The Fannie and Freddie trade is back
76 comments
·January 8, 2025jarsin
dehrmann
> Ackman only puts out stuff like this public if he needs retail to give him leverage on some angle he has.
Replace "Ackman" with "Any major investor" except for maybe Warren Buffett.
WorkerBee28474
> He essentially leveraged the massive pile of money from Spac investors to buyout UMG for his own fund...He keeps making those investors empty promises about some future deal to this day years after the Spac folded.
The UMG purchase did not happen. The SPA(R)C money was returned to investors in 2022.
jarsin
He used the SPAC to get UMG to the table then purposely structured the deal in a way that if SEC did not approve he would have to buy it with his fund. Thus leveraging the spac and all the hype around it to get what he really wanted, UMG in his fund.
Ackman's fund is now the second largest owner of UMG, and spac investors have worthless sparcs waiting for sec approval years later.
If you follow Ackman you will see his m.o. plays out like this over and over on every deal and boardroom he is a part of.
Edit: Also a large amount of retailers were in warrants and got $0 back.
muglug
I hope Matt Levine is well-capitalised because he’s pretty-much the only reason I subscribe to Bloomberg
otherjason
If you or anyone else are interested, his newsletter is available by email for free!
ioblomov
100% As far as Levine’s column and I are concerned, the only value the subscription provides is that the footnotes are hyperlinked.
TheRealPomax
Ah the modern internet. https://i.imgur.com/3c5nQ8J.png
akutlay
Bloomberg may be the last company to be concerned about free information, thinking about their five digit annual fees for the terminal.
great_psy
I think a lot of conspiracies people have are out in the open, it’s just that they are hidden behind articles that take 30 minutes to read and understand.
WorkerBee28474
As they say, the devil is in the details.
nayuki
Relevant quotes from the article:
> 2. Banks lend people the money to buy houses, but the government encourages them to do so by guaranteeing the loans.
> 3. Banks lend people the money to buy houses, but someone else guarantees the loans. There’s a big Mortgage Guarantee Company ... Mortgage Guarantee Company is a regular public company, owned by shareholders, but it is a large good safe company with sterling credit. And the Mortgage Guarantee Company is carefully regulated by the US government to make sure that it is well capitalized and safe, so banks will happily rely on its guarantees. They’re not government guarantees, but they’re AAA-rated, government-regulated guarantees, almost as good as the government. The government, in this approach, is not providing a financial guarantee, but it is putting its seal of approval on the Mortgage Guarantee Company’s guarantee, saying “you should trust this guarantee almost as much as you would trust our guarantee, because we endorse this company and regulate it carefully.
> The approach that the government settled on for many decades was “mostly 2, but kind of really 3.”
I like Matt Levine explicitly spelling out these details. Why? Because many people in the general public, especially leftists and socialists, believe that the 2008 Great Financial Crisis was caused by greedy US banks lending out money to unworthy people who had no ability to pay back loans, and take a profit from each transaction, and sell the toxic debt to other parties. It's a story directly attacking the greed and corruption in capitalism.
While those 3 points in the story are true, what this ever-popular narrative misses out is that the banks were motivated to make these loans because someone else - FMAC and FMAE - guaranteed them. And FMAC and FMAE basically have the full backing of the US government. The banks weren't risking their own money if loans fail; they were risking someone else's money. If the banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money. So in the end, this is more a story about socialism and government interference that underlies the capitalistic greed. The bad loans were subsidized by the public at large, and that is a good example of socialism in practice.
KaiserPro
> then the banks would've been way more diligent and restrictive about loaning out the money
No, because thats not how you make money.
You make money by loaning out as much money as possible for the highest rate possible. When the economy is booming, this works, because you don't need to call in the loans, you can parcel them up and sell them to someone else. This gives you more capital to lend out and so on.
This means that bank failed _alot_ Just go back and look at how many banking runs there were in the states before 1913.
both those companies are secondary market makers, rather than guarantors. Once again high finance likes to make out that they have "fixed" the problem of loans by using a "patented" method for optimum yield. Its always been either a rising market, or fraud that has driven those fancy methods.
Sub prime was just coin clipping but in the 21st century.
tzs
It was definitely a crazy time for mortgages. I was buying my first house in 2007 and went to Countrywide for a mortgage. I had analyzed my finances and determined that I should be looking for a home in the up to $240k range and could push it up to $300k with some trepidation.
Countrywide looked at my finances and pre-approved a loan of up to something like $700k.
