAAP on each month's portfolio additions for separate reporting.
But does the portfolio cap have anything to do with maximizing their risk-adjusted returns?
I cannot bring myself to believe that those who are all in favor of portfolio size caps are thinking that way because they want to increase the risk concentration (and thus risk-weighted returns) on the portfolios.
right, i'm not arguing that point, i'm saying is there really any increased systematic risk if the GSEs drift towards riskier portfolios b/c that's where they think the best returns are?
RE: portfolio cap
I seem to recall the portfolio caps coming in a part of the settlement over the accounting scandal between Fannie Mae and OFHEO. I quick google of this brings up:
"On the same day that OFHEO issued its report, Fannie Mae also into a settlement agreement with OFHEO and the Securities and Exchange Commission (SEC) agreeing to pay one of the largest fines ever imposed on a financial institution and certainly the largest on an enterprise created for a public purpose. Equally important, as a central condition of the agreement with OFHEO, Fannie Mae agreed to cap its investment portfolio at essentially current levels. This groundbreaking settlement clearly shows that Fannie Mae not only did not but does not have adequate control over the growth and risks of its investment portfolio business. "
which is from:
http://www.treas.gov/press/releases/js4316.htm
-K
OT but this is probably all your northern neighbours are discussing today.
China to carry loonie past US$, Mersch says
Jonathan Chevreau, Financial Post
Published: Thursday, September 20, 2007
"The loonie should hit US$1.05 within a few weeks, says Frank Mersch and could pass US$1.10 if the price of oil breaks US$100..."
China to carry loonie past US$, Mersch says
i'm saying is there really any increased systematic risk if the GSEs drift towards riskier portfolios b/c that's where they think the best returns are?
Random possible answers to your question:
Is there any precedent or mechanism in place for enforcing GSE portfolio risk aside from portfolio caps and conforming loan limits?
If I'm not mistaken, the GSEs did agree to adhere to the Nontraditional and Subprime guidance issued by the Fed/OCC/CSBS/AARMR). Wouldn't adhering to this new guidance serve as a check against increased risk going forward?
buy Gold.
Religion is the opium of corrupt society.
Totally Ridiculous,
Now , go sell some more bibles.
THE TEN LOST COMMANDEMENTS
11) Thou shall pay thy mortgage on time.
12) Thou shall spend freely beyond thine means
13) Thou shall damm savers
14) Thou shall not blog more than 5 hours daily
15) Thou shall not idolize bloggers before me
16) Thou sahll not make fun of my spelling
17) Thou shall believe what ever bald headed men say with regards to monetary & economic policy.
18) Thou shall come up with as many confusing acronyms as possisble
19) Thou shall not attempt to mark to market
20) Ubernerds will receive ultimate damnatio
groundbreaking settlement clearly shows that Fannie Mae not only did not but does not have adequate control over the growth
What I am asking, sk, is why it is important to control growth right now. Not whether it requires OFHEO to control that growth for the GSEs via the cap agreements.
In other words, is "growth risk" the biggest risk right now? And I ask this question as a taxpayer-citizen, not as a Fannie Mae shareholder. IF it can be shown that the best thing for all of us is for the GSEs' portfolios to grow a little right now, then "pre-turmoil" concerns with uncontrolled growth seem possibly misplaced.
After all, we seem to have spent all that time worrying about GSE growth and failing to notice that non-GSE growth in high-risk paper has Threatened Planetary Destruction (or at least a thorough-going financial crisis).
2. Insofar as their current acquisition plans are supposed to be some answer to secondary market turmoil rather than a opportunity for them to pick up some nickels in their portfolios, then I really don't care if they end up with less than "optimal" risk-return. I want them to continue to enforce discipline by refusing to keep the market in toxics functioning.
you don't think answering market turmoil WILL pick up nickels for their portfolio and provide BETTER risk-return? who said anything about buying anything toxic?
If I'm not mistaken, the GSEs did agree to adhere to the Nontraditional and Subprime guidance issued by the Fed/OCC/CSBS/AARMR). Wouldn't adhering to this new guidance serve as a check against increased risk going forward?
Yes. Exactly. And "flexibility" in that policy would worry me waaay more right now than "flexibility" in setting dollar caps on the portfolio.
Compare to the FHA situation: it's one thing to try to write some new rules that will help FHA insure more refis of toxic shit (i.e., "detoxifying" it by making it an FHA loan). What you want to watch for is those nutbags in the administration taking this as the opportunity to do their "modernization" plans that simply allow FHA to insure more loans that should never have been made in the first place. It's not dollars, it's dollars of what.
Well, and dollars of whose. The issue with refis is always that it means taking a problem off somebody else's books. So FHA doesn't go out and "buy" junk loans off some bank's books. It insures newly refinanced loans, if it can within whatever guidelines we're dealing with. The reality of the situation is you can't "detoxify" borrowers who were given terrible loans without also "bailing out" the lenders who currently hold those toxics. Not unless you force a serious discount in there someplace.
The thing I think we forget about an environment in which the GSEs are "the only game in town" is that that does give them the "pricing power." If you're worried about lender bailouts, you would want to bear in mind that raising the portfolio caps doesn't mean the GSEs have to pay whatever the loan sellers want.
Changing the cap doesn't faze me in the slightest. It's too early in the morning to discuss the euphemistic changing of Tanta's caps.
The only bailout issue would be if the rules were changed to decrease the QUALITY of the loans being purchased with the additional cap dollars.
subprime in and of itself isn't the problem -- they still have to state income and have a low DTI ratio. Subprime is simply a statement of your credit score and outstanding debts. I've got a 70k job .. if I moved to a house right now (Jesus himself would strike me down first, i'm in Baltimore..) I'd be a conforming subprime loan because of outstanding grad school debt.
who said anything about buying anything toxic?
