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

The corruption at behemoth government boondoggle Fannie Mae--I've called it the mother of all financial scandals-- deserves as much attention as the Enron debacle, but it won't get it. Check it out: Clintonite Franklin Raines now faces civil charges, along with two other former executives, of manipulating Fannie Mae's earnings to jack up their bonuses....


Ex-Fannie execs face civil charges
Updated 12/18/2006
By Edward Iwata, USA TODAY

Federal regulators Monday filed civil charges against former Fannie Mae CEO Franklin Raines and two other former executives, accusing them of manipulating Fannie Mae's earnings to jack up their bonuses.

In a complaint with an administrative law judge, the Office of Federal Housing Enterprise Oversight detailed 101 charges from 1998 to 2004 against Raines, former chief financial officer Timothy Howard and former controller Leanne Spencer, who all resigned in 2003 as the Fannie Mae scandal worsened.

OFHEO is seeking $100 million in penalties and $115 million in return of bonuses. The regulator also seeks the return of legal fees, and to bar the former executives from any future business with Fannie Mae.

A major force in the mortgage investment market, Fannie Mae has been engulfed in political controversy and financial scandal for years. Lawmakers and regulators are seeking greater regulatory control of the government-sponsored housing finance giant.

Fannie Mae was run by Harvard University graduate Raines, former budget director in the Clinton administration and one of the first black CEOs of a major corporation.

James Lockhart, OFHEO's director, said the actions of the former executives "cost the enterprise and shareholders many billions of dollars and damaged the public trust."

OFHEO alleges that the former executives submitted "misleading and inaccurate accounting statements and inaccurate capital reports that enabled them to grow Fannie Mae in an unsafe and unsound manner."

Defense attorneys for the former executives deny the charges.

Howard's lawyer, Steven Salky of the Zuckerman Spaeder law firm, called the allegations "a work of unsubstantiated fiction" and "a politically motivated attempt to rewrite history."

Spencer's attorney, David Krakoff of Mayer Brown Rowe & Maw, said OFHEO brought the charges even after reporting to Congress that Fannie Mae surpassed financial safety requirements through 2003.

Raines' attorney, Kevin Downey of Williams & Connolly, demanded Monday that Lockhart recuse himself from the case. In a letter to Lockhart, he called the OFHEO director "a fatally biased regulator" who is using the case to advance his political agenda of enacting Fannie Mae-related legislation. Raines' lawyers hope to move the case to a federal court.

Lockhart declined to address the allegations of bias.

While the charges cover 1998 to 2004, Lockhart said other violations may have occurred in the early 1990s.

The agency continues to investigate other current and former Fannie Mae executives, he said.

Two years ago, a special examination by OFHEO found that former Fannie Mae executives ignored internal financial controls and manipulated earnings through questionable "cookie jar" reserves.

Last spring, OFHEO and Fannie Mae agreed to a $400 millionfine for alleged accounting manipulation.

Ex-Fannie execs face civil charges - USATODAY.com


The charges only cover 1998 to 2004. Officials say violations may have occurred in the early 1990s. Investigation of other current and former Fannie Mae executives continues. Fannie Mae has already been fined $400 million for alleged accounting manipulation.

Where is the outrage from the Culture of Corruption cops in Washington?

Nancy? Harry? Hillary? Anyone?

June 2003 Flashback:

Martha Stewart is a too-easy target, an overstuffed pink pinata swinging in the wind, waiting to be thwacked by every last critic of capitalist excess. But the stock-dumping doyenne is no match for the real mother of all brewing financial scandals. That moniker belongs to the twin behemoths Fannie Mae and Freddie Mac.

Who, you say? Unlike Martha, or the three-piece-suited villains of Enron or Tyco or WorldCom, Fannie Mae and Freddie Mac haven't been plastered all over the tabloids and prime-time TV. That's because they are faceless, government-sponsored enterprises in a complex, loosely regulated, highly leveraged monopoly business that has engaged in questionable accounting practices and put billions of taxpayer dollars at risk -- with plenty of private profiteering for company executives and Washington lobbyists, but almost zero accountability to the public.

As federally chartered "government-sponsored enterprises," the two institutions have been exempt from normal securities regulations for almost their entire lives. Analysts unable to decipher Fannie Mae and Freddie Mac's incomprehensible annual and quarterly reports have long suspected book-cooking with regard to their real cash flow. This week, the Wall Street Journal reported that Freddie Mac faces an SEC probe over possible accounting irregularities. Investigators will examine whether Freddie Mac may have deferred some income to smooth out results in future periods. The SEC will also probe the actions of the chief executive and chief financial officer, who were fired on Monday over an accounting review of earning restatements. The news sent stocks south and roiled some foreign markets as well.

