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

The True Origins of This Financial Crisis
By Peter J. Wallison

Two narratives seem to be forming to describe the underlying causes of the financial crisis. One, as outlined in a New York Times front-page story on Sunday, December 21, is that President Bush excessively promoted growth in home ownership without sufficiently regulating the banks and other mortgage lenders that made the bad loans. The result was a banking system suffused with junk mortgages, the continuing losses on which are dragging down the banks and the economy. The other narrative is that government policy over many years--particularly the use of the Community Reinvestment Act and Fannie Mae and Freddie Mac to distort the housing credit system-- underlies the current crisis. The stakes in the competing narratives are high. The diagnosis determines the prescription.

If the Times diagnosis prevails, the prescription is more regulation of the financial system; if instead government policy is to blame, the prescription is to terminate those government policies that distort mortgage lending.

There really isn’t any question of which approach is factually correct: right on the front page of the Times edition of December 21 is a chart that shows the growth of home ownership in the United States since 1990. In 1993 it was 63 percent; by the end of the Clinton administration it was 68 percent. The growth in the Bush administration was about 1 percent. The Times itself reported in 1999 that Fannie Mae and Freddie Mac were under pressure from the Clinton administration to increase lending to minorities and low-income home buyers--a policy that necessarily entailed higher risks. Can there really be a question, other than in the fevered imagination of the Times, where the push to reduce lending standards and boost home ownership came from?

The fact is that neither political party, and no administration, is blameless; the honest answer, as outlined below, is that government policy over many years caused this problem. The regulators, in both the Clinton and Bush administrations, were the enforcers of the reduced lending standards that were essential to the growth in home ownership and the housing bubble.

THERE ARE TWO KEY EXAMPLES of this misguided government policy. One is the Community Reinvestment Act (CRA). The other is the affordable housing “mission” that the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were charged with fulfilling.

As originally enacted in 1977, the CRA vaguely mandated regulators to consider whether an insured bank was serving the needs of the “whole” community. For 16 years, the act was invoked rather infrequently, but 1993 marked a decisive turn in its enforcement. What changed? Substantial media and political attention was showered upon a 1992 Boston Federal Reserve Bank study of discrimination in home mortgage lending. This study concluded that, while there was no overt discrimination in banks’ allocation of mortgage funds, loan officers gave whites preferential treatment. The methodology of the study has since been questioned, but at the time it was highly influential with regulators and members of the incoming Clinton administration; in 1993, bank regulators initiated a major effort to reform the CRA regulations.

In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers.

The new regulations also required the use of “innovative or flexible” lending practices to address credit needs of LMI borrowers and neighborhoods. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative” and “flexible.” In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards.

The effort to reduce mortgage lending standards was led by the Department of Housing and Urban Development through the 1994 National Homeownership Strategy, published at the request of President Clinton. Among other things, it called for “financing strategies, fueled by the creativity and resources of the private and public sectors, to help homeowners that lack cash to buy a home or to make the payments.” Once the standards were relaxed for low-income borrowers, it would seem impossible to deny these benefits to the prime market. Indeed, bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better-qualified borrowers.

Sure enough, according to data published by the Joint Center for Housing Studies of Harvard University, from 2001 through 2006, the share of all mortgage originations that were made up of conventional mortgages (that is, the 30-year fixed-rate mortgage that had always been the mainstay of the U.S. mortgage market) fell from 57.1 percent in 2001 to 33.1 percent in the fourth quarter of 2006.

Correspondingly, sub-prime loans (those made to borrowers with blemished credit) rose from 7.2 percent to 18.8 percent, and Alt-A loans (those made to speculative buyers or without the usual underwriting standards) rose from 2.5 percent to 13.9 percent. Although it is difficult to prove cause and effect, it is highly likely that the lower lending standards required by the CRA influenced what banks and other lenders were willing to offer to borrowers in prime markets. Needless to say, most borrowers would prefer a mortgage with a low down payment requirement, allowing them to buy a larger home for the same initial investment.

The problem is summed up succinctly by Stan Liebowitz of the University of Texas at Dallas:

From the current handwringing, you’d think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards--at the behest of community groups and "progressive" political forces.… For years, rising house prices hid the default problems since quick refinances were possible. But now that house prices have stopped rising, we can clearly see the damage done by relaxed loan standards.

The point here is not that low-income borrowers received mortgage loans that they could not afford.

