Smart Real Estate News & Commentary by Chris McLaughlin March 12, 2012
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Fannie and Freddie CFOs make more than CEOs
The Federal Housing Finance Agency’s (FHFA) announcement of salary cuts for Fannie Mae and Freddie Mac executives doesn’t go as far as some would like. The FHFA detailed a $500,000 cap on salaries Friday, in particular for the incoming CEOs of the government-sponsored enterprises. That remains above the federal pay scale and falls short of compensation caps in standing legislation, and includes deferred payments that boost potential pay to $30.73 million for the top 10 executives. Fannie and Freddie’s chief financial officers are exempt from the base salary cap, meaning they’d make more than the new chief executives. CFOs Ross Kari and Susan McFarland will make $675,000 and $600,000, respectively, in 2012. Patrick Lawler, FHFA chief economist, said candidates the agency contacted for CEO positions requested subordinates make a competitive salary. “We’re going to try and fill these two positions at a very low wage rate, but we just don’t think there’s any chance on the others,” Lawler said.
Three Freddie executives are also set to receive a raise, albeit at or below the $500,000 barrier. These levels do represent a sharp reduction since the government took Fannie and Freddie into conservatorship. Compensation for the top 15 executives at each GSE is down 63%, according to the FHFA. Members of Congress, however, weren’t keen on the changes. “That may (be) an appropriate level for the private sector, but as long as the GSEs live off the taxpayers, these companies are owned by taxpayers and their staff should be paid accordingly,” Rep. Spencer Bachus, R-Ala., said in a statement Friday. A House bill sponsored by Bachus would limit GSE executive pay at $218,978 for 2011. It passed the committee level in November. Jeff Emerson, a spokesman for Bachus, said that bill could come up before a full House vote soon. Bachus called the FHFA’s change “long overdue,” but said it doesn’t go far enough.
Another measure, attached to a House and Senate-approved congressional insider trading bill, would put Fannie and Freddie employees on a federal pay scale with a maximum $275,000 salary and no bonuses. Both chambers approved separate versions, each with the GSE provision, in February, but have yet to reconcile the two measures. Sen. Jay Rockefeller, D-W.Va., cosponsored the GSE amendment in the Senate and called the FHFA’s move a “good first step.” “Even a $500,000 salary is too much,” Rockefeller said in a statement. “Excessive executive pay at taxpayer-funded entities has already been going on for too long and must end — period.” The FHFA said any further salary reduction from its $500,000 benchmark or uncertainty around it would “heighten safety and soundness concerns.” “A sudden and sharp change in pay from these levels would certainly risk a substantial exodus of talent, the best leaving first in many instances,” FHFA acting director Ed DeMarco said in a release. “A significant increase in safety and soundness risks and in costly operational failures would, in my opinion, be highly likely.”
Legislators in Washington railed against executive pay at Fannie and Freddie during committee hearings in the fall, including before the House Oversight Committee. That committee, chaired by Rep. Darrell Issa, R-Calif., issued a critical report on GSE pay, calling executives “government-sponsored moguls.” “I’m encouraged to see that (the) FHFA took the Oversight Committee’s recommendation to reevaluate the bonus structure for these executives,” Issa said Friday in a release. The $500,000 salary cap, however, only refers to bimonthly or weekly payments, according to FHFA documents. The pay structure includes “deferred payments,” which the FHFA does not consider bonuses, delayed by a year for each quarter. The top 10 executives can still earn that $30.73 million with deferred payments included, a 13% reduction from roughly $35.3 million in 2011. Executives ultimately brought in $30.1 million last year with these payments.
Deferred payments are subject to reductions based on conservatorship and personal performance, as well as continued employment up to Jan. 31 2014. Early-exit provisions make up 70% of deferred salary. The FHFA included that provision to encourage executives to stay, Lawler said. “This is an unusual pay structure that’s designed for a very unusual situation,” Lawler said. “It doesn’t look 100% like the private sector, but it certainly isn’t the government either.” Charles “Ed” Haldeman and Michael Williams, Freddie and Fannie’s outgoing CEOs, could earn up to $5.4 million in 2012, including $900,000 in base salary. Haldeman, however, recently asked not to receive $2 million in incentives tied to 2009 and 2010, according to a regulatory filing and first reported by The Wall Street Journal. But both have said they’d leave before year-end, with $2.88 million in deferred salary tied to retention reductions.
Stress tests expected to show progress
The Federal Reserve will release the results of its latest stress tests this week, and they are expected to show broadly improved balance sheets at most institutions. While unpleasant surprises are possible, analysts are counting on the Fed to find banks largely healthy. That would stand in marked contrast with the holes, in the tens of billions of dollars, found on balance sheets in the first round of stress tests in 2009. The examination is not merely an intellectual exercise. If institutions fall short, they could be required to raise billions in new capital, depressing their shares. If they pass, dividend increases and stock buybacks by the strongest institutions will follow as they did after the second round of tests a year ago, pleasing investors whose banks’ stocks still trade at levels far below where they where before the collapse of Lehman Brothers in September 2008.
Under the tests, Federal Reserve specialists are trying to predict how capital levels at the 19 largest banks would withstand an economic downturn even more severe than the one that followed the Lehman collapse. In addition to a 50% stock market decline and an 8% contraction in real gross domestic product, the tests envision an unemployment rate of 13%, well above the 10.2% peak recorded in October 2009. A surge in unemployment would increase losses for banks on mortgage and credit card debt. If all that were not enough, the Federal Reserve is considering what would happen to bank assets if a market shock hit Europe and reverberated in the United States, gauging the extent of losses that have not loomed large for American institutions, despite the continuing problems in Greece and weaker European borrowers.