Clothed in politically correct fashions ("Catch the dream," beckons Freddie Mac's program to boost minority home ownership; a "leader in diversity," brags a Fannie Mae press release), these public-private hybrids are two dangerous pigs feeding at the federal trough. Congress created Fannie Mae (nickname for the Federal National Mortgage Association) in 1938 to bolster home ownership during the Depression. Three decades later, it was partially privatized, but retained a host of government benefits. In 1970, Congress spawned Freddie Mac (nickname for the Federal Home Mortgage Corp.) to provide a lending competitor to Fannie Mae. Both entities expand the pool of money for home purchasers by snapping up loans that lenders make to homebuyers, and then converting those loans into relatively safe mortgage-backed securities that are attractive to investors.

So, what's wrong with this picture?

As Fred Smith, president of the Washington, D.C-based Competitive Enterprise Institute, has noted, these financial beasts are a textbook example of "profit-side capitalism and loss-side socialism." When things go right for Freddie Mac and Fannie Mae, they keep the profits. But when things go wrong, taxpayers -- not just private shareholders, managers, and employees -- will be on the hook.

Freddie Mac and Fannie Mae each receive $2.25 billion lines of credit with the U.S. Treasury. These special pipelines give the institutions an implied federal guarantee available to no other private sector competitors in the mortgage market. That protection makes them immune to the costs normally associated with riskier and riskier behavior. Moreover, Fannie Mae and Freddie Mac are not required to pay state and local income taxes. In addition, the standard for how much money the government requires them to keep on hand in case homebuyers default on their mortgages is lower for Freddie Mac and Fannie Mae than for fully private banks and thrifts. The two corporations receive an estimated $10 billion a year in hidden taxpayer subsidies.

Political appointees to the companies' boards pocket millions in stock options to bolster support on Capitol Hill. Clinton-appointed board members at Fannie Mae include Marc Rich lawyer Jack Quinn and Janet Reno's lieutenant at the Justice Department, Jamie Gorelick. At the helm of Fannie Mae is another Clinton appointee, Franklin Raines, who was paid more than $4 million and had almost $6 million in unexercised stock options in his first year at the helm. Cheerleaders in both major political parties have opposed privatizing Fannie and Freddie.

If Martha Stewart is the face of capitalist excess, Fannie Mae and Freddie Mac are the poster children for government-sponsored gluttony. The potential fall of Freddie Mac or Fannie Mae could rival the savings and loan collapse of the 1980s. Too bad the Martha bashers, blind to the far greater catastrophes of market socialism, won't pay attention until it's too late.

Washington is on the borrow-spend-repeat cycle–and Democrats don’t want to get off. Harry Reid has proposed a “foreclosure prevention” act that would pile on billions of dollars more in stimulus-palooza spending on top of the $152 billion already passed into law and radically expand government’s role in meddling with private contracts:
http://www.reuters.com/article/bonds...59236020080227

U.S. Senate Majority Leader Harry Reid said on Wednesday he planned to defy a threatened White House veto and try to win passage of a bill to curb rising home foreclosures by changing bankruptcy law.

“I have no expectation of reaching any agreement with the White House,” said Reid a day after the administration warned the bill would need changes to get President George W. Bush’s signature.

“I have tried for seven years” to reach agreements with Bush on a variety of issues, but have repeatedly failed, said Reid, a Nevada Democrat, at a news conference.

“So we are going to do what we think is best for the country,” Reid said. “If we get 67 votes (in the 100-member Senate to override a possible Bush veto), that’s great.”

The Senate could turn to the housing bill in the next few days, but it must first overcome a possible Republican procedural hurdle that would take 60 votes to clear.

“I think we are going to get more than 60 votes,” said Reid, whose fellow Democrats control the Senate, 51-49.

The measure would let bankruptcy judges erase some mortgage debt and provide billions of dollars to rehabilitate abandoned properties. The White House said the bill was too costly and an unacceptable bailout for lenders and speculators. It had been expected to be taken up Tuesday by the Senate, but got pushed back for consideration of an Iraq measure.

Reid said he opposed dropping the controversial provision to modify present bankruptcy law by letting bankruptcy judges erase some mortgage debt. He said the bill has drawn support from community banks and credit unions.
House Democrats are pushing for $15 billion more in spending to “rescue” borrowers and $20 billion more for the government to buy up homes.

In the House of Representatives, another key Democratic lawmaker is crafting a plan to provide about $15 billion to help a million troubled borrowers, an aide said on Wednesday.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, is developing the proposal which would involve the Federal Housing Administration and government purchases of distressed mortgages.

The five-year plan would apply only to owner-occupied homes and exclude investor-owned and second homes.