That is probably true to some extent but cannot account for the large number of sub-prime and Alt-A loans that currently pollute the banking system. It was the spreading of these looser standards to the prime loan market that vastly increased the availability of credit for mortgages, the speculation in housing, and ultimately the bubble in housing prices.

IN 1992, AN AFFORDABLE housing mission was added to the charters of Fannie and Freddie, which--like the CRA--permitted Congress to subsidize LMI housing without appropriating any funds. A 1997 Urban Institute report found that local and regional lenders seemed more willing than the GSEs to serve creditworthy low- to moderate-income and minority applicants. After this, Fannie and Freddie modified their automated underwriting systems to accept loans with characteristics that they had previously rejected. This opened the way for large numbers of nontraditional and sub-prime mortgages. These did not necessarily come from traditional banks, lending under the CRA, but from lenders like Countrywide Financial, the nation’s largest sub-prime and nontraditional mortgage lender and a firm that would become infamous for consistently pushing the envelope on acceptable underwriting standards.

Fannie and Freddie used their affordable housing mission to avoid additional regulation by Congress, especially restrictions on the accumulation of mortgage portfolios (today totaling approximately $1.6 trillion) that accounted for most of their profits. The GSEs argued that if Congress constrained the size of their mortgage portfolios, they could not afford to adequately subsidize affordable housing. By 1997, Fannie was offering a 97 percent loan-to-value mortgage. By 2001, it was offering mortgages with no down payment at all. By 2007, Fannie and Freddie were required to show that 55 percent of their mortgage purchases were LMI loans and, within that goal, 38 percent of all purchases were to come from underserved areas (usually inner cities) and 25 percent were to be loans to low-income and very-low-income borrowers. Meeting these goals almost certainly required Fannie and Freddie to purchase loans with low down payments and other deficiencies that would mark them as sub-prime or Alt-A.

http://spectator.org/archives/2009/0...of-this-finan/

The Times has the data right but the finger pointing wrong.

Fannie & Freddie, at the behest and adament insistence of Congress, made toxic loans to way too many that had no ability to repay the loans. Congress, especially the Democraps, used these two GSE's as slush funds for re-election fund raising.

But, if blaming it all on Bush will make them feel better, that's what they'll do because for Libs it's all about feelings not reality. It's all about emotions, not facts.

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Every time obama blames Bush I think of the fact he was with Acorn when they were pressuring the banks to give the bad loans. I also remember that Barney Frank and Maxine Waters prevented more regulation over Fannie and Freddie.

http://www.breitbart.tv/unearthed-vi...e-freddie-mac/

Republican lawmakers begin assault on Fannie Mae and Freddie Mac
Amanda Carey - The Daily Caller – Mon Jan 31, 12:59 am ET

Republican lawmakers on Capitol Hill are planning to hold a hearing on February 9 to begin tackling reform of government sponsored enterprises (GSE) like mortgage giants Fannie Mae and Freddie Mac. The hearing will be the first in a long series of investigations by Republicans to fix what is viewed as one of the main causes of the 2008 financial crisis.

The first hearing will be held by the Financial Services subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. The focus of the hearing and the ones that follow it will be stopping taxpayer losses on housing in the short term, preventing future bailouts and removing government from the housing markets all together.

Republican Rep. Spencer Bachus of Alabama, chairman of the Financial Services Committee, said in a statement announcing the hearings, “The Committee will be busy this year addressing the issues of concern to Americans: jobs, economic activity, Fannie and Freddie reform, and implementation of Dodd-Frank. We will work to ensure that taxpayers are protected,” he added.

Reform of Fannie Mae and Freddie Mac is shaping up to be a primary area of concern for the GOP as Republican lawmakers figure out how to address the two financial institutions that were left out of the Dodd-Frank Financial Reform and Consumer Protection Act that was passed last summer.

But Republicans are eying the financial overhaul bill as well.

The announcement of the hearings also comes on the heels of a letter Bachus and Republican Rep. Randy Neugebauer of Texas, chairman of the Financial Services subcommittee on Oversight and Investigations, sent to nine federal agencies asking them to provide information on how much implementing the financial reform law will cost.

Those nine agencies — including the Treasury Department, Federal Reserve, Securities and Exchange Commission, and the Federal Trade Commission — were all charged with producing rules and regulations to implement the law.

