Michael's Feed

CBO Director on Federal Budget Treatment of Fannie, Freddie (Video)

Tue, 09 Sep 2008 15:11 GMT

Some may recall that in late July, I raised the question about what it would mean if our governments' 'implicit' backing of the GSEs - became ‘explicit'. That is: if Treasury used their newly acquired funding powers to capitalize the GSEs, would Fannie and Freddie then be brought onto the federal budget? If so, what does this mean to our government debt, and by extension, Treasuries?

Well, as we all have learned, the government drew Paulsons' "bazooka" last weekend and blasted the GSEs back to pre-1968; with it, raising the specter over their effect on the public purse. With over $5 trillion in outstanding commitments, not to mention operational outlays - there's reason to be worried.

This morning, Dr. Peter Orszag, Director of the Congressional Budget Office, announced that indeed it was the CBO's view that Fannie and Freddie should be brought onto the federal ledger; the impact of which won't be fully known until January 2009 when CBO publishes a new budget baseline.

I strongly recommend that everyone watch todays' Congressional Budget Office Press Briefing on Budget & Economic Outlook to get a sense of the issues ahead. As always, Dr. Orszag gave a very detailed briefing and participated generously in the Q&A session.

IMF Data Mapper® - World Economic Outlook (Web Tool)

Tue, 02 Sep 2008 15:32 GMT

Ever wonder how other countries stack-up against the US in terms of GDP? Or how the fluctuation in the economic growth of competing countries relate with one another over time? While surfing the net yesterday, I ran across this interactive heat-map courtesy of the International Monetary Fund (IMF), cleverly dubbed Data Mapper®.

In the example here, the map shows real GDP growth* by country, tracing trends back to 1980, and looking forward to 2013. Just move the date slider backward or forward then hover over a particular country for granular info.

The area boxed in red allows you to pick from different datasets for information other than GDP. The library is extensive, so have it.

* Based on the April 2008 data set. Click here for 'assumptions and conventions'.

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For a video-briefing of the April 2008 world economic outlook (for the available dataset), click here.

For a complete list of more up-to-date webcasts, click here.

For more information about the International Monetary Fund, click here.

A paradigm shift in credit-risk management in the making

Mon, 18 Aug 2008 10:00 GMT

FT reported yesterday that Morgan Stanley and Goldman Sachs are implementing systems that tie it's decision to lend to hedge funds to behavior in the CDS market. That is, if the cost to protect against it's own issuances rises to "X", it triggers a reduction in the amount of credit it extends to hedge funds, essentially using the market perception of it's own creditworthiness as a way of determining the amount of liquidity risk it will take.

As arcane as this sounds, the thinking makes quite a bit of sense. When the cost to protect against default rises on a company, it's a market cue that participants aren't feeling "warm and fuzzy" about they're financial strength. It's sort of like when your credit score drops, you're ability to finance things are similarly impaired and reflected in the rate and terms of the loan you receive. In this case though, it's an ongoing and public measure of market perception of such corporate financial viability.

What this seems to suggest is that; whereas before credit rating agencies were the final word on financial strength, and whereas Bear Sterns got pummeled into submission by the sudden loss of market confidence, these two firms aren't taking any chances and will rely on the market price of protection against themselves to measure real liquidity risk.

As "wildly interesting" as this sounds :), moves like these should not come as a surprise when you consider the extent of the grilling the Fed's put these firms and their books under in recent months.

Is all this a positive? Yes, if you consider this progress in the effort to implement sound risk management practices to the firms that ultimately bubbled housing with excess, imprudent capital.

For more info on this subject, click this link to the Bank of International Settlements website and read: Page 9, Principle 5, Measurement and Management of Liquidity Risk (and pay particular attention to numeral 23).

Resources:

MS and Goldman change approach to lending
By Henny Sender in New York
Published: August 17 2008 22:40 | Last updated: August 17 2008 22:40

Fed presses Wall Street banks on liquidity
By Francesco Guerrera and Aline van Duyn in New York
Published: August 10 2008 22:31 | Last updated: August 10 2008 22:31

Federal Reserve Bank of New York
Staff Reports
Credit Derivatives and Bank Credit Supply
Beverly Hirtle
Staff Report no. 276; February 2007 Revised March 2008

Bank of International Settlements
Principles for Sound Liquidity Risk Management and Supervision
June 2008 - DRAFT FOR CONSULTATION

Bold Moves At Freddie Mac Today; Work-Out Carrot Now Twice The Size

Thu, 31 Jul 2008 16:36 GMT

Freddie Mac today doubled the amount of pay to servicers for successful loan modifications and short pay's as well as other preventive foreclosure actions; all the while in 21 states lengthening the foreclosure timeline to 300 days. (Yes, California made the list)

From HousingWire:

"...Foreclosure timelines have been the lifeblood of the servicing industry for decades; and, while many borrowers may have been unaware of it, servicers have long compensated by the GSE for their annual performance relative to timelines.

But no more. Perhaps the boldest move by Freddie Mac on Thursday - and one that won't get much press attention - was its decision to eliminate foreclosure timeline compensation altogether for servicers, effective immediately. In other words, servicers will no longer earn a bonus based on how quickly they can foreclose.

If that doesn't scream "modify more loans," then the GSE's decision to double compensation for servicers in completing workouts certainly will. Freddie said it will now pay servicers $800 for a loan modification, $2,200 for a short payoff or make-whole preforeclosure sale, and $500 per repayment plan. Deeds-in-lieu of foreclosure didn't get Freddie's same endorsement, however, and will remain at the current incentive level of $250, the GSE said.

The decision to eliminate timeline compensation, however, was only part of a much broader program change rolled out by Freddie; the mortgage finance giant also said that it was increasing its allowable foreclosure timeline in 21 states to a whopping 300 days from last of date payment, and 150 days from initiation of foreclosure, effective on Friday." (Continue reading)

Click for Freddie Bulletin (pdf)

Emphasis added*

UPDATE: Link to Freddie Mac press release with list of states.

Mortgages Served-Up European Style; Covered Bonds, Baby!

Mon, 28 Jul 2008 17:00 GMT

HousingWire has terrific coverage of todays' Treasury announcement to kick-start a Covered Bond market in the US. For those not familiar with Covered Bonds, what's noteworthy is they've been around Europe since 1770, and materially differ from securitization. For detail about how this works, read Treasury's Best Practices for Residential Covered Bonds white-paper for an overview.

This all seems very promising. While some may be quick to point out that the European bond and housing market is also tanking, I'd say that if it wasn't for the contagion spill of our home grown "mortgage moonshine", they'd probably be okay.

Just a guess, though...