posted 1/11/09
 

What About Fannie & Freddie?

by Carl Soderberg
of The Inside Scoop

In case you didn't know, Fannie Mae and Freddie Mac, the "government-sponsored enterprises" charged with making home mortgages
more available and thereby increasing home ownership, by buying (& guaranteeing) home mortgage loans from banks & financial
institutions, were in the news early December.

You may have missed it, because it was barely covered in the mainstream press. And, any news which did emerge was drowned out by
the saturation coverage of the scandal surrounding Illinois Governor Blagojevich.

The House Oversight & Government Reform Committee held hearings on Fannie Mae's and Freddie Mac's roles in the home mortgage debacle and the ensuing crisis of the financial system. The hearing was supposed to examine what went wrong, and (presumably) seek reforms needed to prevent a recurrence.

However, like most post-mortem Congressional hearings after a good scandal, this one was all about the blame: everyone blamed everyone else.

The four most recent former chief executives of Fannie & Freddie were called to testify before the Committee. They all blamed the collapse of the home mortgage market & ensuing financial crisis on Wall Street greed: banks & financial institutions bought and sold too many securitized mortgages, without understanding, or caring to understand, how risky such purchases really were.

Harold Raines, the ex-CEO of Fannie Mae, even tried to advance the novel explanation that federal regulators were to blame, for allowing
Fannie & Freddie to buy so many, and so risky, home mortgages ("Stop me before I spend again!")

The Committee members, however, would have none of it. The four former executives were there to take the fall. The one thing that
Democrats and Republicans could agree on was that the four execs were to blame. They took turns pillorying the four for their individual and collective incompetence.


Plenty of Blame to Share
Like an airplane or train crash, several contributing causes all combined together simultaneously to cause the economic crash. Had any
of the multiple causes not occurred, the crisis would have been averted, or significantly shortened and/or lessened.

Poor, short-sighted government policies, starting with Congress' Community Re-Investment Act in 1977, and exacerbated by the both the Clinton and Bush administrations' new "interpretations" of the law, laid the foundation for the crisis. Government policy gradually changed from encouraging banks & financials to loan to people who couldn't afford the repayment, to forcing them to do so. The
Administrations then made Fannie & Freddie take these dud loans off the banks' hands, by requiring Fannie & Freddie buy a progressively higher proportion of its loan re-purchases from these high-risk loans. All without anyone setting aside money to fund the predictably higher level of loan default that would ensue.

(HUD regulators actually set a specific percentage quota for the proportion of loans Fannie & Freddie purchased to come from: middle &
low income people; from people in central cities or "underserved" areas; and from people in very low income neighborhoods. Financial
history, credit score, work habits, job history, etc. were relegated to secondary importance after the borrowers' street address.)

Congress also contributed to the disaster, with its more vocal members demanding the Fannie & Freddie make "affordable housing" a higher priority than its existing mission of maintaining liquidity in the home mortgage market. Internal Fannie & Freddie documents, subpoenaed by the Committee and leaked to the press, show that Fannie & Freddie happily complied. They even ignored warnings from their own employees about the dangers of sub-prime mortgages, in order to maintain their market "leadership", "relevance", "competitiveness", market share, high income level, and to avoid becoming a smaller "niche" player.

At the same time, Wall Street financial institutions contributed by convincing themselves that they understood, and could manage, the
increased risks of default (and financial loss) posed by sup-prime mortgages. They bought huge volumes of sub-prime mortgages bundled together into packages ("securitized") which contained mortgages of every degree of risk, all the while treating them as high-quality, low-risk investments.

But like all economic booms that eventually go bust, the home mortgage boom was a failing of human psychology. In the recent technology stock bubble & burst of the 1990's, stock buyers bought ever-increasing amounts of high-tech stocks that were clearly over-valued (overpriced), ignoring the fact that the tech companies couldn't produce enough profits to ever justify their high prices.

Once the home mortgage market was very profitable, everyone wanted in on the "easy" money being made. Secondary buyers of loans kept buying securities which contained a significant proportion of low-quality sub-prime mortgages, ignoring the fact that the sub-prime component of the securities was by definition at higher risk of defaulting. Buyers simply ignored the fact that many sub-prime homeowners either couldn't afford their monthly payments to begin with, or certainly couldn't afford them when adjustable rates increased after a few years.

Add to that mortgage brokers who wrote mortgages to dubious borrowers, knowing Fan & Fred would repurchase them, and homeowners who accepted loans they couldn't afford, and there is plenty of blame to go around.


When I hear the media report the latest developments in the home mortgage - financial system crisis (Who is bailed out? Who is bought
out? Who is nationalized? Who is next?), I always wonder: What about Fannie & Freddie?? While we get saturation coverage of each new group as they get bailed out, the media never seem to report what Fan & Fred are up to.

Are they still buying & guaranteeing new sub-prime mortgages? If so, for how long will they continue to do so? Have they learned anything from this crisis, or are they waiting for an Administration to write, or Congress to legislate, what new standards they should use?

Everyone seems to agree there is a problem, but have Fannie & Freddie changed their behavior? Have they changed the standards &
requirements a mortgage must meet to qualify for repurchase or guarantee by Fan & Fred?

Do they require proof of ability to re-pay for all the loans they buy yet?

Do loan applicants have to have a reasonable credit score yet?

Is a significant down payment (10%? 15%? 20%?) required yet?

Fannie & Freddie say they are buying only "high quality" mortgages now, for whatever that is worth. Remember, they had to re-state their earnings (downward) in the 2000's after their fraudulent accounting was exposed. And, their definition of "sub-prime" is different than
the definition used by the banking industry. (A definition they refuse to make public.)

So next time you hear the latest development in the financial system crisis, ponder: "What about Fannie and Freddie Mac?"

Soderberg is a veteran campaign worker and volunteer, most recently working on Jo Egelhoff's campaign for State Assembly.