The letter points out that the Dodd-Frank Act requires 11 agencies to create, among other things, 243 rules of compliance, 59 studies, and 22 new annual reports. “It is our responsibility to ensure that mandates are not overly burdensome or wasteful of taxpayer,” said the letter.

http://news.yahoo.com/s/dailycaller/...B1YmxpY2FubGE-

comments

uh oh Barnie Boy...they are going to shake the bushes and find out you are the snake everyone thinks you are. When the facts are presented and it is found out that primarily DEMOCRATS.. (Frank, Dodd, Reid, etc.) were the ones running the programs, offices, etc. that caused the vast majority of the financial collapse maybe then they can stop wasting their time blaming Bush and see who the real problem is. Don't believe me check Frank's speeches and comments in the year leading up to the collapse when he repeatedley said nothing was wrong. Nothing like facts to clear up the subject.

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the last time the Republicans tried this (McCain), two black senators (waters and somebody else) called the attempt "racist" and any attempt to regulate FM and FM were shot down. You know what happened next dont you.... the housing mkt collapsed, just like McCain told them it would.

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Since no one here even understands the effect of a Fannie and Freddie on our economy, allow me to explain. Fannie was created for the express purpose of creating a secondary mortgage market. This allowed banks to sell more loans to more people and it effectively lowered mortgage rates since the government was assuming a lot of the risk of default.

The problem is two-fold. Since it lowered mortgage rates, the cost of houses went up and the net effect was for someone with the same payment to simply have a higher amount of debt. Score 1 for banks. The second problem is it created a moral hazard for banks as they don't have as much incentive to do their due diligence when deciding who to lend money to.

People it is your responsibility to know things such as this.

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Greed is the problem here. had the mortgages been held by those who originated none of this would've happened. As it stands Freddie and Fannie are propping up the housing market as best they can. They are in the very very few still making home loans. It seems the Gop won't rest until it is 2008 all over again. I find it ironic that those of you who support the Gop actually thought they would do anything other than fight for the rich and attempt to thwart any and all regulation of the financial markets.

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When Freddie Mac can pay someone like Rahm Emanuel for just attending six meetings at a cost of $300,000---no wonder they got into trouble. I wonder just what goes on when greedy politicians get money for doing practically nothing?
And why won't Obama allow the release of the minutes of those meetings? What are they trying to hide and cover up?
This is just the tip of the iceberg. Politicians wrecking our economy and squandering the wealth of our nation.

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Ok,Ok,Ok, the stupitity of of the repo's blaming the Demo's and the other way around. They are both involved in throwing this country into the @#$%. When you all stop you bull@#$% and start electing representation for the people and by the people, will things ever change. Stop blaming one party and making excusses for the other. You keep crying the sky is falling, the sky is falling. Get a brain and start complaining about Goverment for the Goverment, Goverment for Special Interest, and Corporate Greed. Youre playing right into the hands of goverment corruption and don't have the brain know the difference.

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The real cause of the melt down was Wall Street greed. Pure and simple. Not only did they dream up the no down payment loans, they dreamed up the 'insurance' and 'reinsurance' instruments that no one - not even themselves - could understand

Fannie Mae ignored abusive foreclosure practices for years
By Zachary Roth Senior National Affairs Reporter | The Lookout – Tue, Oct 4, 2011

Government-backed mortgage giant Fannie Mae knew as far back as 2003 that law firms it had hired to foreclose on delinquent borrowers were engaging in extensive abuses, but did little to fix the problem, according to a new report (pdf).

It wasn't until the summer of 2010 that the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae, began looking into the issue. FHFA's inquiry was prompted by news reports that described how law firms working for lenders used practices such as "robo-signing" that unfairly sped borrowers from their homes.

"American homeowners have been struggling with the effects of the housing finance crisis for several years, and they shouldn't have to worry whether they will be victims of foreclosure abuse," said Steve Linick, the FHFA's inspector general, who prepared the report. "Increased oversight by F.H.F.A. could help to prevent these abuses."

Rep. Elijah Cummings (D-Md.), who requested the report, called the FHFA's and Fannie Mae's failure to oversee the law firms--known more familiarly as "foreclosure mills"-- an "assault on the integrity of our justice system."

You can read more at The New York Times : http://www.nytimes.com/2011/10/04/bu...=fannie&st=cse

http://news.yahoo.com/blogs/lookout/...185825880.html

Fannie Mae taps $7.8 billion from Treasury, loss widens
By Margaret Chadbourn | Reuters – 2 hrs 19 mins ago

WASHINGTON (Reuters) - Fannie Mae, the biggest source of money for U.S. home loans, on Tuesday said it needed a further $7.8 billion in federal aid to stay afloat as a shaky housing market widened its third-quarter loss to $5.1 billion.