Frank is also working on another plan to provide as much as $20 billion in grants and loans to buy foreclosed or abandoned homes at or below market value.

Anyone who has paid attention to the Fannie Mae and Freddie Mac racket should balk at the prospect of this massive takeover.

The OMB responds to the Dems’ proposals:

The Administration understands that H.R. 3221 will be amended on the Senate floor by the substitution of the text of S. 2636, the Foreclosure Prevention Act of 2008, as introduced by Senator Reid. Earlier this month, Congress and the Administration worked expeditiously to pass the Economic Stimulus Act of 2008, a robust economic growth package that will put $152 billion into the hands of American individuals and businesses in FY 2008. When the President signed that Act, he stated that Congress can further assist the housing sector by passing legislation quickly to modernize the Federal Housing Administration (FHA) and reform regulatory oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. These bills have bipartisan support and are the appropriate next steps to address the housing downturn; Congress needs to make these important bills an immediate priority. As discussed below, the Administration strongly opposes many of the provisions in S. 2636 as unnecessary, costly, and counterproductive. If S. 2636 were presented to the President, his senior advisors would recommend he veto the bill.

The Administration strongly opposes the provision of S. 2636 that would appropriate $4 billion for assistance to State and local governments for the redevelopment of abandoned and foreclosed homes through a new program in the Department of Housing and Urban Development (HUD). In addition to being extremely costly, this new program would constitute a bailout for lenders and speculators, while doing little to help struggling homeowners. This new program would also be slow to expend money and thus would not provide timely stimulus or immediate relief. In fact, it is more likely that this proposal would prolong the time it would take for the housing market to recover.

The Administration also opposes more than tripling the funding for the Neighborhood Reinvestment Corporation (NRC) in FY 2008 from its FY 2007 funding levels. Such an increase would tax NRC’s capacity to effectively administer its programs, given that NRC has already received a 156 percent increase from its FY 2007 funding level.

The Administration strongly opposes providing bankruptcy judges with power to modify the terms of mortgages for debtors in bankruptcy proceedings. Amending the bankruptcy code in this manner would undermine existing contracts, leading to contraction in mortgage credit availability and affordability. These and other bankruptcy-related provisions in the bill would rewrite long-standing tenets of bankruptcy law in ways that would fundamentally alter the expectations of parties to hundreds of thousands of home purchases after the fact. These provisions would also likely prolong the time it will take the market to recover from the current downturn.

The Administration proposed and supports a number of initiatives that are designed to help homeowners through the Nation’s subprime mortgage crisis, including the HOPE NOW alliance, FHASecure, increased funding for housing counseling, and reforms to the Real Estate Settlement Procedures Act (RESPA). The Administration supports the Federal Reserve’s proposed rule to improve disclosure requirements and develop new national standards for unfair and deceptive practices through its authority under the Home Ownership and Equity Protection Act. In addition, the Administration endorses the actions of the Federal banking regulators to improve underwriting criteria. The Administration looks forward to working with Congress on legislation such as FHA modernization and Fannie Mae, Freddie Mac, and Federal Home Loan Bank regulatory reform already moving through the legislative process.

Paulson Dismisses Mortgage Rescue Plans
Bernanke Keeps Door Open to Rate Cuts To Boost Economy
By MICHAEL M. PHILLIPS and GREG IP
February 28, 2008; Page A1

WASHINGTON -- The Bush administration is hardening its opposition to the chorus of Democrats, bankers, economists and consumer advocates calling for a big-money government rescue program for struggling homeowners.

In an interview yesterday, Treasury Secretary Henry Paulson branded many of the aid proposals circulating in Washington as "bailouts" for reckless lenders, investors and speculators, rather than measures that would provide meaningful relief to deserving, but cash-strapped, mortgage borrowers.

Mr. Paulson's comments came amid signs that the nation's housing market is getting worse, not better. Indeed, at a House hearing yesterday, Federal Reserve Chairman Ben Bernanke kept the door open to further interest-rate cuts to boost the economy, even as he warned that inflation pressures have intensified in recent weeks.

President Bush and other administration officials have voiced skepticism before about a major government effort to ease the burden of the nation's housing slump. But Mr. Paulson's comments are the most explicit to date in laying out the administration's opposition to the recent spate of rescue plans.

Mr. Paulson, citing estimates that as many as two million Americans could lose their homes to foreclosure this year, predicted that the administration's market-based approach will be enough to keep the situation under control. Its centerpiece is a plan that encourages the mortgage industry to voluntarily ease up on certain borrowers.

"I don't think I've seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars," Mr. Paulson told The Wall Street Journal.

