July 2016 - Lessons Learned

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62 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST Fairholme: Status Quo Makes Another Bailout 'Inevitable' New information in a lawsuit challenging the Net Sweep of GSE profits into Treasury suggests GSE executives knew the GSEs were about to incur large profits just prior to the start of the Net Sweep in April 2012. T he Net Worth Sweep, or the sweeping of all Fan- nie Mae and Freddie Mac profits into Treasury, has been under more intense scrutiny as of late since some of the docu- ments related to Fairholme Funds' lawsuit against the government over the Net Worth Sweep were unsealed in April. The recently unsealed docu - ments suggest key government of- ficials, namely Fannie Mae's CFO, may have known the GSEs were on the verge of huge profitability when the bailout agreement was amended in August 2012 to start the Net Worth Sweep. As a preferred stockholder in the GSEs and one of the enterpris - es' largest investors, Fairholme is involved in one of 22 current law- suits against the government that involves the Net Worth Sweep. "We have made enormous progress over the last 12 months, largely behind the scenes," Fairholme CEO Bruce Berkowitz said in a recent interview. "With each passing day, we seem to be getting closer to the finish line, so I remain very optimistic." The fact that the GSEs' capital buffer is being reduced by $600 million per year until it reaches zero by January 1, 2018, as well as the fact that Freddie Mac has suffered a loss in two of the last three quarters, have made many stakeholders in the mortgage industry, as well as GSE investors and shareholders such as Fairholme become deeply concerned about the possibility of another taxpayer-funded bailout. "Fannie and Freddie have over $5 trillion of liabilities outstanding, yet Treasury is milking them of all their income and forcing them to operate with no capital," Berkowitz said. "It's absurd. If the government takes all of your wealth every quarter as the return on a forced investment, and never allows the repayment of that forced investment, then it is in - evitable that there will come a time in the future when the government will force more investment on you, another so-called bailout." To be clear, Berkowitz does not want to get rid of Fannie Mae and Freddie Mac; after all, he said, "Who else makes the 30-year pre- payable fixed-rate mortgage widely available through thick and thin? Who else can provide $7 trillion of liquidity to America's housing market since 2009 helping low and moderate-income Americans buy, rent, or refinance a home?" Berkowitz simply wants the GSEs released from government control, "the same as AIG." He added, "I believe the United States Treasury is growing increasingly isolated as a result of its eight-year policy forcing Fannie and Freddie to remain in a state of captivity known as 'conservatorship.' It is a shame and a huge delay of game." Fannie Mae and Freddie Mac are two of the largest companies in the world, he said, and they are not going away, as evidenced by Freddie Mac hiring hundreds of new employees and Fannie Mae moving into a new 1 million square- foot office in Washington, D.C. "It is still hard to believe that some in Washington want to eliminate them in the hope of finding something better, or at least finding something that caters better to their special interests and crony capitalists," Berkowitz said. Eight Firms Settle RMBS Fraud Claims with FDIC The FDIC alleged the eight firms misrepresented the sales of 21 Countrywide RMBS to five FDIC-insured banks, which have since failed. E ight financial firms have settled for a combined total of $190 mil- lion with the Federal Deposit Insurance Corporation (FDIC) over claims of misrep- resenting the quality of certain residential mortgage-backed securities (RMBS) to five failed FDIC-insured banks, according to an announcement from the FDIC in early June. The FDIC, as a receiver for the five failed banks, filed six lawsuits from November 2011 to August 2012, claiming the eight firms were in violation of federal and state securities laws regard - ing the sales of 21 Countrywide RMBS purchased by the five failed banks. In the suits, the FDIC claimed there were mis - representations in the offering documents for the 21 securities. The eight firms involved in the settlement are, alphabeti - cally: Barclays Capital Inc.; BNP Paribas Securities Corporation; Credit Suisse Securities (USA) LLC; Deutsche Bank Securities Inc.; Edward D. Jones & Co., L.P.; Goldman, Sachs & Co; Royal Bank of Scotland (RBS) Securities Inc.; and UBS Securities LLC. The five banks in receivership that will receive the settlement funds are: Colonial Bank of Montgomery, Alabama; Franklin Bank, S.S.B. of Houston, Texas; Guaranty Bank of Austin, Texas; Security Savings Bank of Henderson, Nevada; and Strategic Capital Bank of Champaign, Illinois. Four out of the five banks failed in 2009; the only one that did not was Franklin Bank, which failed in November 2008. With these six lawsuits, the FDIC has filed a total of 19 RMBS lawsuits on behalf of eight institutions, seeking damages for violations of federal and state securities laws, according to the FDIC. The last RMBS settlement for the FDIC prior to the FDIC's June announcement occurred in February 2016, when Morgan Stanley agreed to pay $62.95 mil - lion to settle four lawsuits which alleged the investment banking firm sold toxic RMBS to three FDIC-insured banks that later failed, including Colonial Bank of Montgomery, Alabama. In August 2015, the FDIC filed a lawsuit accusing Bank of New York Mellon of breach - ing its duties as bond trustee for $2.06 billion worth of RMBS purchased by Guaranty Bank of Austin, Texas.

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