Thread: The Mother Of All Financial Scandals, The Fannie Mae and Freddie Mac racket

IndyMac depositors line up for cash after seizure
By Gina Keating
2 hours, 46 minutes ago

PASADENA, California (Reuters) - Hundreds of worried IndyMac Bancorp Inc customers descended on the company's branches on Monday to withdraw their money, after regulators seized what was once one of the largest mortgage lenders in the United States.

Regulators took over the Pasadena-based lender on Friday after a bank run in which customers -- panicked over IndyMac's survival prospects -- withdrew $1.3 billion over 11 business days, regulators said.

At a branch at IndyMac's headquarters, customers began arriving at 4 a.m., five hours before the doors opened. The Federal Deposit Insurance Corp now operates the thrift's 33 Southern California branches. "I didn't think anything like this would happen," said retired teacher Charles Tengeri from Pasadena, who was first to emerge from the branch after withdrawing $171,000 -- about two-thirds of his life savings. "I withdrew as much as I could. I know it's going to take a little time."

The FDIC said the renamed IndyMac Federal Bank will cover insured deposits, mostly up to $100,000, and initially cover 50 percent of uninsured deposits. "I have $360,000 in this bank, and I was misled by this bank," said Robert Clark, a Glendale resident. "I gave the names of my mother, my sister and my brother on the account so I thought I would be insured. I don't know what to do. I really don't know what to do."

John Bovenzi, an FDIC official working as IndyMac Federal's chief executive, talked with customers as they waited for the doors to open, assuring one that "this bank is as safe and as sound as any bank in the country right now."

The FDIC is hoping to sell IndyMac within 90 days. Among IndyMac's assets are a rapidly deteriorating mortgage loan book, the 33 branches, and the Financial Freedom unit that makes "reverse" mortgages for older Americans.

SALE PROSPECTS

"I'd like to see if we can sell the institution as a whole to one healthy bank," Bovenzi said in an interview. "Companies like Financial Freedom have a great deal of value, so there will be a market for those assets."

The FDIC did not ask Michael Perry, who had been IndyMac's chief executive, to have a role in operations following the takeover, Bovenzi added.

IndyMac is the fifth U.S. banking company to fail this year, and the largest since the 1980s savings-and-loan crisis.

It ended March with about $19 billion of deposits, of which roughly $18 billion were insured, and $32 billion of assets, regulators said.

Jitesh Patel, a doctor from Burbank, said he took a day off from work to withdraw his money from IndyMac. "We have money we are afraid we are going to lose," he said. "I wish we were a little more savvy."

Bovenzi said he expects more banks to fail in the current credit downturn. "I don't expect there will be large bank failures," he said. "There will be small bank failures."

Gerard Cassidy, an analyst at RBC Capital Markets, on Sunday said 300 U.S. banks might fail over the next three years because of credit losses and tight capital markets.

Regulators expect the IndyMac takeover to cost the FDIC $4 billion to $8 billion. The agency's insurance fund has about $52.8 billion.

Tengeri, the retired teacher, said he was originally attracted to IndyMac because of the high interest rates it offered on deposits.

Asked if the thrift's collapse would disturb his retirement, the 70-year-old said: "Very much."


http://news.yahoo.com/s/nm/20080714/...QqT5TxO4Ws0NUE

Fannie-Freddie lifeline puts taxpayers on the hook
By MARTIN CRUTSINGER and ALAN ZIBEL, AP Business Writers
Mon Jul 14, 7:17 PM ET

WASHINGTON - Now that the federal government has thrown a lifeline to mortgage giants Fannie Mae and Freddie Mac, taxpayers could be on the hook for billions more if the crisis of confidence spreads.

There were encouraging signs Monday for the rescue plan, but also signs of concern — notably on Wall Street, where shares of the two companies slumped further — that the plan won't be enough.

Other banks are already teetering: National City Corp. shares fell nearly 15 percent on rumors of financial trouble, even though it said it was experiencing no unusual depositor or creditor activity. And Washington Mutual Inc.'s shares fell 35 percent, to a paltry $3.23 amid worries about whether it had enough cash to handle the mortgage market downturn. WaMu said that it did.

And worried customers lined up Monday to pull cash out of their accounts at IndyMac Bank, seized on Friday by the federal government.

Some critics said they fear the Fannie-Freddie rescue effort will make more bailouts inevitable by sending a message that some institutions are too big to fail and thus encouraging risky behavior. "It sends the wrong message to the world," said Joshua Rosner, managing director of research firm Graham, Fisher & Co. in New York.