Mr. Paulson's stance highlights the rifts appearing in the bipartisan cooperation that led to the passage of a $152 billion economic-stimulus package by Congress earlier this year. Both the Bush administration and the Democrats who control Congress now appear to be staking out increasingly rigid positions.

Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee and typically an ally of Mr. Paulson's, said that, until now, he had supported the Treasury's steps to address mortgage delinquencies and the credit crunch they have spawned. "But they're not helping enough people," Mr. Frank said yesterday. "We're not going to get out of the crunch until we stop this cascade of foreclosures."

The Fed's Mr. Bernanke appeared to take a slightly more flexible position than Mr. Paulson, telling a congressional committee yesterday that the turmoil in the housing market doesn't yet merit large amounts of public money. "I don't think we're at that point, but I do think it's worthwhile to keep thinking about those issues," Mr. Bernanke said.

Despite a generally downbeat outlook on the economy, Mr. Bernanke suggested some of the pessimism on the housing front might be overdone. Home-price declines are partly self-correcting, he said; as prices decline, more buyers will be tempted to jump into the market. He predicted home prices would hit bottom some time next year.

There's a growing sense in Washington that the federal government, either during this administration or the next, may feel compelled to mount a more aggressive, expensive response to mortgage defaults, which have destabilized financial markets and threatened to mire the broader economy in recession.

Running Out of Ideas

Administration officials "have been willing to broker deals, but they haven't been willing to put taxpayer money on the line," said Mark Zandi, chief economist at Moody's Economy.com, a West Chester, Pa., consulting firm. "I think they're trying to stick to those principles, and now they're running out of ideas that are consistent with those principles."

Both Democratic presidential hopefuls have criticized President Bush, saying he exacerbated the housing market's woes by tolerating overly aggressive lending practices. Sen. Barack Obama (D., Ill.) has advocated the creation of a $10 billion fund to help borrowers avoid foreclosure or buy first homes, while Sen. Hillary Clinton (D., N.Y.) has proposed a 90-day moratorium on foreclosures and a five-year interest-rate freeze on adjustable-rate mortgages.

Several major banks, including Credit Suisse Group, have floated plans that would expand an existing federal program run by the Federal Housing Administration to extend government insurance to thousands of troubled loans. Former Fed Vice Chairman Alan Blinder has proposed reviving a Depression-era agency to buy up troubled mortgages and refinance them at affordable rates.

Even the Office of Thrift Supervision, an independent agency within Treasury, is developing a plan that would make it easier for banks and thrifts to refinance loans for homeowners whose houses are worth less than the amount they owe.

Rep. Frank's plan would provide about $10 billion in loans and grants to help states buy foreclosed homes, plus a similar sum to allow the FHA to guarantee new, more-affordable mortgages for homeowners on the brink of losing their houses. Democratic lawmakers, including Senate Majority Leader Harry Reid of Nevada and Sen. Chris Dodd of Connecticut, chairman of the Banking Committee, have legislative remedies in mind, as well.


"I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes," Mr. Paulson said. "Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

The secretary added one caveat: "It would be imprudent not to have contingency plans, but we are so far away from seeing something that would have me calling for a bailout that I don't see it."

Mr. Bush is threatening to veto a Senate bill that includes $4 billion to help states and localities redevelop abandoned and foreclosed houses. "I believe the evidence is clear that these [voluntary industry] initiatives alone will not steer enough families away from foreclosure or our country away from further economic weakening," Mr. Reid wrote in a letter to the president yesterday, referring to the main element of the White House-backed industry plan. "In my view, the enormity of the foreclosure crisis requires a much more aggressive response."

The Reid bill also includes a provision -- opposed by many Republicans and the White House -- that would allow bankruptcy judges to alter the terms of mortgages.

Mr. Paulson, a former chief executive of Goldman Sachs Group, repeated his view that the U.S. economy is fundamentally on sound footing and would dodge a recession. Still, he warned again yesterday that the chances of worse-than-expected economic growth are greater than the chances of an upside surprise.

In his congressional testimony, Mr. Bernanke indicated that the Fed is inclined to lower interest rates to support the economy.

"The further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater" risk that inflation will be higher this year than officials expected last month, Mr. Bernanke said in the first of two days of testimony to Congress.

Market Expectations

Nonetheless, he showed more concern that the economy will grow more slowly than the already-sluggish performance envisioned a month ago, due to the possibility that housing, the job market or credit conditions may deteriorate more than expected. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Mr. Bernanke said.

His comments cemented market expectations that the Fed will lower its short-term interest-rate target to 2.5% from the current 3% at its next meeting, March 18.