Fannie Mae also attributed the deeper cash drain to losses on derivatives that are used to hedge the firm's exposure to swings in interest rates and expenses related to home loans made prior to the 2008 financial collapse. In the year-earlier quarter it had a loss of a $1.3 billion.

Fannie Mae, seized by the government in 2008, has drawn $112.6 billion in bailout funds from the Treasury Department since 2008 and has paid $17.2 billion to the government in the form of dividends.

"Fannie Mae is working to reduce losses on our legacy book and limit taxpayer exposure," Susan McFarland, the company's executive vice president and chief financial officer, said in a statement.

The government-owned company and its smaller rival Freddie Mac were taken over in the financial crisis as losses on subprime mortgages threatened insolvency. Given the crucial role the two play in U.S. housing finance, owning or guaranteeing about half of all mortgages, the government has pledged unlimited funds to keep the firms afloat through the end of 2012.

Fannie Mae said credit losses, which include expenses related to the foreclosed properties it holds on its books, increased in the third quarter to $4.5 billion from $3.9 billion in the second quarter.

Freddie Mac, the second-largest source of U.S. mortgage finance, said last week it lost $4.4 billion in the third quarter and needed to borrow an extra $6 billion from the federal government.

Fannie Mae has now reported losses in 16 of the last 17 quarters. It reported a profit of $73 million in the fourth quarter of last year, but that was largely attributed to a one-time payment from Bank of America.

Fannie Mae and Freddie Mac were created by Congress to encourage homeownership by making it easier for people to get loans by buying mortgages from lenders and repackaging them as securities for investors, with a guarantee.

The two firms, along with the Federal Housing Administration, now back about nine out of ten new home loans.

http://news.yahoo.com/fannie-mae-tap...220618641.html

comments

If they are reporting loss why give them more? If the government does not give them more then taxpayer are not on the hook for. Is there anyone smart enough to figure this out. No more bailing out, we can't afford it.

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Something fishy going on here. Wouldn't it be nice if at least one politician would come forward and explain exactly why this transaction is needed. Draw us a diagram if nescessary.

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Sooooo,, fannie pays big dividents to treasury,, while losing money? Never understood why - don't think most companies do. The biggest part of the loss LAST quarter was due to paying $6billion in dividends, then having to get the money from the treasury (us) to pay them. Somebody smarter than me will have to figure that out. We NEED Fannie and Freddie to assure low home loan rates, and availability of long, fixed rates, but quit getting funds, to pay dividends!!!!

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If you do a bad job you get Fired and you get NO COMPENSATION! Therefore why are the CEO's and Big wigs of these companies still be getting large salaries, bonuses(for failure) and compenstation dollars for failing? ITs what happens when there are too many hands in the cookie jar, or too many turning their heads, and for those who think our current government cares for the common people, think again! What Fannie and Freddie are asking for could be sent to help the millions of people out of work, losing their homes, the elderly, the children and the next piece of the puzzle, take back the USA and bring back jobs here!
Freddie and Fannie CEOS put thousands of families on the street, now its time to empty their million dollar buildings and mansions and put them on the street! Bailout the American men and women, not CEOS!!!

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Ten executives received $12.79 million in bonuses just a few months after the Government bailout, their CEO, received a $2.37million bonus. This is insane, I say no to any more money given to them, enough is enough!

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Meanwhile the CEO, Michael Williams, has received $4.7 million in compensation in 2010. The reward for incompetence, and the worst thing is that it is paid by taxi drivers, mine workers, teachers,.... me and you, we tax payers who are struggling to stay afloat, have to pay this so a greedy incompetent CEO like him can buy his next yacht and villa and take his family to posh vacations in Canary islands and around the world and his company is meanwhile bleeding. Probably they have laid off a bunch of poor low ranking staff too.

The Community Organizer-in-Chief is at it again! What's the definition of insanity? Doing the same thing over and over again expecting different results. LIKE and SHARE if you think Obama's push for home loans for people with sub-par credit is CRAZY!

http://www.washingtonpost.com/busine...755_story.html

Obama administration pushes banks to make home loans to people with weaker credit
By Zachary A. Goldfarb, Published: April 2, 2013

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession. http://www.federalreserve.gov/newsev...e20130308a.htm

In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps. http://www.treasury.gov/press-center...es/tg1836.aspx

Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars. http://www.washingtonpost.com/politi...adb_story.html

“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae. http://www.aei.org/scholar/edward-j-pinto/

Administration officials say they are looking only to allay unnecessary hesi*ta*tion among banks and encourage safe lending to borrowers who have the financial wherewithal to pay. “There’s always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s,” said a senior administration official who was not authorized to speak on the record.