Since my analysis had told me that was way more than I could afford I only looked at houses under $300k. I wonder though how many people apply without having done their own analysis instead trusting that the mortgage company would not offer more than they can afford?
Anyone else here who was buying around the time with stories of receiving insanely high pre-approvals?
santoshalper
1. It's Fannie and Freddie, nobody uses the acronyms, but if you must it's FNMA and FHLMC.
2. The mortgage meltdown started with subprime loans, which were not guaranteed by Fannie and Freddie. It was private lenders selling loans to clients and then selling the mortgage-backed securities on the private investor market.
3. Fannie and Freddie were not under federal conservatorship at the time. They were regulated by the government as government sponsored entities (GSE) but were corporations with shareholders and profit motive. The regulation under the Bush administration was extremely lax. There was no FHFA or CFPB.
4. The real damage happened between 2001-2006. That's when option ARMs, pick-a-pay loans, and NINA/SISA (no documentation) loans were being made. The fact that these loans would age poorly was well understood in the industry. It was just assumed that continually rising property values would offset how genuinely terrible these loans were.
5. After the clusterfuck, Fannie and Freddie were brought into conservatorship by the federal government to prevent a repeat, and it has largely worked. The quality of mortgage paper is much, much higher than it was 20 years ago.
Yes, it was 100% stupid greed. And to be clear, nobody learned the lesson. The Trump administration is going to defang CFPB and probably bring Fannie and Freddie out of conservatorship. Another mortgage meltdown is a predictable outcome of this and I would expect it around 2032.
steveBK123
Real estate pumper president pumping real estate seems like a very likely outcome yes.
bormaj
> And to be clear, nobody learned the lesson.
This is not true. The mortgage lending pipeline is quite different today compared to pre-GFC. There is considerably more due diligence required by lenders and banks in order to back loans. Conventional loans backed by the GSEs these days have a much higher quality control. If the originating lender lied to push the loan through or didn't due diligence, they'd be on the hook for paying the defaulted principal.
> The Trump administration is going to defang CFPB and probably bring Fannie and Freddie out of conservatorship.
I'm not aware of any chatter on the former and the latter is becoming discussed quite frequently. Though I'm not sure the GSEs are interested in a GFC 2.0
> Another mortgage meltdown is a predictable outcome of this and I would expect it around 2032.
These days I would be more concerned about private credit than the mortgage market...
nayuki
Thank you, that was really helpful in correcting my understanding.
scarface_74
Default of conforming loans was partially caused by people who could afford to keep paying their mortgage deciding it wasn’t worth it because the value of their houses was so much less than their loan, they decided to do a strategic default.
The prices of homes were inflated by investors overpaying for homes and non conforming loans that were not government backed.
There were a lot of tricks that investors and home buyers could play. I was involved in investment real estate and had my first house built between 2001-2005.
The first and easiest non conforming process that wasn’t government backed was to take out two mortgages - 90/10. I had a my first house built a 2500 square foot home and only put $1000 down. The cost at the time was $175K mortgage and the value of the house went up to $205K before the crash. It was also an interest only first mortgage.
I refinanced it before the crash to get fixed interest rate and had a HELOC for $30K
While one investment property I bought was 10% down, it also wasn’t government backed.
The second investment property not only was done 100% financed because I knew people by then, it was also valued by a bank appointed appraiser at an unreasonable high price, I overpaid for it and the seller gave me cash back for the difference. I knew this was shady. But I later found out that this was illegal.
They also took my word for it that I had enough income from my other investment property to cover the mortgage.
By 2008, I was making $70K from work and had five mortgages totaling around half million.
By late 2012, I walked away from all of them. The value of all three houses put together were worth $250K.
Exactly three years after the last foreclosure to the day, I got approved for a mortgage of $335K FHA and had my house built - 3200 square foot 5 bedroom 3.5 bath in 2016 with 3.5% down and 3.5% interest rate. I just sold it last year for $670K
The house I had built in 2003 and walked away from in 2012 just got back up in value to the price I paid for it in late 2018 and the price I refinanced it for in mid 2020. It sold for $270K last year.
The bank bailouts were because banks were making a lot of risky non conforming non government back loans and as investors like me started walking away from houses, the economy crashed and people saw it made no sense to try to keep their homes, they walked away.
> The banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money Banks also lied about the credit worthiness of loans in their portfolio when they sold them off
That’s just the thing, as soon as the banks made even non conforming non government back loans, they bundled them, lied about the credit worthiness of the loans and sold them off - mortgage backed securities. They weren’t ever at risk.
