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Refinancing is a key way for homeowners to improve their bottom lines. But did Freddie Mac prevent borrowers from pursuing refis so it could make more money?
Yesterday's NPR/ProPublica story about Freddie Mac's refusal to refinance mortgages so that it can make more money on some high-risk parts of its investment portfolio has divided the blogosphere. As I noted yesterday, Matt Levine at Dealbreaker thinks that Freddie was absorbing a refinancing risk that it would find difficult to pass on to investors. Felix Salmon at Reuters disagrees and disagrees profoundly, basically saying that we should call a duck a duck and conclude the Freddie was putting its own returns above the needs of homeowners.
Arnold Kling thinks not, dismissing the idea that Freddie was engaged in pure speculation:
The authors describe this as only being bad. It is bad for homeowners because it reduces Freddie's incentive to refinance loans. It is bad for Freddie Mac because it means taking on more risk from these instruments.
There is another possibility. In its normal course of business, Freddie Mac buys mortgages and issues debt, giving it a duration mismatch. These inverse floaters seem to have negative duration, which helps to offset that mismatch.
The article does not discuss the duration issue at all. Instead, it acts as if inverse floaters were a pure speculative play by Freddie Mac, which I think is unlikely to be the motivation.
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Pep Boys has been purchased by The Gores Group, a private-equity firm in Los Angeles.
Manny, Moe & Jack are going private: Aftermarket auto parts chain Pep Boys is selling itself to Los Angeles investment firm Gores Group for $791 million in cash.
Expansion-minded Pep Boys executives say the total enterprise value of the deal is about $1 billion. The $15-per-share price reflects a 24% premium on Pep Boys’ Friday closing price of $12.08.
Philadelphia-based Pep Boys, which has benefitted from a trend of drivers holding on to their existing cars rather than buying new ones, watched its stock jump 23% to nearly $15 during midday trading Monday.
This is both interesting and worrying. First the interesting. The Gores Group has been around since 1987 and has made, as may private-equity firms have, many millions if not billions of dollars between now and then. The firm closed a third fund early last year, amounting to $2 billion. Now it's buying Pep Boys, all in cash (debt brings the value of the deal up to $1 billion). As the Wall Street Journal points out, the purchase price amounts to $15 per share, but it's been more than two years since Pep Boys closed at that level.
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The bleachers stand empty at Dodger Stadium in Los Angeles, California.
Just a quick update on the sale of the Los Angeles Dodgers. The bids were submitted last week and already a few potential buyers have dropped out. Most prominent among these is Dallas Mavericks owner Mark Cuban, who tried to buy both the Chicago Cubs and the Texas Rangers when they available were (he failed in both cases).
Magic Johnson, the Lakers superstar and successful regional businessman, is still in the running, however. As are two of the big money guys who've been discussed as prospective owners: East Coast hedge-fund king Steven Cohen; and LA-based private-equity duke Tom Barrack.
Additionally, St. Louis Ram's owners Stan Kroenke — a player whom I hadn't written about — made the cut, which was managed by Dodgers owners Frank McCourt in concert with the investment back that's advising him on the sale, Blackstone Advisory Partners. Given that the Rams could be the new LA NFL franchise, depending on how things go with the AEG Downtown stadium project (the project is still in search of a team, and it seems to be down to the Rams and Raiders), I'm not sure how Kroenke could own two sports teams in town. But that's for the NFL and Major League Baseball to sort out.
Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.
At Forbes, Peter Cohan isn't exactly thrilled by Facebook's impending IPO. Which, it should be added, is no longer being talked about aa a $100 billion public offering so much as a $75-$100 billion public offering, with the emphasis on that lower number. Anyway, here's Cohan:
It is popular in the media to compare the Facebook IPO to that of Google whose price has risen nicely since its 2004 IPO from $84 to $580. That 30% compound annual growth is good – but Google trades 19% below its 2007 peak of $715.
To be fair, there is a bit of good news for those hoping that Facebook stock will climb after it goes public. A quick look at Google’s 2004 prospectus reveals that its IPO price of $84 valued Google at a P/E of 80 – the same as Facebook’s estimated P/E (Google had 271 million shares and estimated 2004 net income of $286 million at the time of its August 2004 IPO).
That’s the only glimmer of good news for why Facebook’s IPO might breathe some life into the business of VCs and tech entrepreneurs. But Facebook’s inability to transform the way companies operate their business means that it will remain a niche phenomenon in the grander economic scheme.
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A recent ProPublica/NPR report on Freddie May refusing to refinance mortgages for struggling homeowners shows that the market is still coming to terms with new ways of measuring risk.
This morning, NPR and ProPublica fired a broadside at the government side of the embattled mortgage market, with a report on how Freddie Mac is refusing to refinance loans, reportedly because Freddie has developed a financial derivative that would suffer if interest rates on loans were lowered. Here's a sampling, and please note that there's something called an "inverse floater" at the core of the alleged problem. The Silversteins are a couple who have been unable to refinance their mortgage after doing a short sale on another property:
Here's how Freddie Mac’s trades profit from the Silversteins staying in “financial jail.” The couple’s mortgage is sitting in a big pile of other mortgages, most of which are also guaranteed by Freddie and have high interest rates. Those mortgages underpin securities that get divided into two basic categories.
One portion is backed mainly by principal, pays a low return, and was sold to investors who wanted a safe place to park their money. The other part, the inverse floater, is backed mainly by the interest payments on the mortgages, such as the high rate that the Silversteins pay. So this portion of the security can pay a much higher return, and this is what Freddie retained.
In 2010 and '11, Freddie purchased $3.4 billion worth of inverse floater portions — their value based mostly on interest payments on $19.5 billion in mortgage-backed securities, according to prospectuses for the deals. They covered tens of thousands of homeowners. Most of the mortgages backing these transactions have high rates of about 6.5 percent to 7 percent, according to the deal documents.
Between late 2010 and early 2011, Freddie Mac’s purchases of inverse floater securities rose dramatically. Freddie purchased inverse floater portions of 29 deals in 2010 and 2011, with 26 bought between October 2010 and April 2011. That compares with seven for all of 2009 and five in 2008.
In these transactions, Freddie has sold off most of the principal, but it hasn’t reduced its risk.
First, if borrowers default, Freddie pays the entire value of the mortgages underpinning the securities, because it insures the loans.
It’s also a big problem if people like the Silversteins refinance their mortgages. That’s because a refi is a new loan; the borrower pays off the first loan early, stopping the interest payments. Since the security Freddie owns is backed mainly by those interest payments, Freddie loses.