Sung Won Sohn, an economics professor at The Smith School of Business at Cal State Channel Islands, cited soaring oil costs, a weakening economy and an unstable housing market that he said will only get worse. "I don't think these steps are enough to arrest the deterioration," he said.

As long as more homeowners default on mortgages, losses to financial institutions will mount. Those losses already exceed $400 billion, and some analysts believe they will top $1 trillion before the housing carnage is over.

By comparison, Congress has authorized $650 billion so far to fight the Iraq war.

[color=red]The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages — almost half of the nation's total.[/b]

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.

The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed — a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

House Financial Services Chairman Barney Frank, D-Mass., predicted Congress would grant approval for the extended line of credit as part of a broader housing measure that he believes President Bush could sign by the end of next week.

In a letter to Fed Chairman Ben Bernanke and Timothy Geithner, the president of the Fed's New York regional bank, Treasury Secretary Henry Paulson said Monday that he saw any Fed loans as an interim step designed to serve as a bridge to legislation. He added the administration is pursuing legislation "urgently" with Congress to increase Treasury's lending authority to the two institutions.

Monday began with a good sign for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions which raised $3 billion in short-term securities.

Fannie and Freddie stock rose early in the day but gave up the gains. Fannie closed down about 5 percent, at $9.73, and Freddie closed down about 8 percent, at $7.11.

Meanwhile, hundreds of worried customers lined up Monday to pull their money out of IndyMac bank, seized by the government Friday in the second biggest bank failure in U.S. history.

The Federal Deposit Insurance Corp. estimated the IndyMac failure, the largest since the collapse of Continental Illinois in 1984, would cost between $4 billion and $8 billion out of the agency's $53 billion insurance fund.

Analysts do not expect the volume of bank failures that happened from 1990 to 1992, when 834 of them folded. But the FDIC does plan to review whether to raise the fees it charges banks to beef up its insurance fund.

Brian Bethune, chief U.S. financial economist at Global Insight, called the troubles at Fannie and Freddie a "potentially dangerous turn of events" for the U.S. economy.

He said they needed to be addressed quickly with an infusion from the government — read "taxpayers" — of as much as $20 billion in new capital for both institutions.

Right now, the Treasury can extend up to $2.25 billion in loans each to Fannie and Freddie. Officials refused to discuss what the new limit might be but dismissed one report of a $300 billion limit as too high.

Treasury officials also said directly buying Fannie and Freddie stock would be a last resort.

Substantial sums are involved in any event. Analysts say the economic risks of doing nothing are just too great. "If the government hadn't moved and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous," said Mark Zandi, chief economist at Moody's Economy.com.

In Fannie and Freddie were unable to play their huge roles in financing new mortgages, the housing market would only suffer more, he said — not to mention the turmoil for the financial institutions around the world that invest in Fannie and Freddie's debt securities.

Critics have warned for years that Fannie and Freddie had grown too large, with not enough of a financial cushion. "They have been allowed to grow out of control to the point where they must be backed by the U.S. government," said Peter Wallison, a senior fellow at the American Enterprise Institute and a longtime critic. "We have just ... allowed ourselves to become hostage to these two institutions."

Fannie and Freddie's financial reports remain difficult to understand, even after accounting scandals that came to light five years ago forced the companies to restate several years of earnings and oust top executives.

Wall Street analysts were spooked in May when one measurement of Freddie Mac's total assets fell to negative $5.2 billion at the end of the first quarter, a huge swing from positive $12.6 billion at the end of last year.

The company downplayed the figure, saying it reflected a frozen market for mortgage investments, and said those assets would eventually rebound in value.

The next few weeks — in which Fannie and Freddie post their second-quarter results and may attempt to raise a bigger capital cushion — are key, Zandi said. He said in the best possible outcome is if the rescue plan helps the two companies stabilize their finances on their own without any loss of government loans. "At the end of the day, with a little bit of luck, it won't cost taxpayers a dime," Zandi said.

http://news.yahoo.com/s/ap/20080714/...eIXXPZusms0NUE

"At the end of the day, with a little bit of luck, it won't cost taxpayers a dime," said Mark Zandi, chief economist at Moody's Economy.com.

WOW - doesn't that make you feel all safe and cozy now ?