The banks servicing the loans were not the original underwriters
abduhl
I assume you were in a non recourse state? Your strategy as I understand it would only work in a non recourse state.
scarface_74
Two of the mortgages for one investment property were sold so many times, we were able to negotiate a short sale. The first mortgage short sold for $27K when I owed $120K and the second mortgage negotiated a pay off for $1000 on I believe around $25k.
For my home back then, the second mortgage didn’t ask for anything and I believe I was able to negotiate around $10K and the short from what it was sold was around $50k.
The fifth mortgage I never heard anything back. I think it sold for around $50K less than owed in foreclosure.
My backup plan was bankruptcy. I had a place to stay and all of my assets were in my protected retirement accounts.
eli_gottlieb
> If the banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money.
With government and without, the business cycle has always oscillated between irrational exuberance and irrational stinginess, even as most of the individual players in the market continue to insist that they are simultaneously entrepreneurial and prudent, ambitious and responsible. It's just a positive-feedback system all on its own.
datavirtue
It only works because the interest is amortized out to term and front loaded so that investors can distribute almost the entire mortgage payment to shareholders immediately. If the home owner pays for five or ten years you are golden. If they default you get the principle back from the loan guarantee/foreclosure and you move on and do it again. This is why MBS REITs can pay such amazing dividends.
fredgrott
that is not how those securities work....if you buy such a security you are betting on your own disaster...
How?
When you buy what is called A tranches it always has a layer of toxic non A tranches....
Once housing repossessions rose above 8% all housing mort securities were under water....
downrightmike
Most of the loans that people couldn't pay back were from the best borrowers with the best credit that bought more than they could afford. IT wasn't poor people taking out loans en masse it was doctors and white collars
alecco
Maybe it's a good trade. But if it's not, Ackman and all the other snakes will get out of the trade well before you. Stay in safe money markets with decent yields. Don't swim with sharks.
everybodyknows
Some history may be useful here. In the first weeks after the 2016 election, on similar speculation, FNMA doubled in price. A few months into 2017, it crashed back down.
Mistletoe
Money markets don’t remotely have enough gains to keep a retirement portfolio going.
alecco
My point is that doing risky stuff as a small investor in an unfair market with high risks is even worse.
downrightmike
That's how I read it
AnotherGoodName
Note that the majority of bad 2008 loans were from a spike in financial business lending not personal lending.
https://en.m.wikipedia.org/wiki/Subprime_mortgage_crisis#/me...
You’ve probably heard of private equity buying companies, loading them with debt, transferring money to the parent and bankrupting the company and wondering why banks give loans to private equity when we know this playbook. Well the bank loans are guaranteed ultimately by Freddie/Fannie. There’s no risk here and everyone but productive members of society win here. It’s still ongoing too.
downrightmike
I've heard about it because that's how we lost American Manufacturing like SunBeam, sold off for parts. But hey deregulation and greed was good in the 80's, and no one who should have stopped it, did.
parineum
Do you think greedy people would sell off a companies' assets for parts if that company was profitable?
They don't buy healthy companies, the people that do that are looking for failing companies that they can buy for pess than their assets are worth.
c6400sc
The question is not profitable. The question is can they be MORE PROFITABLE than they currently are. Some companies are unprofitable and easy targets. Others are mildly profitable, but PE can lever up their investments to goose MORE out of them, resilience and survivability be damned.
downrightmike
At that point, it didn't matter, the investors expected the chopping block to keep rolling, because that was the zeitgeise, and making more deals meant you could make more, until you run out of companies to kill or the times change.
mdorazio
That's literally what Jack Welch did with General Electric in the 80s and 90s, and all the Boomers loved him for it. And yes, PE firms do it all the time as well - it's actually pretty rare for PE to acquire a large company that is actually failing. More often, it's one that is doing OK but not great. A good example is Toys R Us. Net earnings were around $100M in 2004 when PE bought it out and ruined it.
kasey_junk
What are you talking about? Fannie and Freddie don’t buy loans for businesses other than some commercial real estate. They certainly don’t back most private equity plays.
I encourage anyone thinking of following Ackman to look up all the shenanigans he played on investors with his Spac.
He essentially leveraged the massive pile of money from Spac investors to buyout UMG for his own fund. Leaving the Spac investors high and dry with no ownership. He keeps making those investors empty promises about some future deal to this day years after the Spac folded.
Ackman only puts out stuff like this public if he needs retail to give him leverage on some angle he has.