Source: WikiMedia Commons, Ben Campbell Steamboat, circa 1855.

Here’s a silly question.  When the Chairman of the Federal Reserve’s Board of Governors and the Secretary of the Treasury speak, do their colleagues listen?

I don’t know.  But if I tell you why I’m confused, then perhaps you’ll be able to tell me where I ran aground.

[Note: Those NOT in the mortgage business may have a tough time following this post.  To help those of you that are NOT, or anyone that does not know what an “APM” is, read my prior piece (Buyout Drive-By and The Perfect Storm) before continuing, as well as the quick "flashcards" that appear at the end of this post.]

On 15 Oct 2008, Chairman Bernanke spoke in New York. His topic – Stabilizing the Financial Markets and the Economy. A portion of his talk dealt with TARP, and brief excerpts of his comments appear below.

• The Troubled Asset Relief Program (TARP) … will allow the Treasury … to undertake two highly complementary activities.
• First, the Treasury will use the TARP funds to help recapitalize our banking system by purchasing non-voting equity in financial institutions…
• Second, the Treasury will use some of the [bill’s] resources … to purchase troubled assets from banks and other financial institutions, in most cases using market-based mechanisms. Mortgage-related assets … will be the [program's] focus…
• With time, the provision of equity capital to the banking system and the purchase of troubled assets will help credit flow more freely, thus supporting economic growth.

Source: Chairman Ben S. Bernanke, Stabilizing the Financial Markets and the Economy , 15 Oct 2008.

About a month later, Treasury Secretary Henry Paulson announced that the Treasury, Fed, and the FDIC had re-examined the relative benefits of purchasing illiquid mortgage-related assets (the second TARP item in Chairman Bernanke’s speech), and concluded that this was not an effective way to use TARP funds.

However, even as Secretary Paulson set aside TARP’s original “troubled asset” purchase program on 12 Nov, he reaffirmed Chairman Bernanke’s focus on strengthening banks’ capital positions and balance sheets.

So why then did HUD issue APM 08-23 on 7 Nov, about three weeks after Chairman Bernanke spoke, and less than one week before Secretary Paulson reconfirmed the importance of bank capital in the bailout process?

As I noted in Buyout Drive-by and The Perfect Storm, APM 08-23 makes it more (NOT! less) difficult to resecuritize delinquent GNMA loans that are bought out of GNMA pools. (See my earlier article or APM 08-23 for the details.)

Let me be blunt.  If the goal of the “Bailout” effort is to direct additional capital to the banking system – to “help credit flow more freely” – why would you make it more difficult, now, to generate capital through the GNMA buyout process?

To put it another way, IF the government is “bailing”, why are some Federal agencies acting as if they are trying to sink the “boat”? 

Early on, many focused on the difficulty that TARP administrators would have in setting a price that was “just right”:

• Overall, the trick [with respect to the purchase of troubled assets] is for the government to walk a fine line between offering a sufficiently attractive price to the securities’ holders so that trading can be rejuvenated while also avoiding paying so much that taxpayers recover too little money on the securities’ ultimate resale…
• ”If you end up paying too little to these institutions, … you’re not giving them the support that they need,” …[one Senator] told government officials … ”If you end up paying too much, then there’s no upside potential for the taxpayer … And the details of how you find the right balance here are the ones that …  all of us need to understand better.”

Source: S. Marcy, BNA Accounting Policy and Practice – Bailout Bill Offers Few Clues for Valuing Assets for US Purchase, 3 Oct 2008.

However, it is NOT unusual for government entities to allow for mortgage-related transactions at prices that differ from market. In fact, it is a well-established component of the GNMA buyout process, in which buyouts occur at par. Furthermore, the price differential, between the buyout price and the market value,  is what generates the returns from an efficiently managed GNMA buyout program.

Here’s a modest proposal.  

IF  it is important to direct more capital into banks, then let’s start by withdrawing APM 08-23, and revert back to the GNMA repurchase policy that prevailed prior to 7 Nov 2008. 

THEN, let’s encourage the increase of bank capital by withdrawing, or rolling back,  APM 02-24.  APM 02-24, like APM 08-23 referenced above, makes it very difficult to conduct an effective GNMA buyout program.

OR maybe I’m just confused.  Time for our closing number.

- – - – - – - – - – -

I used to work with numbers for a living, but now I’m rolling with the punches as I look for a job or at least my next ‘idea’.   Till next time.

FLASHCARDS – Reperforming Loans, Non-Performing Loans,  &  APMs

- – - – - – - – - – -
REFERENCES [Accessed 15 Nov 2008]

 
M. Adelson & E. Bartlett, Nomura Fixed Income Research – Home Equity ABS Basics, 1 Nov 2004.

 
I. Artman, Sterling Slivers – Buyout Drive-by And The Perfect Storm, 9 Nov 2008.
 
Chairman B. Bernanke, Board of Governors of The Federal Reserve System – Stabilizing the Financial Markets and the Economy,  15 Oct 2008. 

 
Ginnie Mae/HUD, Change to Ginnie Mae’s Policy for Pooling Repurchased Loans – APM 08-23, 7 Nov 2008; and New Policy for Repurchase of Loans – APM 02-24, 6 Nov 2002.
Ginnie Mae/HUD, Ginnie Mae 2003 Annual Report.

 
S. Marcy, BNA Accounting Policy and Practice – Bailout Bill Offers Few Clues for Valuing Assets for US Purchase, 3 Oct 2008.

 
Secretary H. Paulson, US Treasury, Remarks on Financial Rescue Package and Economic Update – HP-1265,  12 Nov 2008.

 
WikiMedia Commons, Ben Campbell Steamboat, circa 1855.

 
Ike and Tina Turner, Workin’ Together – Proud Mary & Get Back, Rhapsody/Capitol USA, 1971.