Bush: Troubled financial system is basically sound
By TERENCE HUNT, AP White House Correspondent
45 minutes ago

President Bush said Tuesday the nation's troubled financial system is "basically sound" and urged lawmakers to quickly enact legislation to prop up mortgage giants Fannie Mae and Freddie Mac.

He also called on the Democratic-run Congress to follow his example and lift a ban on offshore drilling to help increase domestic oil production.

"I readily concede it won't produce a barrel of oil tomorrow, but it will reverse the psychology," Bush told a White House news conference — his first since late April.

Bush said the two troubled mortgage companies play a central role in the nation's housing-finance system and that government action to help them were not bailouts because the two would remain shareholder-owned companies.

"I don't think the government ought to be involved in bailing out companies," Bush said.

Amid soaring gas prices, the toughest real estate market in decades, falling home prices and financing that's harder to come by, Bush said: "It's been a difficult time for many American families." But he also said that the nation's economy continues to grow, if slowly.

Bush said that despite the woes of Fannie Mae and Freddie Mac and the recent government takeover of California bank IndyMac, U.S. depositors should not worry because their deposits are insured by the government up to $100,000

"If you're a depositor, you're protected by the federal government," Bush said.

The administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages — almost half of the nation's total.

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.

The Fed also announced that it would allow Fannie and Freddie to get loans directly from the Fed — a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

At the same time, a housing package was heading toward final congressional passage. It would modernize the Federal Housing Administration and create a new regulator and tighter controls for Fannie Mae and Freddie Mac.

It's this legislation that Bush urged Congress to pass as soon as possible.

Congress could move as early as this week on the housing legislation to send it to Bush. First, though, House and Senate leaders must strike a deal in consultation with Treasury Secretary Henry Paulson to resolve key differences so Bush, who has threatened to veto the measure, will sign it.

"I think the system is basically sound, I truly do," Bush said. "I understand there's a lot of nervousness. The economy is growing. Productivity is high. Trade's up. People are working — it's not as good as we'd like. And to the extent that we'll find weakness, we'll move."

Bush defended his insistence that the U.S. economy was not in a recession, even though many economists believe it is.

He said the traditional definition of a recession — two quarters in a row of negative growth — had not been met.

"I'm not an economist, but I do believe we're growing," he said. "I'm an optimist. I believe there's a lot of positive things for the economy."

He acknowledged, however, that "it's not growing as it should."

On Capitol Hill, Fed Chairman Ben Bernanke warned that inflation seemed likely to move even higher and economic growth would be "appreciably below its trend rate,"

"In general, healthy economic growth depends on well-functioning financial markets," Bernanke said. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority," he said.

Bush acknowledged it could take years before opening the Continental Shelf to oil drilling would result in increased U.S. production. But, he said, at least it would put the nation on the right track toward reducing its reliance on imported oil.

"There is no short term solution," Bush said. "The president doesn't have a magic wand. You can't just say, 'Low gas.' "

Asked about his comment earlier this year that he hadn't heard of $4 gasoline, Bush said: "I've heard of it now."

Asked why he hasn't appealed more to Americans to conserve energy, Bush said: "They're smart enough to figure out whether they're going to drive less or not ... The marketplace works."

"If they're not in their homes, they ought not to keep the air conditioning running. There's a lot they can do," he added.

Bush's first full-blown exchange with reporters at the White House since April 29 came amid troubling developments in Afghanistan, where U.S. deaths have exceeded casualties in Iraq over the last two months. There also is turmoil in the financial markets, and the government has been forced to throw a lifeline to mortgage giants Fannie Mae and Freddie Mac.

Bush opened with a statement about steps to help stabilize the housing and financial markets and his lifting of the executive ban on offshore oil drilling. He also called on lawmakers to pass long-stalled spending bills.

On other subjects, Bush:

• Said the wars in Iraq and Afghanistan are both important fronts on the war on terrorism. Currently, events in Iraq are going better, and some troops are coming home "based upon success," he said. "The question really facing the country is, will we have the patience and determination to succeed in these very difficult theaters."

• Declined to comment on whether he felt betrayed by a highly critical book about his administration by former press secretary Scott McClellan.

• Expressed unhappiness with the casting of vetoes by Russia and China in the U.N. Security Council to block U.S.-sponsored sanctions on the government of President Robert Mugabe of Zimbabwe, who was has retained power in an election that the United States and many other countries have labeled a sham. "I was displeased," Bush acknowledged.

http://news.yahoo.com/s/ap/20080715/...YH.mjuMz2s0NUE

Mortgage giant rescue could cost $25b
By JULIE HIRSCHFELD DAVIS, Associated Press Writer
1 hour, 30 minutes ago

WASHINGTON - A federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion, Congress' top budget analyst said Tuesday.

But Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers that there's a better than even chance the government will not have to step in to prop up the companies by lending them money or buying stock.

Congress is expected to vote this week on a housing measure that would give the Treasury Department authority to throw Fannie and Freddie a temporary lifeline.

Treasury Secretary Henry M. Paulson, who has been pressing for the power, says it's intended as a backup plan to help calm investors and stabilize financial markets.

Orszag said it's most likely that the companies will remain afloat and the government won't have to put up any money, but there's a very small possibility that Treasury will have to step in to help cover losses at Fannie and Freddie topping $100 billion. The $25 billion estimate reflects his office's best guess of how big a federal infusion would be needed.

With financial markets now assuming the measure will be approved, Orszag suggested the cost of inaction could be steep, too.

"It is arguable that if it were not enacted at this point, that the consequences could be quite severe," he told reporters.

Paulson said in a New York speech Tuesday that Congress needs to quickly approve a support package for Fannie Mae and Freddie Mac — which guarantee or own almost half of the home mortgages in the country — to make sure they maintain their critically important role in housing finance. He said their continued operations were "central to the speed with which we emerge from this housing correction."

Treasury officials confirmed that bank examiners from both the Federal Reserve and the Office of the Comptroller are currently inspecting the books at both Fannie Mae and Freddie Mac. Paulson said in an interview published Tuesday in the New York Times that he believed the results of those examinations would provide an important signal of confidence for the markets.

After a period of market turbulence in which fears grew about the fiscal soundness of both institutions, the administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and also to purchase stock in the two companies if needed. Paulson has stressed that the proposal is a backup effort that would be in effect for 18 months.

Critics have charged that the open-ended offer of support exposes taxpayers to billions of dollars of losses.

Sen. Jim Bunning, R-Ky., told reporters Tuesday that Paulson is trying to "ram down" his proposal to shore up Fannie Mae and Freddie Mac, which Bunning said "smacks of socialism."

Rep. Jeb Hensarling, R-Texas, head of the conservative Republican Study Committee, said if Congress is "forced to bail out" the two companies, they should be privatized.

"If Congress is forced to bailout Fannie and Freddie, I believe that we must take all the necessary steps to protect taxpayers from" a potential collapse of the companies in the future, he said in a statement.

Paulson said that Fannie and Freddie have issued $5 trillion in debt and mortgage backed securities. Of that amount more than $3 trillion is held by U.S. financial institutions and more than $1.5 trillion is held by foreign institutions, making the stabilization of the two companies essential to the global economy.

"Because of their size and scope, Fannie and Freddie's stability is critical to financial market stability," Paulson told an audience at the New York Public Library. "Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly and to the U.S. economy."

During a question and answer period, Paulson said that housing was at the "heart of our nation's economy." He added that a key to turning the housing market around was bringing home buyers back into the market, an area where he said Fannie and Freddie needed to play a critical role to provide mortgage financing.

The effort to provide support to the two mortgage giants follows the government's involvement in dealing with the near-collapse of Bear Stearns in March when the Federal Reserve provided a $30 billion loan to facilitate the sale of Bear Stearns to JPMorgan.

__

AP reporters Candice Choi in New York and Jeannine Aversa in Washington contributed to this report.

http://news.yahoo.com/s/ap/20080722/...jVryy.BgCs0NUE

House OKs rescue for homeowners, Freddie, Fannie
By JULIE HIRSCHFELD DAVIS, Associated Press Writer
31 minutes ago

WASHINGTON - Rescue legislation sailed through the House on Wednesday aimed at helping 400,000 strapped homeowners avoid foreclosure and preventing the collapse of troubled mortgage companies Fannie Mae and Freddie Mac.

The 272-152 vote reflected a congressional push to send election-year help to struggling borrowers and to reassure jittery financial markets about the health of two pillars of the mortgage market.

Hours before the vote, President Bush dropped his opposition to the measure, which now is on track to pass the Senate and become law within days.

The White House swallowed its distaste for $3.9 billion in grants for devastated neighborhoods. In return, the administration got both the power to throw Fannie Mae and Freddie Mac a lifeline and the legislation Republicans long have advocated to rein in the government-sponsored mortgage companies.

