PennyMac - Federal Reserve supported acquirer of distressed mortgage debt

Monday, March 24th, 2008

The creation of a new company, Private National Mortgage Company, or PennyMac, was disclosed today. The firm seeks to make investments in the distressed subprime markets. Backing PennyMac is the 30 billion dollar asset management firm Blackrock and privately held Highfields Capital Management LP.

Blackrock, BLK, was quoted 25 points higher on the news reaching record highs around $250 per share. Bloomberg describes the intentions of the newly created company below:

PennyMac will try to work out loans that homeowners have stopped making payments on or that are expected to fall into delinquency. It will focus on whole mortgages, or those that haven’t been packaged into pools of debt known as residential- mortgage-backed securities. It’s one of fewer than 10 funds targeting whole loans, compared with more than 60 that buy securitized mortgages.

source:bloomberg

PennyMac run by Countrywide founder

The new company will be headed by former Countrywide President Stanford Kurland. Blackrock and Highfields will provide the initial capital to PennyMac. According to the Highfields Capital Management website,

Highfields Capital is a value-oriented investment firm which principally makes long-term investments in
public and private companies in the U.S., Canada, and in other global markets. It currently invests over
$11 billion of capital on behalf of investors that include college and university endowments, charitable
and other philanthropic organizations and other institutional and high net worth individual investors. It
invests in a wide variety of industries, securities and financial markets. Highfields Capital is based in
Boston, MA.

Stayed tuned for insight on the connection between Blackrock and the Federal Reserve’s recent change in open market policy — allowing access by Investment Banks to the Fed’s balance sheet by accepting private label mortgage backed paper as collateral in repurchase agreements.

Stock Charts

Tags: Bailout, banking, blackrock, Fed, FOMC, Highfields Capital Management, PennyMac, repo
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Private Label Paper and Modern Central Banking

Monday, March 24th, 2008

In its continued efforts to bailout the banking industry and stay the continuing credit collapse the Federal Reserve Bank has exercised Section 13, Rule 3 of the Federal Reserve Act of 1913 to support the Central Bank’s financial backstopping of JP Morgan Chase’s acquisition of battered investment bank Bear Stearns whose sudden collapse has sent warning sirens to central bankers and politicians eager to appease their constituency.

Federal Reserve Act of 1913

Enacted in 1913, the Federal Reserve Act constitutes the Federal Reserve’s existence and defines the frame work of a central banking system. To justify opening the Central Bank’s book of treasury securities to Investment Banks in a effort to ease liquidity, The Fed is exercising Section 13 Part 3 which defines the Fed’s open market conduct with “Individuals, Partnerships, and Corporations”.

3. Discounts for Individuals, Partnerships, and Corporations

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

[12 USC 343. As added by act of July 21, 1932 (47 Stat. 715); and amended by acts of Aug. 23, 1935 (49 Stat. 714) and Dec. 19, 1991 (105 Stat. 2386.]

http://www.federalreserve.gov/GeneralInfo/fract/sect13.htm

This effectively says that the Fed, when times are “requiring immediate action or aid; urgent; pressing” or “requiring a great deal, or more than is reasonable”, the Fed can act as the lender of last resort to anyone, including but limited to “Individuals, Partnerships, and Corporations”.

Tags: Bailout, Bear Stearns, FOMC, JP Morgan
Posted in Bailout, FOMC, PPT, Rate Cuts, Subprime | Comments Off

Fannie and Freddie Capital Requirements Reduced, Bailout Continues

Wednesday, March 19th, 2008

The Office of Federal Housing Enterprise Oversight ["OFHEO"] has reduced the capital requirements for embattled government sponsored entities Fannie Mae and Freddie Mac from 30% to 20%. The reduction in capital requirements is expected to free up nearly 200 billion in capital for the firms which can be used to fund new mortgages.

The capital requirements were raised years ago do to accounting issues at the publicly traded companies.

For Immediate Release
March 19, 2008

OFHEO, FANNIE MAE AND FREDDIE MAC ANNOUNCE INITIATIVE TO INCREASE MORTGAGE MARKET LIQUIDITY

Washington, DC - OFHEO, Fannie Mae and Freddie Mac today announced a major initiative to increase liquidity in support of the U.S. mortgage market. The initiative is expected to provide up to $200 billion of immediate liquidity to the mortgage-backed securities market.

OFHEO estimates that Fannie Mae’s and Freddie Mac’s existing capabilities, combined with this new initiative and the release of the portfolio caps announced in February, should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year. This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas.

To support growth and further restore market liquidity, OFHEO announced that it would begin to permit a significant portion of the GSEs’ 30 percent OFHEO-directed capital surplus to be invested in mortgages and MBS. As a key part of this initiative, both companies announced that they will begin the process to raise significant capital. Both companies also said they would maintain overall capital levels well in excess of requirements while the mortgage market recovers in order to ensure market confidence and fulfill their public mission.

OFHEO announced that Fannie Mae is in full compliance with its Consent Order and that Freddie Mac has one remaining requirement relating to the separation of the Chairman and CEO positions. OFHEO expects to lift these Consent Orders in the near term. In view of this progress, the public purpose of the two companies, and ongoing market conditions, OFHEO concludes that it is appropriate to reduce immediately the existing 30 percent OFHEO-directed capital requirement to a 20 percent level, and will consider further reductions in the future.

Additionally, all parties recognize the need for a world-class regulatory structure and have renewed a shared commitment to work for comprehensive GSE reform legislation.

“Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year,” said OFHEO Director James Lockhart. “Let me be clear – both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves. We believe they can play an even more positive role in providing the stability and liquidity the markets need right now. OFHEO will remain vigilant in supervising the safe and sound operations of these companies, and will act quickly to address any deficiencies that may arise. Furthermore, we recognize the need to ensure that their capital levels are strong, protecting them from unforeseen risks as the market recovers.”

Fannie Mae President and Chief Executive Officer Dan Mudd said, “We are working with our customers, regulators and policy makers to minimize foreclosures, increase affordability – and as of today – to restore liquidity in the market. This progressive, sustainable plan will help bring the stability the market needs.”

Freddie Mac Chairman and Chief Executive Officer Dick Syron said, “The recent environment demonstrates the benefits of the GSEs to the U.S. economy. This approach allows us to continue to create these benefits in a way that balances our mission to provide stability, liquidity, and affordability consistent with safety and soundness while enhancing the interests of shareholders.”

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OFHEO’s mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

http://www.ofheo.gov/newsroom.aspx?ID=422&q1=0&q2=0

Tags: Bailout, fnm, fre, Housing, mortgage
Posted in Bailout, Government Sponsored Entities | Comments Off