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Issue link: http://digital.themreport.com/i/106030
Local Edition Or ig i nat ion SECONDARY MARKET Rate-Rigging Scandal Drained $3B from GSEs s e c on da r y m a r k e t a na ly t ic s se r v ic i ng The Federal Housing Finance Agency has revealed that Fannie and Freddie could've lost as much as $3 billion in the international Libor scandal. United Kingdom // Fannie Mae and Freddie Mac may have lost billions of dollars as a result of borrowing rate manipulation, according to a report from the Office of the Inspector General of the Federal Housing Finance Agency (FHFA-OIG). The banking world was rocked back in late June as it was revealed that traders at Barclays spent years rigging the London Interbank Offered Rate (Libor), a global interest rate at which banks lend money to each other. Investigations have been under way since that time to uncover the roles any other banks might have played in the scandal—so far, only Barclays and UBS AG have reached settlements to resolve investigations of their practices. As those probes continue, the Wall Street Journal (WSJ) is now reporting Fannie Mae and Freddie Mac may have sustained more than $3 billion in losses from the rate-rigging. The WSJ uncovered an internal memorandum from FHFA Inspector General Steve Linick to Acting Director Edward DeMarco examining the extent of the financial damage the GSEs likely took during the height of the financial crash as a result of rate manipulation. The team that prepared the report—which was apparently given to Linick October 26 and forwarded to DeMarco November 2—came up with their loss figures based on an analysis of historical Libor data and the GSEs' balance sheets. In the report, FHFA-OIG calls for the enterprises to conduct their own analyses of the potential losses they faced from Libor rigging and to consider options for legal action. 78 | The M Report "In the context of active federal and state investigations into possible Libor manipulation, as well as the results of our own preliminary analysis of publicly available information, we believe that further investigation of the potential harm to Fannie Mae and Freddie Mac—and therefore to Treasury and, ultimately, the American taxpayer—of any Libor manipulation is firmly warranted," the report reads. In a response letter dated November 15, deputy director for enterprise regulation Jon Greenlee notes the enterprises have both engaged an outside law firm to help conduct such assessments. FHFA issued a statement after the publishing of the WSJ article, saying the agency "has not substantiated any particular Libor-related losses for Fannie Mae and Freddie Mac" and "has not made any determination regarding legal action" as of yet. Investment Firm Predicts Status Quo Performance for Lending Calling for minimal change year-over-year, analysis from Keefe, Bruyette & Woods indicated "more of the same" for the mortgage business in 2013. New York // Keefe, Bruyette & Woods (KBW), a boutique investment bank and brokerdealer, is predicting "more of the same" for the mortgage market this year. KBW anticipates a decline in mortgage originations in 2013. However, the firm maintains originations will "remain strong." After totaling about $1.7 trillion last year, KBW suggests originations will reach about $1.54 trillion in 2013. This is close to the estimate put forth by the Mortgage Bankers Association—$1.5 trillion—and not far from Fannie Mae's expectation of $1.3 trillion. About $150 billion of KBW's total estimated $1.7 trillion will be refinanced through HARP 2.0, KBW suggests. The Federal Reserve's QE3 policy of purchasing mortgagebacked securities (MBS) will likely keep mortgage rates low, encouraging refinances, and changes to HARP will make the program accessible to more homeowners. Continuing the "more of the same" theme, KBW predicts prepayment speed will remain essentially unchanged between 25 and 30 percent. However, mortgage investment returns will contract, according to KBW, which "will result in a challenging investment environment for the mortgage REITs, especially so for the agency MBS REITs." Additionally, mortgage credit costs will continue to be impacted by rep and warranty expenses imposed by Fannie Mae and Freddie Mac, according to KBW's predictions. As lawmakers continue to deliberate mortgage regulation, KBW says, "We do not expect major market reform through Congress in 2013, but we expect FHFA to continue to make changes at the regulatory level, including raising guarantee fees." Basel III Timeline to Stay on Track According to the Basel Committee, the deadline for implementing new capital adequacy requirements remains on schedule despite extensions granted to U.S. banks. Switzerland // U.S. banks may have received an extension on their deadline to implement Basel III regulations, but that isn't stopping the global