A particular risk Mr. Bernanke highlighted in response to questions from lawmakers was that the Fed's 2.25 percentage points of interest-rate cuts since September aren't being fully passed through to consumers and businesses because banks, other lenders and the capital markets have become more reluctant to lend.

A major reason for their reluctance is that losses related to subprime mortgages and other risky loans have depleted the capital of many banks and other major financial intermediaries, such as government-sponsored mortgage giants Fannie Mae and Freddie Mac. Mr. Bernanke called on such institutions to raise additional capital so that they could resume normal lending activity.

Mr. Paulson cited estimates that 1.5 million homeowners lost their houses to foreclosure last year and that the toll could reach two million this year. During normal economic times, there are some 650,000 foreclosures a year in the U.S.

In the coming days, a mortgage-industry alliance called Hope Now is expected to report on its efforts, backed by the administration, to expedite refinancing or rate freezes for as many as 1.2 million subprime borrowers whose adjustable interest rates are due to rise in the next two years. Mr. Paulson said he planned to keep the pressure on mortgage servicers to cut a deal with homeowners who are current on their payments but might slip into delinquency if their rates jump up.

He also said he would press the industry to expand the program to reach borrowers struggling with prime-rate and other mortgages.

http://online.wsj.com/article/SB1204...apl=y&r=154370




DISCUSS : Who should take the lead in resolving problems of consumers struggling with mortgage debt? Share your thoughts....

Michael Jackson is facing foreclosure on his famous Neverland Ranch, inspiring Kevin Depew to rewrite “We are the World” for potential bailout recipients everywhere…

We are the Foreclosed
We’re the defaulters
We are the ones who make a brighter day
For subprime lending
There’s a choice we’re making
To simply walk away
It’s true, our debt has gone away
We’re clear and free

When you’re down and out
And nothing seems to sell
But if you just believe
We’re much too big to fail
Well, well, well, well, let us realize
That the bailout soon will come
When we stand together as one

[Chorus]

We are the Foreclosed
We’re the defaulters
We are the ones who make a brighter day
For subprime lending
There’s a choice we’re making
To simply walk away
It’s true, our debt has gone away
We’re clear and free

Freddie Mac posts $2.5B loss in 4Q
By MARCY GORDON, AP Business Writer
39 minutes ago

WASHINGTON - Freddie Mac on Thursday said its loss widened to $2.5 billion in the fourth quarter of 2007 as mortgage defaults mounted and falling interest rates hurt certain investments.

Despite expectations of further losses this year and next, the company's chief financial officer said Freddie, the No. 2 U.S. buyer and backer of home loans, will not need to raise additional capital unless "things dramatically deteriorate."

The wider-than-expected fourth-quarter loss was much larger than Wall Street expected and compares with a loss of $401 million in the same period a year earlier. If not for an accounting change, Freddie said its fourth-quarter loss would have been $3.7 billion.

Investors appeared unfazed by the news, however. Freddie shares rose more than 5 percent in morning trading to $26.41.

A federal regulator announced Wednesday that Freddie and its larger government-sponsored sibling, Fannie Mae, will be allowed to expand their roles in the turbulent mortgage market, through the removal on March 1 of an investment-portfolio cap placed in the aftermath of multilbillion-dollar accounting scandals at the companies. Analysts said the impact will be limited, however, because of the large cash cushion the companies must maintain as a reserve against risk.

Fannie reported a loss of nearly $3.6 billion in the October-December quarter.

In a telephone interview, Freddie's chief financial officer, Buddy Piszel, said the company has sufficient capital to get through 2008 thanks to a special stock sale in December that raised $6 billion.

But if conditions worsen significantly in the already turbulent mortgage market, Freddie may have to again tap the public markets, Piszel said. "You can't rule it out," he said.

Piszel also said the company is in an "engaged dialogue" with its regulator, the Office of Federal Housing Enterprise Oversight, on a possible reduction of the mandated 30 percent capital cushion that Fannie and Freddie must maintain.

Meantime, rating agency Moody's Investors Service on Thursday said it may lower its assessment of Fannie's financial strength in light of "sizable" anticipated losses this year that could erode its capital cushion.

Freddie, like Fannie a day earlier, offered a pessimistic outlook for the U.S. housing market. The company said it expects its losses from soured home loans to reach an estimated $2.2 billion this year and $2.9 billion in 2009.

"If the economy weakens substantially from here — a possibility for which we need to be prepared as a company — it will have a further negative effect on homeowners across the country and drive credit costs higher," Freddie Mac's chairman and CEO, Richard Syron, said in a statement.

In addition to having to set aside $912 million in the fourth quarter for soured loans, Freddie said its suffered around $2.3 billion in losses in the value of holdings of derivatives, the complex financial instruments it uses to hedge against swings in interest rates.