Treasury Secretary Henry M. Paulson and lawmakers in both parties negotiated the final deal. It accomplishes several Democratic priorities, including aid for homeowners, a permanent affordable housing fund financed by the two mortgage companies and the money for hard-hit neighborhoods. The grants are for buying and fixing up foreclosed properties.

"It is the product of a very significant set of compromises," said Rep. Barney Frank, chairman of the House Financial Services Committee. "We are dealing with the consequences of bad decisions and inaction and malfeasance from years before," said Frank, D-Mass.

Paulson said he would push for enactment of the bill by week's end. Despite disappointment with some items rejected, he said "portions of this bill are orders of magnitude more important to turning the corner on the housing correction and supporting our markets and our economy."

Bush had argued the neighborhood grants would benefit bankers and lenders. But the White House said a showdown with Congress over the proposal would be ill-timed.

It was a striking split for Bush and many congressional Republicans. GOP leaders said they would not be stampeded into supporting a bill they called a bailout for irresponsible homeowners and unscrupulous lenders, even as they acknowledged it was probably necessary.

"It's a bill that I wish I could support. It's a bill that the market clearly needs ... but this is not a bill that I can support," said Rep. John A. Boehner, R-Ohio, the minority leader.

One outside observer questioned how much good the legislation would do for consumers.

"This isn't going to be the catalyst for a better housing market," said Mark Zandi, chief economist at Moody's Economy.com. "It may staunch some of the downturn, but it's going to have a very modest positive impact."

Only 45 Republicans — most from districts ravaged by the housing crisis and some facing tough re-election fights — voted for it.

Liz Glenn, a community planning official in Baltimore County, Md., said the grants "would enable us to acquire and rehab more homes and offer them at an affordable price."

The Treasury Department would gain power to extend the government-sponsored mortgage companies an unlimited line of credit and to buy an unspecified amount of their stock, if necessary. The two companies, chartered by Congress, back or own $5 trillion in mortgages — nearly half the nation's total.

Sen. Richard C. Shelby of Alabama, the top Republican on the Senate Banking, Housing and Urban Affairs Committee, said Bush's turnabout reflected political reality.

"They looked at the Hill, they counted some votes and they see there's pretty broad support for this," said Shelby, his party's lead negotiator.

He and Sen. Christopher J. Dodd, the committee chairman, said they would push for swift approval of the measure without any changes.

"We'll be anxious to move this product along," said Dodd, D-Conn.

But conservatives led by Sen. Jim DeMint, R-S.C., were threatening to slow the measure unless Democrats allowed a vote on barring Fannie Mae and Freddie Mac from lobbying and making campaign contributions. Senators' objections could delay enactment of the measure until next week.

Congressional analysts estimate that a government rescue of the mortgage giants could cost $25 billion, but they predict there is a better than even chance it will not be needed.

The bill would let the Federal Housing Administration back $300 billion in new loans so an estimated 400,000 homeowners who cannot afford their house payments could try to escape foreclosure by refinancing into safer, more affordable mortgages. Lenders would have to agree to take a substantial loss on the existing loans, and in return, they would walk away with at least some payoff and avoid the often-costly foreclosure process.

"The industry really has to step up and use it," said Bruce Dorpalen, director of housing counseling for Acorn Housing Corp., a nonprofit housing group based in Philadelphia.

The plan also creates a new regulator with tighter controls for Fannie Mae and Freddie Mac and modernizes the agency. It includes about $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time buyers, and increases the statutory limit on the national debt by $800 billion, to $10.6 trillion.

Lawmakers abandoned efforts to place conditions on any Fannie and Freddie rescue, but the bill hands the new regulator approval power over the pay packages of executives at the companies.

http://news.yahoo.com/s/ap/20080724/...kwqj3Mvxqs0NUE

Housing bill won't solve market's problems
By ALAN ZIBEL, AP Business Writer
Thu Jul 24, 2:03 AM ET

WASHINGTON - Cash-strapped homebuyers and borrowers facing foreclosure will get some relief from a housing bill passed by the House on Wednesday but the bill won't solve the deep-rooted ills of the U.S. housing market.

The bill was widely praised by real estate industry groups but doubts remain about how much real-world impact it will have for consumers. "This isn't going to be the catalyst for a better housing market," said Mark Zandi, chief economist at Moody's Economy.com. "It may staunch some of the downturn, but it's going to have a very modest positive impact."

