Fed Transfers Record $79.3 Billion Income to U.S. Treasury for Last Year

By Scott Lanman –Bloomberg

The Federal Reserve said its payments to the U.S. Treasury rose 67 percent to a record $79.3 billion last year on income from mortgage securities purchased to spur economic growth.

The transfers, higher than initial Fed estimates, increased from $47.4 billion in 2009, according to annual financial statements released by the central bank today in Washington. The statements included a letter from auditors Deloitte & Touche LLP approving the numbers. The Fed in January reported an unaudited 2010 total of $78.4 billion in payments to Treasury.

Fed Chairman Ben S. Bernanke said in January that the payments could decrease if the Fed raises short-term interest rates because of a recovering economy. The Fed is buying $600 billion of Treasury securities through June in the second round of quantitative easing. It purchased $1.7 trillion of mortgage and Treasury debt from December 2008 to March 2010 in the first round to revive the economy with the benchmark interest rate near zero.

Operating expenses for the Fed and its 12 regional banks rose to $5.07 billion from $4.98 billion. That includes $1.05 billion for Board of Governors operating expenses and currency costs, up from $888 million in 2009; $33 million for the new Bureau of Consumer Financial Protection, which operates independently of the Fed; and $10 million for the Treasury’s new Office of Financial Research, the statement shows.

Both new organizations are funded through the Fed under last year’s Dodd-Frank financial-regulation law. The financial- research office will be funded by bank fees after the first two years.

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FHFA: Home prices dip 0.3% in January

By Jon Prior –HousingWire

Home prices dipped 0.3% in January from the month before, according to the Federal Housing Finance Agency.

In December, home prices dropped a revised 0.3% as well. The FHFA calculates the monthly index using purchase prices on homes backed by mortgages sold or guaranteed byFannie Mae or Freddie Mac.

Home prices also fell 3.9% from one year before and remain 16.5% below its peak in April 2007.

Home prices are declining through a stagnant selling season over the past six months, according to another index put out by CoreLogic (CLGX: 17.95 +1.07%). Even as the spring could bring more selling activity, as it traditionally does, a number of barriers still face the housing market including elevated foreclosures, negative equity and weak demand.

For the nine Census Divisions in the FHFA home price index, the biggest drop, 1.3%, came in the Mountain and South Atlantic Divisions. Prices in the West and South Central divisions actually increased 1.6% from the previous month.

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SEC moves to charge Fannie, Freddie execs

By Zachary A. Goldfarb and David S. Hilzenrath –The Washington Post

The Securities and Exchange Commission is moving toward charging former and current Fannie Mae and Freddie Mac executives with violations related to the financial crisis, setting up a clash with the housing regulator that oversees the companies, according to sources familiar with the matter.

The SEC, responsible for enforcing securities laws, is alleging that at least four senior executives failed to provide necessary information to investors about the companies’ mortgage holdings as the U.S. housing market collapsed.

But the agency that most closely regulates Fannie and Freddie, the Federal Housing Finance Agency, disagrees with that assessment, according to sources familiar with the matter.

FHFA officials think Fannie and Freddie’s financial disclosures, which agency staff members had reviewed before the documents were released to the public, were sufficient, the sources said. One source added that FHFA has sent a letter to the SEC opposing the filing of charges.

An FHFA spokesman declined to comment.

Over the past eight weeks, the SEC sent notices to the executives saying they may face civil charges. The SEC has not yet formally filed such charges and ultimately may choose not to.

The agency alleged that executives at both companies misled investors about their exposure to dangerous mortgage products, such as subprime loans, sources familiar with the matter said.

The executives include former Fannie chief executive Daniel Mudd, former Freddie chief executive Richard Syron, former Freddie chief financial officer Anthony “Buddy” Piszel and current Freddie executive Donald Bisenius, who recently announced that he would leave the company after he received his notice.

The allegations are slightly different for both the companies. One of the chief allegations against Fannie executives is that it characterized mortgage loans as “prime” — meaning high-quality — when they should have been classified in a more risky category of loans.

Meanwhile, Freddie executives are accused of not fully warning investors about the risks associated with subprime loans.

Fannie and Freddie, on the verge of collapse as the financial markets imploded in the fall of 2008, were seized by the federal government. The companies, now owned by taxpayers, have needed $150 billion in aid to stay afloat.

The SEC case may also add to a brouhaha on Capitol Hill over federal expenditures by Fannie and Freddie for former executives. The companies are spending tens of millions of dollars to cover the legal costs of a different set of former executives who face private class-action lawsuits. FHFA officials say the former executives are legally entitled to that coverage.