Through these investments, known as "interest rate swaps," Fannie and Freddie try to hedge against the risks of rising or falling interest rates. The mortgages on the companies' books tend to rise in value when interest rates drop, and vice versa. But that bet hasn't worked out of late, as interest rates fell in the fourth quarter and the value of mortgages held on the books has fallen as well.

Freddie said the quarterly loss was equivalent to $3.97 a share, steeper than the $2.34-per-share loss expected by analysts polled by Thomson Financial. For all of 2007, Freddie lost $3.1 billion, or $5.37 a share, compared with a profit of $2.3 billion, or $3 a share, in 2006.

http://news.yahoo.com/s/ap/20080228/...goVTTM5ACs0NUE

This is just simply 'buy the vote' crap. If people can not read the small fine print in the columns that tell of the massive balloon payment coming up. It is their fault and I SHOULD NOT HAVE TO PAY FOR IT!!

What happened to buyer beware? Not only will these people not learn but the finacial institutes that promoted the schemes of these interest only loans are getting a free pass.

The economy is not in such dire straights as claimed by the MSM. It is doing a self correction. The consumer is wiseing up. Many people are learning from their mistakes and no longer jumping on the jones bandwagon.

This is why used vehicals are outselling new ones. They are affordable. People are not interested in paying $400,000 for a home worth only $175,000. Is it my fault that the PROFIET MARGIN for companies , developers, and finacial institutes is no it what the projected. NO IT IS NOT.

For those wise and all impotent elected officials who think our tax money will never end. They need to get in touch with reality.

When a person purchases a major finacial investment such as a house or car. The loaning institutes always look at the gross income. This is the first mistake made. It is not a real thing. What needs to be looked at is net income after bills and living expenses are paid. This is the investment net. If this net is low then one should not purchase the big ticket item. However the loaner will always say you can afford it because he gets your signature on a piece of paper and makes you responsible for your bad decision.

CONSUMER/BUYER BEWARE DAMMIT JANNET!

Downsize Fannie Mae and Freddie Mac
Mon Jul 14, 4:00 AM ET

Americans are little aware of how much they rely on federal assistance to help pay for a home. No longer. The mortgage crisis has finally caught up with two government-backed giants in home finance. Once the crisis passes, it may be time to further privatize the American Dream.

Investor panic has fallen over both of the federally chartered private enterprises known as Fannie Mae and Freddie Mac. Their stocks have tumbled as some experts question whether further drastic drops in house prices may sink the two into enough red ink to force a government bailout.

The implicit guarantee of federal backing for Fannie and Freddie, combined with the millions they have spent to lobby Congress for favors, have given them an outsized advantage in the mortgage business, reselling the loans to global investors. They are allowed to borrow easily and keep very little money on hand compared with their competitors. As a result, they own or guarantee about half of the country's $12 trillion in mortgage debt.

They are socialist instruments holding great sway over private finance from Wall Street to Main Street, having built up powerful allies among home builders and real estate agents to keep it that way.

So far in the past year, the two have lost more than $100 billion in value. A full bailout could cost taxpayers as much as the Iraq war, or more. To stem further losses, the US Treasury is aggressively working to find ways short of a bailout to rescue them, such as injecting fresh capital to help them ride out the mortgage storm.

If these efforts work, Congress must then begin to shrink these entities to avoid further financial panic, not to mention a potential economic disaster. The reason is simple: They have outlived their Depression-era purpose of greasing the mortgage business for low-income home buyers by repackaging loans as securities. The market for that is now well developed. And at best, the two help lower mortgage interest rates by only about a quarter point.

When the housing market is doing well, Fannie and Freddie are not needed, and in fact they helped create the recent housing bubble whose implosion now touches them. When markets tank as badly as now, even the well-vetted mortgages that the two purchase are in jeopardy and are only as good as government credit.

They've gone way beyond their mission of helping the poor and are now backing loans for the wealthy. Congress has made the mistake of continuing their existence in the belief that house prices will only keep going up and that homeownership is a social good worth the risk of a massive taxpayer bailout.

The troubles for these hybrid public-private entities show how risky it is for government to have a strong hand in running any business. Normal markets should allow businesses to fail. That helps improve the economy. But the political pull of Fannie and Freddie won't let that happen in their case. In fact, the two only grow bigger.