The vote on the bill came after months of negotiations between House and Senate lawmakers and the Treasury Department. President Bush initially opposed it but now could sign as early as this week.

The highlights include: $300 billion to provide more affordable mortgages to troubled homeowners, nearly $4 billion in grants to help communities fix up foreclosed properties and a $7,500 tax credit for first-time homebuyers.

Andrew Lenz, a 27-year-old first-time buyer in Minneapolis, said the tax credit won't affect his decision to make an offer soon on a foreclosed townhome, but added, "Every little bit helps."

And plenty of first-time buyers won't get help.

The tax break only applies for homeowners who purchase between April 9, 2008 and July 1, 2009. The full amount of the credit also is only available for individuals with incomes under $75,000 or couples earning less than $150,000.

Moreover, it will have to be paid back, interest-free, over 15 years.

In Baltimore County, Md., where foreclosure filings between January and March were running at nearly four times last year's levels, Liz Glenn was grateful to see the provision in the bill for $3.9 billion in grants to help local governments buy and fix up empty homes.

The money "would enable us to acquire and rehab more homes and offer them at an affordable price," said Glenn, a community planning official.

The county, which surrounds Baltimore's city limits, currently works with nonprofit developers to fix and sell up about 20 homes a year — nowhere near enough. Maryland estimates it could receive about $30 million in funding as part of the bill, said Carol Gilbert, a state housing official.

Homeowners, who are spending more than 31 percent of their income on their house payment, may qualify for a new, more-affordable loan backed by the Federal Housing Administration under the bill.

Lenders, however, would have to agree to take a loss on the existing loans, and would walk away with at least some payoff and avoid the costly foreclosure process. Lender participation is also voluntary.

"The industry really has to step up and use it," said Bruce Dorpalen, director of housing counseling for Acorn Housing Corp.

In addition, homebuyers who purchase a property with an FHA loan will no longer be able to receive financial assistance from the sellers. The bill closes a loophole that let sellers channel money to buyers through charities.

While critics say defaults from these no-money down loans are rising to such an extent that they threaten to put taxpayers on the hook, supporters say many borrowers with good credit but without enough money saved up for a down payment will be locked out of the market.

"That's going to cause a lot of people not to be able to buy a house," said Mike Davis, a Realtor in West Des Moines, Iowa. "That's really going to hurt."

In a move to shore up mortgage finance companies Fannie Mae and Freddie Mac, the bill allows the government to buy stock in them and extends a line of credit to the companies.

Over the past week, investor fears about the health of Fannie and Freddie, which buy or guarantee about half of the nation's mortgage loans, have rippled through the market, causing a sharp rise in mortgage rates since late last week. Rising rates mean more trouble for the housing market as fewer borrowers are able to afford the higher monthly payments.

Average rates on 30-year fixed rate loans under $417,000 have soared to more than 6.8 percent — the highest rates in a year, according to data publisher HSH Associates.

Besides worries about Fannie and Freddie's future, rising rates reflect an effort by banks recapture money lost on mortgages made in 2005 and 2006.

Keith Gumbinger, a senior vice president with HSH Associates, said, "You have to offset those losses some way or another."

http://news.yahoo.com/s/ap/20080724/...MqUAQ.TuOs0NUE

The bill was widely praised by real estate industry groups but doubts remain about how much real-world impact it will have for consumers.

Because it is not ablout helping the "people" but designed to help the real estate, banking, and lending institutions which caused the problem by ripping off the consumers in the first place.

John, Jane Doe pick up tab for Fannie and Freddie
THE X FACTOR: Don Stammer
July 30, 2008

THE US monetary authorities recently announced support packages for two giant mortgage lenders experiencing financial stress -- Fannie Mae and Freddie Mac.

The announcement is unambiguously good for Australian investors but a longer-term worry for Americans, especially US taxpayers.

Fannie Mae and Freddie Mac are government-sponsored enterprises that between them finance or guarantee over $US5 trillion ($5.1 trillion) of housing mortgages in the US. Fannie Mae was created as a government agency in the 1930s Depression and privatised in 1968, though retaining a cosy relationship with the US Government. Freddie Mac was set up in 1970, also as a government-sponsored enterprise, to provide competition.

Fannie Mae takes its name from the initials of the Federal National Mortgage Association. Freddie Mac is the (somewhat contrived) acronym for the Federal Home Loan Mortgage Corp.