The SEC case will add to those taxpayer bills because the executives facing allegations are also indemnified.

In the years relevant to the SEC case, Fannie and Freddie routinely submitted their financial disclosures to FHFA’s predecessor agency before releasing them to the public.

“The disclosures and procedures that are the subject of the [SEC] investigation were accurate and complete,” Mudd, now chief executive of Fortress Investment Group, said in a statement released to Bloomberg News this month.

He added, “These disclosures were previewed by federal regulators, and have been issued in the same form since the company went into government conservatorship.”

One person familiar with the matter pointed out that the SEC itself reviewed Freddie’s disclosures in 2008 as part of the company’s application to become officially registered with that agency.

An attorney for Syron said Freddie made accurate disclosures. Attorneys for Bisenius and Piszel could not be reached.

Approval by a federal regulator is not a defense for a misleading securities filing, said Donald C. Langevoort, a Georgetown law professor. It could make it harder for the SEC to prove fraud, but the agency can file other kinds of charges, he said.

Even in charging fraud, “the SEC enforcement staff is well within bounds in proceeding if it believes that the regulators who approved did not have all the relevant facts, and the subject in question knew or recklessly disregarded such facts,” Langevoort said by e-mail.

If the SEC were to take enforcement action against Fannie Mae, Freddie Mac or any of their executives, it would not be the first time. In the past, the fact that other regulators had overseen the companies did not shield them from SEC action.

Before they were taken over by the government, the companies went through twin accounting scandals. Each firm paid a fine to settle SEC fraud charges and was forced to correct past financial reports.

Although the Office of Federal Housing Enterprise Oversight, predecessor of the FHFA, had previously given both companies a clean bill of health, in 2003 and 2004 the regulator accused them of accounting irregularities, and the SEC later agreed.

Mudd and Syron were placed in charge of the companies with mandates to clean up the accounting and organizational problems left by their predecessors.

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House Republicans introduce bill to reform Fannie, Freddie

by John Prior –Housingwire.com

Rep. Jeb Hensarling (R-Texas) re-introduced legislation late Thursday that would end the bailouts of Fannie Mae and Freddie Mac and end their conservatorship in two years.

So far, the government-sponsored enterprises have pulled $131 billion from the Treasury Department. According to President Obama’s budget, the bailout of these two firms will ultimately cost taxpayers $73 billion after dividend repayments by the end of 2021. In February, the Treasury released its white paper on the future of housing finance,detailing three possible options Congress could take in winding down these two firms that have supported the mortgage markets for decades.

"It’s time to enact fundamental reform of Fannie and Freddie before these companies go from ‘too big to fail’ to ‘too late to fix,’” Hensarling said in a statement released Thursday.

Hensarling originally introduced the bill in 2008, then again in 2010 as an amendment to the Dodd-Frank Act.

In early March, Treasury Secretary Timothy Geithner too urged lawmakers to reform Fannie and Freddie within the next two years.

The GSE Bailout Elimination and Taxpayer Protection Act would immediately implement several reforms. It would repeal the GSE’s affordable housing goals and would cap their maximum mortgage portfolio size at $700 billion. That cap would gradually come down to $250 billion over five years.

The bill would also reduce the GSEs’ market share by returning the conforming loan limit to $417,000, and it would increase fees they charge for guaranteeing its securities, or G-Fees, to bring more competitive private capital to the market.

Once conservatorship ends for the Fannie and Freddie, their regulator the Federal Housing Finance Agency would evaluate the financial status of each company and place them into receivership if necessary. If not, the GSEs would be allowed to resume their "limited market operations" for a maximum of three years under certain rules.

According to the bill, during these three years, the minimum down payment would be at least 5% for all new loans. That would increase to 7.5% in the second year and 10% by the third year. The bill would also remove their exemption from paying state and local taxes and would force the companies to register their securities with the Securities and Exchange Commission.

After the end of that three-year period, each GSE’s charter expires, according to the bill.

"At that point, Fannie and Freddie must conduct all new operations as fully private sector companies competing on a level playing field without any government advantages," according to Hensarling.

The bill also provides for a wind down of any legacy business commitments after the charters expire over the next 10 years.

"Our goal is to help homebuyers stay homeowners, and free taxpayers of the burden that comes when homes get sold to buyers who simply can’t afford them," Hensarling said. "It’s my hope that President Obama will work with us to pursue a path that will protect taxpayers, end the billions of dollars in bailouts, and bring certainty back to the mortgage market."