Recent accounting scandals at the two enterprises revealed how a presumption of invulnerability crept into their operations. The task for Congress is to help Fannie and Freddie slowly shrink to minor roles strictly for the poor, saving the economy from their possible collapse. Long-term stability in homeownership demands it.

http://news.yahoo.com/s/csm/20080714....oxiRI5_e7e8UF

see also : http://www.bigbigforums.com/news-inf...age-probe.html

Pledge fails to lift cloud over Fannie, Freddie
By Lynn Adler
49 minutes ago

NEW YORK (Reuters) - Buyers showed no hesitation in bidding on Freddie Mac's $3 billion debt sale on Monday, just hours after the U.S. government pledged support for the nation's top mortgage finance agencies, but the steps failed to stem growing alarm on Wall Street.

Global stock markets had rallied after the Treasury Department and Federal Reserve stepped in on Sunday with offers of richer credit lines, equity purchases and direct access to central bank coffers should Freddie and its sister agency Fannie Mae run into deeper financial trouble.

However, stocks quickly shed initial gains as investors feared the steps will do little stem the losses spreading through the financial sector in the wake of a deflating housing market and stalling economy.

Friday's failure of mortgage lender IndyMac Bancorp Inc (IMB.N), the third-largest bank collapse in U.S. history, was a pointed and painful reminder of the financial strains. Shares in a host of banks, including National City (NCC.N) and Washington Mutual (WM.N), fell sharply.

"This incident (with Fannie and Freddie) is not the last one," billionaire investor George Soros told Reuters in a telephone interview, adding that the year-long global financial market turmoil represented "the most serious financial crisis of our lifetime."

Fannie and Freddie together finance about half of U.S. homes and are seen as vital for stabilizing the worst housing slump since the Great Depression some 80 years ago. But as mortgage defaults rise, even among borrowers with seemingly solid credit, concerns have grown that the two agencies may need more money to cover heavier losses.

Their shares ended a volatile trading day lower, despite the investor vote of confidence exhibited in the debt auction.

"Ultimately, we do not view these (government) measures, dramatic as they look, as either a turning point for the U.S. housing market or as a sign that the downturn will be much worse than previously believed," Goldman Sachs economist Jan Hatzius wrote in a note to clients.

"They simply reaffirm our long-held -- and widely shared -- view that the government will do everything it can to avert a meltdown in the conforming mortgage market and will continue to stand behind the government-sponsored enterprises," he said.

Attention now shifts to Tuesday's hearing of the U.S. Senate Banking Committee, where Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox are expected to join Fed Chairman Ben Bernanke, who was previously scheduled to testify. All three will likely be called upon to detail the Fannie and Freddie proposals.

CONGRESSIONAL APPROVAL

On Sunday, the Treasury Department agreed to raise Fannie and Freddie's credit lines above the existing $2.25 billion each and buy shares to strengthen their finances if needed. The Federal Reserve offered to let the agencies borrow at the rate it charges banks for direct loans.

Congress must approve some of those measures. Rep. Barney Frank, the Massachusetts Democrat who chairs the House of Representatives Financial Services Committee, said those provisions would be part of a broader housing bill that is expected to be sent to President George W. Bush for approval by the end of next week.

Frank also said Fannie and Freddie were financially sound, and would probably not need to borrow from the Fed.

Debt buyers also seemed confident in the mortgage agencies. Monday's $3 billion debt sale from Freddie drew stronger demand than a similar one on July 7. Fannie announced that it will sell $3 billion worth of debt on Wednesday.

While Monday's debt auction was routine, it was viewed as a key test of market appetite following last week's stock sell-off. Freddie's treasurer said the sale was "business as usual," and he did not perceive a crisis of investor confidence.

The two companies rely on regular debt auctions for funding, and any disruption in the flow of money could push up mortgage rates and deal a fresh blow to a sinking U.S. housing market and fragile economy.

The housing crisis and subsequent credit contraction have prompted banks to tighten lending terms, leaving Fannie and Freddie as the dominant source of mortgage financing.

Fannie and Freddie own or guarantee $5 trillion of debt, close to half the value of all U.S. mortgages. Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.

The White House said Fannie and Freddie had not tapped any of the lifelines offered by the Treasury and Fed on Sunday.

"As far as I know, neither of the companies have gone forward to take advantage of any of the borrowing opportunities," White House spokeswoman Dana Perino told reporters. "Both of their regulators have stated that the companies are well-capitalized."

Freddie Mac shares closed down 8.3 percent at $7.11 and Fannie Mae ended 5.1 percent lower at $9.73. In a volatile session, the stocks posted both double-digit gains and losses over the span of only a couple of hours.

http://news.yahoo.com/s/nm/20080714/....N7GPPjxms0NUE

REVIEW & OUTLOOK
Fannie Mayhem: A History
July 14, 2008

• Fannie Mae Ugly 07/12/08 – Investors continued to flee Fannie Mae and Freddie Mac almost as frantically as the political class tried to reassure everybody there was nothing to worry about.