Fannie and Freddie do not lend directly for housing, but they finance the mortgage loans of home lenders using funds borrowed on professional markets by issuing debt or on-selling packages of mortgages. They also guarantee the payment of interest and repayment of principal on housing loans.

Over the years, Fannie and Freddie have borrowed huge amounts of money from US investors but also from lenders in other countries, including many central banks.

Despite the capital bases of the two companies being rather skinny -- at the end of last year, borrowings were an awesome 65 times their capital bases -- Fannie Mae and Freddie Mac have been able to borrow at interest rates not much higher than those on US government bonds.

That's because their debt has been seen as carrying the implicit backing of the US Government -- the Government has not confirmed such commitment and, indeed, prospectuses have warned that their borrowings are not government guaranteed.

The global credit crisis, which has been running now for almost a year, has taken its toll on Fannie Mae and Freddie Mac.

The demands on them to refinance existing mortgages of banks and other lenders have increased.

They have had to write down the value of assets. And their share prices have plunged by about 80 per cent over the 12 months to mid-July, creating the risk they will be unable to absorb further losses and asset write-downs -- with devastating effects on the already strained housing market.

To head off these problems, the Bush administration has proposed government lending to, and investment in, Fannie Mae and Freddie Mac, and the Fed has announced that they will have access to central bank lending on terms similar to those available to banks. (And, as the Fed accepts the debt of government-sponsored enterprises as collateral when it lends, the two mortgage lenders might even come to the discount window offering each other's paper as security for their loans.)

In normal circumstances, the US Treasury and the Fed would not have contemplated providing this generous support to mortgage lenders.

But these are not normal times. The scale of mortgage debt held or guaranteed by Fannie Mae and Freddie Mac, the long-held view that these institutions carried an implicit guarantee from the Government, and the continuing pain in US housing (illustrated in my chart) make them "too big to fail".

The announcement by the US monetary authorities seems to have achieved its short-term aims.

Even though a rating agency (belatedly) has downgraded their credit rankings, Fannie and Freddie appear comfortable in refinancing their maturing debts and maintaining the guarantees they've provided, and their share prices have stabilised. For investors around the world, including Australians, these interventions by the US monetary authorities are good news.

The broader strains in global credit markets, which had intensified over early July, have eased.

Moreover, the US monetary authorities are showing they are prepared to do whatever it takes to help ease the credit crunch.

Of course, the many investors holding Fannie Mae or Freddie Mac debt -- directly or via managed funds -- can breathe more easily.

Americans will reap these benefits and also take comfort from the better prospect that house prices can soon stabilise. But the moves to support Fannie and Freddie will raise longer-term problems for the US.

Expectations have been created (or, at least, intensified) that the US monetary authorities will stand behind any other big financial institutions imperilled by the credit squeeze -- and that, in any future credit crunches, Fannie Mae and Freddie Mac will again be bailed out by government.

It will be a difficult, over coming years, for the US monetary authorities to achieve the disciplined financial behaviour by banks and other financiers that is a key ingredient of stable and well-functioning credit markets.

The interventions will also be expensive for US taxpayers, who ultimately pick up the tab for the support provided to Fannie Mae and Freddie Mac.

It is possible, too, that the scale of the support could even stretch the Fed's balance sheet.

Renationalising Fannie Mae and Freddie Mac is not an option, as the whole of their debt would then -- formally -- be brought on to the balance sheet of the US Government and about double the level of the (stated) public debt.

Dr Stammer chairs Praemium Ltd and the investment committee of the Portfolio Solutions Group at ING Investment Management. The views expressed are his alone

http://www.theaustralian.news.com.au...013988,00.html

'Liar loans' threaten to prolong mortgage crisis
By ALAN ZIBEL, AP Business Writer
2 hours, 17 minutes ago

In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower's income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets."

The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.

"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They're heavily concentrated in states where home prices are plummeting" such as California, Florida, Nevada and Arizona.

Many homeowners with liar loans are stuck. They can't refinance because housing prices in those markets have nose-dived, and lenders are now demanding full documentation of income and assets.

Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 billion in expected losses from subprime loans.

Fannie Mae and Freddie Mac, the nation's largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.

Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.

The mortgage bankers and brokers who survived were more cautious, but acknowledge they too were swept up in the housing hysteria to some extent.

"Everybody drank the Kool-Aid" said David Zugheri, co-founder of Texas-based lender First Houston Mortgage. They knew if they didn't give the borrower the loan they wanted, the borrower "could go down the street and get that loan somewhere else."