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Fed gives OK for large banks to boost dividends, restart stock buybacks

–Housingwire.com

Some of the largest banks in the country may boost dividends and restart stock repurchase plans now that theFederal Reserve has completed its comprehensive capital analysis and review.

About two years ago, the central bank advised financial institutions "that safety and soundness considerations required that dividends be substantially reduced or eliminated."

On Friday, the Fed plans to discuss its review with banks that requested a capital action, and all 19 firms that were subject to the stress tests will get "more detailed assessments of their capital planning processes next month."

The mandates to boost capital levels included in Basel 3 and the new requirements in the sweeping Dodd-Frank financial reforms have "substantially clarified the regulatory environment in which these firms will be operating," the Fed said.

From the end of 2008 through 2010, common equity increased by more than $300 billion at the 19 largest U.S. bank holding companies, the Fed said. Allowing these banks to return capital to shareholders improves the entire sector and helps promote the firms long-term access to capital, according to the central bank. The Fed has advised firms to keep dividends to 30% or less of earnings in 2011.

Washington thinktank MF Global anticipates some large firms to act immediately on the Fed decision.

"We would expect most of those banks to make announcements in the coming hours and days," analysts at the Washington-based commodities and derivatives brokerage said.

Under the Fed’s stress tests, banks had to show the ability to maintain at least a 5% Tier 1 common ratio. The most-recent test wasn’t "as standardized" as the Supervisory Capital Assessment Program undertook in early 2009, and doesn’t appear to be as transparent.

"We hear many initial complaints about the black box nature of this stress test," MF Global said. "It is true that the Federal Reserve has provided less detail than in the 2009 test. Yet the Fed did disclose the key economic assumptions. So we believe there is more here than the first impression indicates."

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Fed sees economy on ‘firmer footing’

-Bloomberg

Federal Reserve policy makers said the recovery is gaining strength and that higher energy prices will have a temporary effect on inflation, while reaffirming plans to buy $600 billion of Treasuries through June.

“The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Federal Open Market Committee said Tuesday in its statement after a one-day meeting in Washington. The effects of higher fuel and commodity costs on inflation will be “transitory,” and officials “will pay close attention to the evolution of inflation and inflation expectations,” the Fed said.

The statement represents an upgrading of the outlook by Fed Chairman Ben S. Bernanke and his colleagues, who removed language that the recovery is “disappointingly slow” and that “tight credit” is holding back consumer spending. Policy makers went out of their way to acknowledge higher commodity prices while dismissing any inflation danger.

“This statement takes QE3 off the table, as they are taking off the downside risk in deflation and saying the economy is on track,” John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C., said in a reference to speculation that the Fed might embark on a third round of quantitative easing. “They are coming to the view that the economy has improved over time. They are going to finish QE2. There is no need for more stimulus at this point.”

Even so, the statement echoed a cautionary note from the prior release, saying that “the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate” for stable prices and maximum employment.

The Fed left its benchmark interest rate in a range of zero to 0.25%, where it’s been since December 2008, and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.” Officials next meet April 26-27 in Washington.

Payrolls have increased by an average 134,000 a month for the past five months and the unemployment rate has dropped by almost 1 percentage point over three months to 8.9% in February, the lowest since April 2009. Still, the pace of job growth is too slow for officials including New York Fed President William Dudley, who said in a speech last week that a “substantial pickup is sorely needed.”

The average U.S. retail price of regular unleaded gasoline rose to $3.56 a gallon this week, the highest since October 2008.

“Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks,” the Fed said. “Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.”

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8% in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6% to 2%.

One gauge of inflation expectations has approached levels from before the financial crisis intensified in 2008. The breakeven rate for 10-year Treasury Inflation Protected Securities, which is the yield difference between the inflation- linked debt and comparable-maturity Treasuries, declined to 2.45 percentage points yesterday since reaching 2.57 points on March 8, the highest since July 2008, Bloomberg data show.

Gasoline and other “highly visible” commodities have shown “significant increases” since the U.S. summer, Mr. Bernanke said in congressional testimony March 1. “The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation,” Mr. Bernanke said.

The FOMC decision was unanimous for a second consecutive meeting. That means Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, both skeptics of the second round of so-called quantitative easing who voted for the statement today, don’t disagree strongly enough with the path of policy to dissent.

Fed Governor Kevin Warsh, who resigned in February effective at the end of March, didn’t attend Tuesday’s meeting in accordance with FOMC practice.

