Thursday, February 4, 2010

Fannie, Freddie, and You as the Secret Santa

[Updated 20-SEPT-2010]
Perhaps you missed this big news during the holidays while you were enjoying time with friends and family but the United States government committed a huge sum of taxpayer money without Congressional approval. For some reason, it has not been widely reported in the media, which I personally find strange, interesting, and a tad bit frightening.

Quietly, late on Christmas Eve 2009, during the Christmas-New Years news lull, the Obama Administration pledged UNLIMITED taxpayer-financed assistance to bankrupt, government-run Fannie Mae and Freddie Mac. This allowed the Administration to exceed the $400 billion loss limit without seeking Congressional approval (which in itself may be un-Constitutional). Some people call this "nationalization," especially when referring to Banana Republics.

WASHINGTON POST (25-DEC-2009): U.S. promises unlimited financial assistance to Fannie Mae, Freddie Mac
We do not know the final tally for this madness. It will likely exceed the cost of the following programs, measured in inflation-adjusted "today" dollars.
So how did we get here? Here is some interesting historical basis, courtesy of the New York Times archives. Travel back to September 1999, nine years before the crisis. Remember, we and the government were flush with money. The Dot.Com bubble was in full swing and we were all going to get rich selling dog food over the Internet using our sock-puppet spokesmodel. Government was awash is tax dollars from low unemployment and capital gains on highly-appreciated bubble stocks. We were running a SURPLUS! The money would never end!

NEW YORK TIMES (29-SEPT-1999): Fannie Mae Eases Credit To Aid Mortgage Lending
WASHINGTON, Sept. 29, 1999 -- In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
So far, well intentioned but not without economic risk, especially knowing what happened during the 1980's Savings and Loan Crisis (but apparently we do not learn from our mistakes). Read on ...
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
Nearly a decade before the disaster, the potential risk was there for everybody to see--everyone but Congress.

Now some will argue, "Well, that's just Fannie Mae. Lots of banks made bad loans." True, but you also need to understand how quasi-governmental Fannie Mae operates, as described in the article.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
And the banks did exactly what the government, via Fannie Mae, wanted. Banks offered more mortages to "people with less-than-stellar credit." Fannie Mae was a willing buyer for just about any loan, regardless of quality. The market reached its ultimate madness with 100% loan-to-value NINJA loans (No Income, No Job or Assets). I don't think the banks needed much pushing by outsiders, although that did occur in some cases. Banks and mortgage brokers made money on fees selling these loans to a quasi-governmental entity willing to buy this junk. Who turns down free money if the government thinks it's a good idea?

Along about 2003, five years before the meltdown, various Enron-like accounting irregularities were discovered at Fannie Mae and its cousin, Freddie Mac -- both under Congressional oversight. This prompted a Bush Administration call for better controls and oversight.

NEW YORK TIMES (10-SEPT-2003): New Agency Proposed to Oversee Freddie Mac and Fannie Mae
WASHINGTON, Sept. 10, 2003 -- The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
The proposal is the opening act in one of the biggest and most significant lobbying battles of the congressional session.
"The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises," Mr. Oxley (of Sarbanes-Oxley fame) said at the hearing. "We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight," the independent agency that now regulates the companies.

"These irregularities, which have been going on for several years, should have been detected earlier by the regulator," he added.

The Office of Federal Housing Enterprise Oversight, which is part of the Department of Housing and Urban Development, was created by Congress in 1992 after the bailout of the savings and loan industry and concerns about regulation of Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them as securities or hold them in their own portfolios.
And what was the debate in regard to the proposals? Here are some now-infamous quotes from Congressman Frank of Massachusetts, who continues to hold office.

House Financial Services Committee hearing, Sept. 10, 2003 (Congressman Barney Frank):
The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios ....
House Financial Services Committee hearing, Sept. 25, 2003 (Congressman Barney Frank):
I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing ....
I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
It's always easier to gamble when it's other people's money. Oh, and it's always a good idea to disregard the advice of professional accountants.

My favorite quote, in hindsight, is from Senator Hagel (Nebraska), a critic of Fannie and Freddie. Was he talking about fat cat Wall Street bankers here? No, this was for then quasi-governmental entities under Congressional review, now fully owned by the government.
Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we
reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.

In a June 28, 2004 letter, 58 members of Congress--many from the far-left Congressional Progressive Caucus--admonished President Bush ...
We have been concerned that the Administration's legislative proposal regarding the GSEs would weaken affordable housing perfomance by the GSEs, by emphasizing only safety and soundness. While the GSEs' affordable housing mission is not in any way incompatible with their safety and soundness, an exclusive focus on safety and soundness is likely to come, in practice, at the expense of affordable housing.
Sigh! In hindsight, there was apparently too much emphasis by some in Congress on borrowers that were incapable of repayment.

In 2005, three years before the crisis, Senator Hagel went on to author S.190: Federal Housing Enterprise Regulatory Reform Act of 2005 which sought to regulate the likes of Fannie Mae and Freddie Mac. Unfortunately, it apparently "died in committee."

In May 2006, two years before the Fannie's and Freddie's bankruptcy, seizure by the federal government, and ultimate bailout by the U.S. taxpayer, twenty Senators sent a letter to then-Majority Leader Bill Frist pledging their support to help bring S.190 to the Senate floor for a vote.
We are concerned that if effective regulatory reform legislation for the housing-finance government sponsored enterprises (GSEs) is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. 
They are mammoth financial institutions with almost $1.5 Trillion of debt outstanding between them. With the fiscal challenges facing us today (deficits, entitlements, pensions and flood insurance), Congress must ask itself who would actually pay this debt if Fannie or Freddie could not?
Congress has the opportunity to recommit itself to the housing mission of the GSEs while at the same time making sure the GSEs operate in a manner that does not expose our financial system, or taxpayers, to unnecessary risk.
More importantly, Congress must ensure that the American taxpayer is protected in the event either GSE should fail.
So what did Congress do? Apparently nothing. The bill was never voted upon, the legislation never took effect, and now we, the Taxpayers, are out a few hundred billion dollars. Oops!

SIDENOTE: In an ultimately ironic moment, Senate Majority Leader Frist, to who the letter was addressed said, "Congress should be forward thinking in policies we set, instead of waiting until catastrophe looms."

On July 14, 2008, two months before Fannie's and Freddie's crash, Congressman Frank then said:
I don't think that Fannie and Freddie are financially insolvent. I don't think they need large bailouts.
Two short months later, on 8-SEPT-2008, the United States government, under direction of Secretary of the Treasury, Henry Paulson, seized mortage giants Fannie Mae and Freddie Mac. At the time, the government pledged up to $200 billion in support. Now, that pledge is for UNLIMITED support.
Fortunately, at least a few Washington leaders are not asleep at the switch. Some of these were among the 20 that sent the May, 2006 letter. Despite the article's title, the list of concerned leaders includes right-wing Republican Senator Jim DeMint and left-wing Democrat Congressman Dennis Kucinich. You know something is up when both ends of the political spectrum cry "FOUL!"

Reuters (19-JAN-2009): Six Republican senators take aim at Fannie, Freddie

Yet, I find it interesting that the media is not covering this story. Why not?

The Administration complains loudly about Wall Street bonuses to failed firms (rightly so) but fails to issue a peep about millions paid to government-run Fannie and Freddie executives. Why?

Congress created the Financial Crisis Inquiry Commission to discover the root causes of the crisis. Why doesn't the government investigate the government's role?

See also ...

Veronique de Rugy Explains Fannie and Freddie's Role in the Housing Crisis
A History of the Housing Crisis

No comments:

Post a Comment