The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers around $2,000 to $4,000 in fees for a fixed-rate loan.

During the housing boom, liar loans were especially popular among investors seeking to flip properties quickly. They were also commonly paired with "interest only" features that allowed borrowers to pay just the interest on the debt and none of the principal for the first several years.

Even riskier were "pick-a-payment" or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.

While some borrowers were aware of their risky features and used them to gamble on their home's value or pull out money for vacations, others like Salvatore Fucile insist they were victims of predatory lending.

Fucile, who is 82, and his wife, Clara, wound up in an option ARM from IndyMac after consolidating two mortgages on their suburban Philadelphia home. Fucile was attracted by the low monthly payments, but says the mortgage broker who signed him up for the loan didn't tell him the principal balance could increase. It has risen about $24,000 to $276,000.

"He put me in a bad position," said Fucile, who fears he will be forced into foreclosure. "He misled me."

IndyMac was taken over by the Federal Deposit Insurance Corp. last month.

FDIC spokesman David Barr declined to discuss the Fuciles' case, but said the agency has temporarily frozen all IndyMac foreclosures and is working on a broad plan to modify mortgages held by the Pasadena, Calif-based bank.

The low monthly payments of liar loans helped many home buyers afford to purchase in areas of the country where prices were skyrocketing. But they also helped drive up prices by allowing people to buy more than they could truly afford. Case in point: about 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs, according to First American CoreLogic.

"It was pretty evident that the only thing that was supporting these loans was higher home prices" said Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.

Now that prices have fallen, almost 13 percent of borrowers with liar loans were at least two months behind on their payments in May, nearly four times higher than a year earlier, according to First American CoreLogic.

Countrywide Financial Corp., now part of Bank of America Corp., was one of the top providers of liar loans. The company is now is paying the price. More than 12 percent of Countrywide's $25.4 billion in pick-a-payment loans are in default, and 83 percent had little or no documentation, according to a Securities and Exchange Commission filing last week.

Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year, fixed-rate mortgages.

"I personally think that they ventured beyond their mission," said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of their decision to back shakier loans, he said, "the home-buying public is going to have to pay."

Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings Inc. were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.

Freddie Mac wanted "to stay competitive in the market and take steps to preserve market share," spokesman Michael Cosgrove said.

Fannie Mae increased its purchases of liar mortgages "at the requests of many of our customers," according to spokesman Brian Faith.

Both companies also were able to use subprime and liar-loan investments to meet government-set affordable housing goals.

Now Fannie, Freddie and other mortgage investors are reviewing defaulted loans to see if lenders committed fraud. If they find enough evidence, they could force lenders to assume responsibility for losses.

But it's unclear how much money they might recover, especially from lenders that have gone under or been seized by the government.

http://news.yahoo.com/s/ap/20080818/...yLC.9J1Uus0NUE

mortgages approved without requiring proof of the borrower's income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets."

HOW did they expect to collect on this ?

Gov't may soon back Fannie, Freddie
By ALAN ZIBEL, AP Business Writer
3 minutes ago

The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.

Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.

The news, first reported on The Wall Street Journal's Web site, came after stock markets closed. In after-hours trading Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06, or almost 21 percent, to $4.04. Common stock in the companies will be worth little to nothing after the government's actions.

The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets. Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.

While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount. Many in Washington and on Wall Street hadn't expected Paulson to intervene unless the companies had trouble issuing debt to fund their operations.

This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed. Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages — almost half the nation's total.

Representatives of Fannie and Freddie declined to comment on the government assistance plan.

Treasury spokeswoman Brookly McLaughlin said officials "have been in regular communications" with Fannie and Freddie, but refused to comment saying, "We are not going to comment on rumors."

Concern has been growing that a government rescue of Fannie and Freddie could not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares.

Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

Mudd, the son of TV anchor Roger Mudd, was elevated to Fannie Mae's top post in December 2004 when chief executive Franklin Raines and chief financial officer Timothy Howard were swept out of office in an accounting scandal. Syron was named Freddie Mac's CEO in 2003, replacing former chief Gregory Parseghian, who was ousted in after being implicated in accounting irregularities.

He formerly was executive chairman of Thermo Electron Corp., a Waltham, Mass.-based maker of scientific equipment, served head of the American Stock Exchange and was president of the Federal Reserve Bank of Boston in the early 1990s.

Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie. A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.

But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.






http://news.yahoo.com/s/ap/mortgage_...jXHFQc4Kus0NUE