• The Price of Fannie Mae 07/10/08 – It's time Americans understood the price they could soon pay for the Beltway's confidence game with these high-risk "government-sponsored enterprises."

• Too Political to Fail 04/21/08 – Fannie Mae and Freddie Mac aren't held to the same standards of accountability as everyone else.

• Fannie Mayhem 11/20/07 – Chuck Schumer is lucky Congress ignored his idea that Fannie Mae and Freddie Mac should ride to the rescue of the housing market.

• Fannie More 10/23/07 – Barney Frank and Chuck Schumer have come up with a proposal that would increase the risk to taxpayers from Fannie Mae and Freddie Mac.

• Fannie to the Rescue? 09/29/07 – Fannie and Freddie went up the Hill to fetch a pail of money.

• Freddie Krueger Mac 05/10/07 – Just when you think they're defeated, Fannie Mae and Freddie Mac arise in Congress to kill any attempt to clean up their dangerous habits.

• The Fannie Tax 04/12/07 – Democrat Barney Frank and the Bush Administration seem to have found common ground on new rules for Fannie Mae and Freddie Mac. Naturally, there's a catch.

• Memo to Fannie 06/14/06 – A joke in Washington these days goes like this: "What's the difference between Enron and Fannie Mae?
Answer: The guys at Enron have been convicted."

• Freddie's Friends on the Hill 04/27/06 – The Federal Election Commission sheds some light on how Freddie Mac rewards its friends.

• Fannie Mae's House 10/25/05 – Every Congressional session can be counted on to produce its share of bad bills. But the "reform" bill for Fannie Mae and Freddie Mac is in a class of its own.

• Fannie's Friends on the Hill 05/09/05 – Congress finally seemed ready to protect taxpayers from Fannie Mae and Freddie Mac. Then Republican Mike Oxley decided to ride to their rescue.

• Fannie Turns a Page 12/23/04 – Fannie Mae – a slick, semiprivate firm operating with the patronage of politicians – is the kind of institution one still expects to find in a country like France.

• Fannie the Centaur 12/17/04 – Understanding their half-man, half-beast nature is crucial to fixing Fannie Mae and Freddie Mac in the wake of their recent financial scandals.

• Fannie Mae Liberals 10/14/04 – There were many moments of high entertainment during the House hearings on Fannie Mae's creative accounting. But our favorite was the Mister Magoo performance given by Barney Frank (D., Massachusetts).

• Fannie Mae Enron? 10/04/04 – The company was cooking the books. Big time.

• Fannie Uncovered 09/23/04 – The housing-finance giant has been engaging in some accounting funny business.

• Fannie's Risky Business 02/25/04 – Alan Greenspan puts his credibility behind the cause of reforming Fannie Mae and Freddie Mac.

• Christmas for Fannie Mae 12/23/03 – The Federal Reserve Board releases a new staff study about the impact of taxpayer subsidies for Fannie Mae and Freddie Mac.

• White House Fannie Pack 11/11/03 – White House chief economist N. Gregory Mankiw dares to tell the truth about Fannie Mae and Freddie Mac. The mortgage giants were not amused, which means we're getting somewhere.

• Fannie Takes the Hill 10/09/03 – When the House of Representatives can't get even a modest regulatory bill out of committee, the dangers of Fannie Mae become clear in reality.

• Speaking Truth to Fannie 03/12/03 – The president of the Federal Reserve Bank of St. Louis warns of a potential crisis arising from Fannie Mae and Freddie Mac.

• Fan and Fred Get the Business 02/19/03 – The year has not started auspiciously for the two mortgage-finance behemoths.

• Fannie Mae's Risky Business 09/23/02 – We've been suggesting that Fannie Mae was exposed to too much interest-rate risk. All of a sudden investors seem to agree with us.

• Fannie Capitulates, Sort Of 07/15/02 – Fannie Mae and Freddie Mac end months of resistance, stonewalling and downright crankiness and agree to register their common stock with the Securities and Exchange Commission.

• Fannie's Inside Info 07/01/02 – Even in this post-Enron world, Fan and Fred do not provide as much information about these securities as private mortgage lenders do.

• Inside Fannie 03/19/02 – Fan and Fred don't function like other companies. They're allowed to pile up debt, implicitly guaranteed by taxpayers, without being held to even the minimum of corporate governance standards.

• Frantic Fannie 02/28/02 – Companies taking on so much risk and debt, and backed by taxpayers, ought to be more transparent in what they tell the world.

• Fannie Mae Enron? 02/20/02 – Fan and Fred look like poorly run hedge funds: lots of leverage and snarkily hedged risk. Does the word Enron ring any bells?

http://online.wsj.com/article/SB1215...w_and_outlooks