Loan Think

THIS JUST IN: The Bush administration may try to eliminate the mortgage interest deduction. Well,maybe not. But maybe. One thing is for certain: The president wants to rewrite the tax code and a "flat tax"is a possibility. Mortgage lobbyists believe this means the mortgage interest deduction could be in trouble. Whatdefinitely is in trouble is any legislation that would make mortgage insurance payments tax deductible...

The Special Election Column

Countrywide CEO and chairman Angelo Mozilo believes Fannie Mae and Freddie Mac shoulddrop their minimum servicing fee to 12 basis points from the current 25 bps. Why? You'll have to read the Mondayedition of National Mortgage News to find out. In a recent interview with NMN, Mr. Mozilo said ifhe had to do it all over again he'd base Countrywide in Texas, not California. Don't get Mr. Mozilo wrong. TheBronx-born Mr. Mozilo believes California is still great, but he thinks "the political structure of the stateis so anti-business"...

The HELOC market is hot, hot, hot. So is the alternative-A market. Finding good, solid statistics on these nichesis not easy. National Mortgage News has just finished compiling a special midyear report on the top-rankedfirms in the two sectors. To order a copy, contact Deartra Todd at Deartra.Todd@

A criminal referral is a form a regulator files with the Justice Department, signaling the regulator'sbelief that an institution (or a person working at that institution) has done something wrong that warrants a criminalinvestigation. After a criminal referral is filed, the next step is to assign agents from the Federal Bureauof Investigation to, well, investigate. Two weeks ago, The Wall Street Journal and other mediaoutlets reported that the Justice Department had launched a criminal probe of Fannie Mae's accounting practices.When the Journal first ran the story, Fannie spokesman Chuck Greener told the newspaper that he had no knowledgewhatsoever about a DOJ probe. Presumably, if a criminal referral had been filed on Fannie it would've been filedby its regulator, the Office of Federal Housing Enterprise Oversight. Well, guess what? On Wednesday ofthis past week, OFHEO director Armando Falcon Jr. told Rep. Richard Baker's subcommittee that hehad not filed a "formal criminal referral" with DOJ. To me, no referral means no criminal probe -- whichmeans all those media outlets were wrong. We also picked up the Journal's scoop and ran with it. No mediaoutlets, except National Mortgage News, seemed to care that Falcon had said he didn't file a criminalreferral. And even after Mr. Falcon made his comments, plenty of reporters continued to write stories referencinga criminal probe of Fannie Mae. But is there an official criminal investigation or is DOJ making informal inquiries?The difference between an official probe and a mere "inquiry" is huge. DOJ needs to clarify this pointASAP...

When Fannie Mae chairman Franklin Raines testifies before a congressional panel on Wednesday,he will be fighting not just for his company but for his political and business reputation. Washington insiderswho know Mr. Raines say a lot is on the line. Not only was Mr. Raines a star in the Clinton administration(as OMB director he helped balance the budget), but he is/was up for a job in a Kerry administration,should there be one. It's anticipated that members of the House GSE Subcommittee will focus some of theirquestions on the $200 million in expenses deferred by Fannie back in 1998 so the firm could meet earnings-per-sharegoals (almost to the penny) that triggered $5.79 million in bonus money paid to its six top officers. Who got thebonus money? Answer: James Johnson, chairman and CEO ($1.9 million); Mr. Raines, chair/CEO designee ($1.1million); Larry Small, president ($1.1 million); Jamie Gorelick, vice chairman ($779,625); TimothyHoward, CFO ($493,750); and Rob Levin, EVP ($493,750). Mr. Johnson is a key advisor to Sen. John Kerry,D-Mass., and like Mr. Raines is supposedly up for a job in a would-be Kerry White House. Ms. Gorelick, who likeMr. Johnson, is no longer with the company, also has been mentioned as a possible Kerry appointee. Mr. Small, onthe other hand, is now the head of the Smithsonian. His management of that institution has been somewhatcontroversial. Earlier this year he copped a plea to being in possession of rare bird feathers...

Here's a paragraph from OFHEO's scathing report on Fannie Mae's accounting practices that shouldbe memorized by the GSE's attorneys (as well as the attorneys for the GSE's board): "OFHEO believes that themethods selected and infrastructure developed to support the estimation of prospective unrecognized income or expense,were in fact designed to facilitate a proactive management of earnings that extended well beyond the flexibilitymerely afforded by the Enterprise's accounting for the current quarter's catch-up." In a nutshell, OFHEO believesthat Fannie's management manipulated earnings. Why would Fannie's executives do this? According to OFHEO, thiswas done in one instance (1998) so the company's senior managers could earn $23 million in bonus money. ($200 millionin expenses were deferred that year so bonus earnings triggers could be met.) Observers following the scandal saythe key issue OFHEO must prove is that management knowingly manipulated accounting rules in order to gain somethingof value -- in this case, cash (the bonuses). If management did this, said one Fannie Mae seller/servicer, thenthat constitutes a crime. Then again, Fannie's supporters argue that the accounting issues are so complex, convolutedand open to interpretation, that Fannie did not do anything (legally) wrong. What's next for Fannie? For OFHEO?As we went to press this weekend one thing was clear: OFHEO wants heads to roll at the company and has told theboard as much. Not only has the board hired its own attorney but sources say individual directors are scoutingfor counsel as well. There is one other point to keep in mind. When was the last time a regulator levied allegationsthis serious and didn't win? One other point: If Fannie has to restate earnings downwards (as some have speculated),does it have enough regulatory capital on hand? Stay tuned...

This just in: Morgan Stanley's Ken Posner, one of the most respected analysts in the business, has takenhis ratings on the mortgage finance industry down a notch. On Friday he lowered the sector to "in-line"from "attractive." Mr. Posner now believes the stellar growth in home values is "unsustainable,"forecasting appreciation of just 2% next year. He labeled Fannie Mae, Freddie Mac and ARM giant GoldenWest "safer" stocks in the group and gave "underweight" ratings to MGIC and PMI...

Is it a load of nonsense that the residential lending sector is consolidating rapidly and that only a handfulof firms control the production market? According to the new Home Mortgage Disclosure Act database, 8,070firms filed detailed production information with the Federal Reserve in 2003. The year before 7,771 lendersfiled with the Fed. So does that mean the industry is growing? Yes and no. It also could mean that going forwardresidential finance will be an industry of "whales" and "minnows." For more information aboutthe HMDA database see the "Mortgage Data/Research Notice" at the end of this column...

Goldman Sachs & Co. has yet to say boo about its subprime/nonconforming conduit. Its PR people havecontinually maintained a "no comment" stance about its plans. (Keep in mind there are two types of PRpeople in the world: those whose job it is to tell you stuff, and those who job it is to not tell you stuff. Goldman,like most of Wall Street, employs the latter.) Of course Goldman probably also doesn't want it known that it'sbeen looking at the subprime servicing platform of PCFS Financial Services . For details see Monday's NationalMortgage News . If you don't subscribe to NMN , call (800) 221-1809...