Mr. Bernanke, in two days of congressional testimony this month, reiterated the Fed’s outlook that while growth will accelerate this year, he still wants to see a “sustained period of stronger job creation.” He has avoided indicating what the Fed’s next step will be after finishing the $600 billion of purchases.

“While indicators of spending and production have been encouraging on balance, the job market has improved only slowly,” Mr. Bernanke, 57, a former Princeton University economist, said March 1 and March 2 in semiannual hearings on monetary policy.

“The economy still needs help,” said former Fed Governor Lyle Gramley, now senior economic adviser at Potomac Research Group in Washington. “Inflation hasn’t risen to a point where something like” the monetary stimulus “would be counterproductive,” Mr. Gramley said before the announcement.

The central bank, through the New York Fed’s traders, is halfway through the purchases, having bought about $304 billion of Treasuries as of March 9. The total is about $419 billion including securities bought by reinvesting proceeds of maturing assets from the $1.7 trillion first round of purchases of mortgage debt and Treasuries.

The Fed chairman has tried to take credit for higher stock prices and lower corporate-borrowing premiums since the central bank started talking about the second round of quantitative easing. In the testimony, he dated gains to two events in August — the FOMC’s decision to stop the securities portfolio from shrinking by reinvesting maturing mortgage debt and a speech signaling the possibility of QE2.

The Standard & Poor’s 500 Index increased 15% from Aug. 10 through Monday. For investment-grade corporations, the difference between companies’ rates and comparable government securities has narrowed to 1.51 percentage point on March 11 from 1.88 point on Aug. 10, according to Bank of America Merrill Lynch index data.

Yields on 10-year Treasuries declined to 2.57% on Nov. 3, when the Fed announced the second round of asset purchases, from 2.76% on Aug. 10. They were up to 3.36% Monday. Mr. Bernanke said the initial drop reflected investor expectations of Fed buying. Yields later rose “as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases,” he said in the congressional testimony.

At the last FOMC meeting in January, policy makers raised projections for economic growth this year and made few changes to forecasts after 2011. They also made little change to projections for unemployment and inflation.

U.S. retail sales increased in February by the most in four months, the Commerce Department said March 11. Further gains may be tempered by concerns over higher fuel prices that helped push consumer confidence to a one-month low in the week to March 6, according to the Bloomberg Consumer Comfort Index.

Expectations for the inflation rate in one year rose to 4.6% in March from 3.4% in February, according to the Thomson Reuters/University of Michigan consumer sentiment survey released March 11.

Atlanta Fed President Dennis Lockhart said in a March 7 speech that he doesn’t expect consumer-price inflation to accelerate because of the rise in food and energy costs. Speaking to economists in Arlington, Va., Mr. Lockhart said he is “very cautious” about further asset purchases, while not ruling out the possibility because turmoil in the Middle East and Africa risks slowing the U.S. economy.

Pleasanton, Calif.-based Safeway Inc., the fourth- largest U.S. supermarket chain by stores, expects that 2011, “while it will be a challenging year,” will be “much better” than 2009 or 2010, Chief Executive Officer Steven Burd said March 8.

“The economy will improve, but only moderately,” Mr. Burd said at the company’s investor conference. “We’re not looking for any kind of a hockey-stick curve here.”

In Congress, lawmakers are debating how to cut spending to reduce a record budget deficit. After the federal rescues of home-finance providers Fannie Mae and Freddie Mac cost taxpayers $154 billion, politicians are also starting to consider ways to reduce support and tax subsidies for the housing market, which the FOMC described as “depressed” in December and January’s statements.

“During a time when we’re trying to create jobs, why in good God’s name would you start to talk about changing policy and tax implications for new-home purchases?” Robert Toll, chairman of Horsham, Pennsylvania-based Toll Brothers Inc., the largest U.S. luxury-home builder, said on a Feb. 23 conference call with investors.

Purchases of new houses in the U.S. fell more than forecast in January and are running at about one-fifth of the record rate in 2005. Housing starts climbed 15 percent to a 596,000 annual rate, a pace that is still less than one-third the homebuilding boom’s peak of 2.27 million in 2006.

Other parts of the economy are strengthening. Manufacturing grew in February at the fastest pace in almost seven years, while orders to U.S. factories climbed in January by the most in more than four years, reports this month showed.

Japan’s earthquake, which disrupted cooling systems at nuclear reactors, “certainly introduces yet another wild card or potential risk that’s out there,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn., before the Fed announcement.

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