The administration’s efforts come in the midst of a housing market that has been surging for the past year but that has been delivering most of the benefits to established homeowners with high credit scores or to investors who have been behind a significant number of new purchases.

“If you were going to tell people in low-income and moderate-income communities and communities of color there was a housing recovery, they would look at you as if you had two heads,” said John Taylor, president of the National Community Reinvestment Coalition, a nonprofit housing organization. “It is very difficult for people of low and moderate incomes to refinance or buy homes.”

Argh! :

In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

We're still paying for the last round of crap and now he's offering up our pocket books again!

“It is very difficult for people of low and moderate incomes to refinance or buy homes.”

Maybe because they can't afford it?

One reason, according to policymakers, is that as young people move out of their parents’ homes and start their own households, they will be forced to rent rather than buy, meaning less construction and housing activity.

Young people, join the rest of us and learn how to appreciate being a homeowner. I know I rented before buying, many of my friends who own their home now, did the same.

If they were living at home, why weren't they saving and building their credit? Renting first also gives one an idea of the expenses and responsibilities of being a homeowner. Like when the faucet leaks, "Hello landlord", well, when you own, you better know how to fix it or afford to pay someone. Welcome to home ownership. These are the little lessons taught to young people when they move out and rent.

And I will say, not everyone was meant to be a homeowner. Some are better off being lifetime renters. No shame in that.

If borrowers with FHA loans default on their payments, taxpayers are on the line — a guarantee that should provide confidence to banks to lend.

How does taking our tax payer money build confidence that the borrower will pay? It doesn't, it only guarantees that the lender will be paid.....with our (taxpayer) money.

Oy vey.....de`ja vu.

Read also : http://www.bigbigforums.com/news-inf...y-renters.html

"When you have made evil the means of survival,
do not expect men to remain good.
Do not expect them to stay moral and lose their lives
for the purpose of becoming the fodder of the immoral.
Do not expect them to produce,
when production is punished
and looting rewarded.
Do not ask,
'Who is destroying the world?'
You are."

- Atlas Shrugged -

hmmmm

study confirms economy was destroyed by Democrat policies

A new study from the widely respected National Bureau of Economic Research released this week has confirmed beyond question that the left's race-baiting attacks on the housing market (the Community Reinvestment Act--enacted under Carter, made shockingly more aggressive under Clinton) is directly responsible for imploding the housing market and destroying the economy.


U.S. Rep. Barney Frank (D-MA), Sen. Charles Schumer (D-NY) and Sen. Christopher Dodd (D-CT) brief the media after a meeting on Capitol Hill

The study painstakingly sorted through failed home loans that caused the housing market collapse and identified an overwhelming connection between them and CRA mortgages.

Again, let's review:

~ President Bush went to Congress repeatedly for years warning them that Fannie Mae and Freddie Mac were going to destroy the economy (17 times in 2008 alone). Democrats continuously ignored him, shut down his proposals along party lines and continued raiding the institutions for campaign contributions on their way down.

~ John McCain also co-sponsored urgently critical reforms that would have prevented the housing market collapse, but Democrats shut that down as well, along party lines, and even openly ridiculed anyone who suggested reforms were necessary...to protect their taxpayer-funded campaign contributions as the economy raced uncontrollably toward the cliff.

~ No one was making bad loans to unqualified people until Democrats came along and threatened to drag banks into court and have them fined and branded as racists if they didn't go along with the left's Affirmative Action lending policies...all while federally insuring their losses. Even the New York Times warned in the late 1990s that Democrats continuing to force banks into lowering their standards would lead to this exact catastrophe.

~ Democrats themselves are even on the record personally helping sue one lender (Citibank) into lowering its lending standards to include people from extremely poor and unstable areas, which even one of the left's favorite blatantly partisan "fact-checkers," Snopes, admits (while pretending to 'set the record straight').

~ Even The New York Times admitted that there is "little evidence" of any connection between the "Republican" deregulation measures Democrats blame, like the Gramm-Bleach-Liley Act (signed into law by a Democrat), and the collapse of the housing market.

But non-Fox media have spent years deliberately and relentlessly inoculating people against the facts, training them to mindlessly blame Bush for being in charge when Democrat policies destroyed the economy. So here we sit, to this day, still watching Democrats excuse and shrug off endless economic failures, illegal government takeovers and utter national bankruptcy with zero accountability.

http://www.examiner.com/article/new-...ocrat-policies