That's the problem, isn't it? If those portfolio dollars don't get allocated to EA III and whatnot, what's the point from the "addressing the foreclosure crisis" perspective?
Lord knows I hope they pick up some nickels, and I assume they will. I just don't think the public interest in this is whether they make money or not; it's whether this is an "intervention" in the secondary market and if so, whether it's doing what we need it to do.
Paulson today tried to make it clear that there is no government financial support implied or otherwise for the GSEs. Is this claim as authentic as his strong dollar policy?
If GSEs take on additional risk, higher LTV & higher loan limits, at the market price peak without the financial backstop, GSE securities might end up following subprime securities march south on the ABX.
what's the point from the "addressing the foreclosure crisis" perspective?
i was thinking more about addressing the liquidity crisis. in my opinion that's what they could do best without bailing anyone out.
re: WHY portfolio caps..
Well, the OFHEO report on the accounting scandal : http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF
is 348 pages long with 125 occurences of the word "portfolio". So far, the reasons I can see are:
"A key political victory for Fannie Mae senior management was the inclusion in the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the 1992 Act) of
provisions that weakened OFHEOs authorities and subjected the agency to the appropriations
process. Those provisions helped Fannie Mae and Freddie Mac grow their retained mortgage
portfolios without impediment beginning in 1993."
So, based on that I have to go to BEFORE 1992 to answer why there were caps originally. Watch this space.
Another read on this is that it was payback. Sweet Revenge !
Other ways of looking at it is that it was to limit the risk ; their controls were so bad, increasing the portfolio when the CURRENT risk wasn't known ( and STILL isn't known )
-K
What I am asking, sk, is why it is important to control growth right now.
Tanta,
I think Poole has a good justification (from another time, but I think it applies even more now) for limiting GSE portfolios:
banks and other financial firms, and many nonfinancial firms, hold large amounts of GSE obligations and GSE-guaranteed mortgage-backed securities. I believe that many risk managers simply accept that GSEs are effectively backstopped by the Federal Reserve and the federal government without ever thinking through how such implicit guarantees would actually work in a crisis. The view seems to be that someone, somehow, would do what is necessary in a crisis. Good risk management requires that the someone be identified and the somehow be specified. I have emphasized before that if you are thinking about the Federal Reserve as the someone, you should understand that the Fed can provide liquidity support but not capital. As for the somehow, I urge you to be sure you understand the extent of the presidents powers to provide emergency aid, the likely speed of congressional action and the possibility that political disputes would slow resolution of the situation.
I think Pooles point is that GSE portfolio size is partly a function of poor risk management, that their growth as they exist now has been aided by an unreasoned faith in some mythical bailout. If investors actually thought through GSE risk, they would not continue to aid GSE growth. This is partially a problem of the government itself for not being forthright about GSE bailouts. The chief problem with increasing GSE portfolio size is implied guarantee. If Paulson and Bernanke hold a press conference and announce that under no circumstance will the federal government bailout the GSEs or their investors and that investors, were the GSEs to go bankrupt, might lose every penny, I think you might see a very different situation for the GSEs. At the same time congress would go berserk and instantly pass legislation federally guaranteeing a GSE bailout and simultaneously the president would fume about vetoing it. GSE portfolios should not be allowed to grow until the guarantee issue is explicit and in your face for market participants. This is a case of the government wanting it both ways: an institution that provides the benefits of a government agency with no one wanting responsibility for the liabilities.
As a tax payer, I want to know about the guarantee. If I am going to bail someone out, there had better be a damn good reason and one that is out in the clear and open to debate.
Personally I prefer my institutions to be small enough to fail, because institutions that are not have an incentive to be reckless and develop structural incompetence even when they are regulated, and those who deal with them have a tendency to make unwarranted assumptions on naïve faith. If there is a good argument for nationalizing the majority of mortgage market liabilities while privati
continued:
If there is a good argument for nationalizing the majority of mortgage market liabilities while privatizing the profits I would like to hear it, because that is the blunt fact of the matter when it comes to expanding GSE portfolios.
speaking of FHA, who wants a bunch of FHASecure loans in their GNMA II? Redefaults might mess up your prepayments.
Did we just bomb Iran or something? Oil is going through the roof. Last look it was almost $84 a barrel.
banks and other financial firms, and many nonfinancial firms, hold large amounts of GSE obligations and GSE-guaranteed mortgage-backed securities.
Correct. But GSE obligations (corporate debt) and MBS are not "portfolio." Portfolio loans are the ones the GSEs did not sell to some other investor.
We are confusing the MBS program, the debt the GSEs issue to fund their mortgage purchases, and their retained portfolios.
If you want growth of the retained portfolios to slow, then the GSEs must either 1) sell more MBS, which Poole thinks might be a problem or 2) purchase fewer loans in the first place.
Item number 2 is a bit of a problem these days, since nobody else is purchasing loans either (the market is locked up), and the GSEs are chartered to provide liquidity. (Anyone is free to dislike that part of the charter, but that's the charter.)
Not Iran. We bombed the dollar.
Tanta,
Thanks for pointing that out. Apparently I did not have enough coffee today, or maybe it was too much, something like that. I think I opt for 2) because there should not be any expansion of GSE MBS, GSE debt or expansion of retained portfolio until the guarantee notion is crushed publicly, not as an aside in a related speech or in response to questions, but as an unequivocal statement solely for the purpose of disabusing. And the too big to fail notion needs to be squashed as well. Perhaps they are too big to fail. Maybe that is part of the problem.