Regulators are walking a fine line: if they permit the banks to return too much capital now, that might leave the industry vulnerable in the event of a downturn and lead others to think the industry was returning to its risky ways. On the other hand, a raft of negative results would alarm investors just as calm seems to be returning to the markets. For banks to pass the tests, they must show that their Tier 1 capital ratio – the strictest measure of a bank’s ability to absorb financial blows – will be at 5% or better, even in the Fed’s nightmare case. To raise dividends or buy back stock, the ratio would have to remain above 5%, after capital was returned to shareholders. Tier 1 capital ratios for the 19 largest banks have improved since the depths of the financial crisis, rising to 10.1% in the third quarter of 2011 from 5.4% in the first quarter of 2009. Actual capital in dollar terms has jumped to $741 billion from $420 billion.
Olick – homebuilding stocks too hot?
“Improvement in the jobs market, improvement in potential buyer traffic, improvement in existing home sales, no change in record low mortgage rates…no surprise the analysts are starting to upgrade the nation’s public home builders. Not to mention that we’re getting an unusually warm start to the spring market. ‘We are raising our targets for the builders, and are upgrading DHI, LEN, and TOL to Outperform (from Neutral), and also upgrading MTH and RYL to Neutral (from Underperform),’ wrote Credit Suisse’s Dan Oppenheim in a note this morning, that then sent the stocks of all the builders on a tear. Not that they haven’t been on a tear since last fall, with the S&P home builder’s index nearly doubling. If that happened even before all this new spring energy in the market, then the obvious question is, how much farther do these stocks have to go?
That will depend entirely on the spring results, which we won’t get until summer. We want to focus on new orders and new home sales, but we also need to pay close attention to the distress in the market, since many foreclosed homes are relatively new construction, left over from the building boom barely six years ago. ‘There will likely be added supply/competition as more foreclosures come to market following the robo-signing agreement, and a significant backlog of 6.6 million delinquent loans/foreclosures still needs to be worked off (though foreclosure pricing seems to have bottomed and there are plenty of investor buyers of foreclosures),’ writes Oppenheim.
He also cites increases in FHA mortgage insurance premiums. FHA is a favorite loan product for first time home buyers, and first time buyers are major clients of the new home builders. And while bargain-basement foreclosures may be hurting the home builders in the short term, the rental boom due to all these foreclosures may actually provide builders with another opportunity. ‘Bowing to the realities of today’s for-sale housing market, a growing cadre of market-rate builders are warming to the concept of houses as an alternative rental product,’ writes Lew Sichelman in National Mortgage News. That’s right, building houses to rent, not sell. Not so crazy, given rising rents and rising demand. If the multi-family developers can do it, why can’t single family builders? As for the stocks of the big guys, are they too hot? Most builders are pricing in order increases of 20% at least, according to CNBC’s Bob Pisani. ‘That seems to be happening, which would leave little room for price run-ups, but remember, this market is very under-owned by a lot of investors, so these stocks could go beyond reasonable valuations very easily,’ says Pisani.”
Obama defends energy policy
President Obama is stepping up defense of his record amid concern higher oil prices may lift gasoline to $5 a gallon in some parts of the country this summer, posing a potential threat to the president’s bid for reelection on November 6. Republicans point out that Obama policies have hobbled the energy industry with red tape and point to the administration’s blockage of TransCanada Corp’s Keystone XL oil pipeline project to back their charge that he is hostage to environmentalists in his political base. Obama visited election battleground states North Carolina and Virginia last week to promote his message and will speak at the White House on Monday with local television stations serving key swing states, including Colorado, Nevada and Pennsylvania.
BOA and MBIA battle over evidence
Bank of America (BOA) is defending itself after insurer MBIA filed a letter with a court asking for sanctions against BOA over alleged delays or failure to produce records compelled in discovery. MBIA, which is suing Countrywide over alleged misrepresentations made about the quality of Countrywide loans that MBIA insured as securities, is requesting documents that could shed light on allegations of fraud within the former subprime lending giant. BOA purchased Countrywide in 2008. In a letter to Judge Eileen Bransten with the New York State Supreme Court, MBIA claims BOA failed to produce documents requested on fraud allegations, delayed the production of requested materials and dumped thousands of documents on MBIA at the last minute, making it difficult for the insurer to conduct an appropriate investigation before depositions in the case.
Bank of America responded with its own letter to the court. The bank said the allegations are baseless and blamed the mass release of documents on a coding error that was disclosed to MBIA. Furthermore, in its letter, BOA claims MBIA refused to wait for the coding error situation to be remedied, which led to the production of documents on a rolling basis. The bank claims MBIA knew the process would take weeks and says BOA devoted significant resources to the document production. MBIA views the recent discovery spat in a different light. “Over the course of the last three weeks, Bank of America has produced nearly 170,000 pages of new, relevant, successor liability documents,” MBIA attorneys wrote. “These productions, which are continuing, have forced postponement of a number of successor liability depositions and compelled MBIA to agree to a brief extension of the successor liability discovery schedule. This is just the latest conduct by BAC to sabotage the discovery schedule and cause MBIA significant prejudices, and is part of an indefensible pattern of delay and discovery abuses by both the BAC and Countrywide defendants.”
MBIA’s request for discovery sanctions also claim Countrywide failed to produce documents related to allegations of fraud on Countrywide home loans. “This includes withholding important categories of documents on specious grounds and then selectively producing certain of such documents that it believes are favorable on the eve of (or during) depositions,” MBIA said in its filing. Bank of America denies the discovery process has prejudiced MBIA and says MBIA’s sanction requests are baseless in a letter to the court.
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Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 150 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
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thousands of investors make money in the
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closed 3,336 sides for a closed sales volume of
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