Tag Archives: Fannie Mae

Here We Go Again

Housing Bubble

As if it wasn’t bad enough that we suffered through one government induced housing bubble and then burst – we’re back at it:

WASHINGTON, DC – Today, Fannie Mae (FNMA/OTC) announced an option for qualified first-time homebuyers that will allow for a down payment as low as three percent. Building upon Fannie Mae’s successful lower down payment program offered through state Housing Finance Agencies, the 97 percent loan-to-value ratio (LTV) option will expand access to credit for qualified first-time homebuyers that may not have the resources for a larger down payment.  These loans will meet Fannie Mae’s usual eligibility requirements, including underwriting, income documentation and risk management standards. These loans will require private mortgage insurance or other risk sharing, as is required on purchase loans acquired by the company with greater than 80 percent LTV.

“Our goal is to help additional qualified borrowers gain access to mortgages,” said Andrew Bon Salle, Fannie Mae Executive Vice President for Single Family Underwriting, Pricing and Capital Markets.  “This option alone will not solve all the challenges around access to credit.  Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage.  We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers.”

Just as before, political pressure to move unqualified borrowers into homes is too much to resist.

Housing Crisis – Data Point

Housing BubbleThere is no doubt that the housing crisis was caused by government policy.  Bad actors everywhere?  Sure.  But at the root of it all the was the government’s desire – by both parties – to increase home ownership in America.  And specifically for the poor and minorities.

With that in mind:

There is no doubt what really happened. Between 1997 and 2007, HUD’s affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis.


As I mentioned, there were guilty actors everywhere. Everyone from the appraiser who fudge the home value to the banker who pressured lending agents to companies that engaged in fraud – guilty all.

But it was the government, through the agencies Freddie and Fannie that drove the whole failure.


HUD was still at it in 2004, stating that “Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market . . . rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create.”

That statement is all you need to understand why, in 2008, 74% of the subprime mortgages outstanding in the U.S. financial system were on the books of government agencies, particularly Fannie and Freddie.



Watch How They Defend ‘Em

Fan and Fred

In a move so surprising I had to check THREE times that I wasn’t reading The Onion.  Obama is proposing to kaput Fanny and Freddie:

(Reuters) – President Barack Obama will propose overhauling the U.S. mortgage finance system in a speech on Tuesday, weighing in on a tangled and polarizing problem that was central to the devastating financial crisis in 2007-2009 and that continues to slow the economic recovery, the White House said.

Just another big government program in the waiting, right?  Hardly:

Obama will propose eliminating mortgage finance entities Fannie Mae and Freddie Mac over time, replacing them with a system in which the private market buys home loans from lenders and repackages them as securities for investors, senior administration officials said.


Obama is suggesting that we demolish the government agencies and replace them with private market systems?  But I thought that the practice of repackaging mortgages was immoral and the root of all evil?

The mortgage securitization process is deemed essential to the smooth flow of capital to housing markets and the availability of credit.

What has happened?  I thought that it was evil Wall Street that brought down fire and brimstone upon us all?  It was Wall Street bankers that took mortgages, packaged them and the resold them.  Right?

The two enterprises don’t directly make loans, but buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.

But how much influence do they really have?

Fannie and Freddie currently own or guarantee half of all U.S. mortgages and back nearly 90 percent of new ones.

Blink.  Blink.

Holy shit that’s a lot of loans.

It’s long overdue, to be sure, that Fannie and Freddie are shut down and the government stop its subsidizing of loans to folks who have no hope of paying them back.  For me, this just reinforces the fact that the government policies and agencies were the primary driving force behind the housing collapse.

Now, to see who may or may not be right, watch who approves of this approach and watch who does not approve of it.  The first democrat that defends Fannie and Freddie is the first to be guilty of those policies I have been criticizing this whole time.  And the first republican who opposes the President is the most guilty of simply opposing every idea he has.


The Birth Of The Next Housing Crisis – Day One?


I’m not sure that we’ll have another housing bubble burst soon, or even in my lifetime.  But I’m sure that if we do, the genesis of that bubble will begin like this:

 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.

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.

The best of intentions, to be sure.  But the beginnings of a potential housing contagion.

And let’s not forget the associated racist dog whistle that accompanies these efforts:

“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.”

And like past bad behavior, this time around the language surrounding the policy sounds good:

“I think the ability of newly formed households, which are more likely to have lower incomes or weaker credit scores, to access the mortgage market will make a big difference in the shape of the recovery,” Duke said last month. “Economic improvement will cause household formation to increase, but if credit is hard to get, these will be rental rather than owner-occupied households.”

It’s a free stimulus!

However, to be fair, if this is Day One, then Day Zero occurred a long time ago:

Deciding which borrowers get loans might seem like something that should be left up to the private market. But since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans, according to the industry publication Inside Mortgage Finance. It has done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.

It’s the same song that got us into this mess, this is just a new stanza.



Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

Yes it did:

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tractmonth that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

This should not be contentious or surprising or controversial.

The government wanted to increase the home ownership rate among US citizens.  The government created conditions that would increase that rate.  Such conditions led to practices that helped that increase.

In short; riskier lending.

And at the heart of it all?  The usual suspects; Fran and Fred:

To satisfy CRA examiners, “flexible” lending by large banks rose an average 5% and those loans defaulted about 15% more often, the 43-page study found.

The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.

CRA regulations are at the core of Fannie’s and Freddie’s so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.

It passed a law requiring the government-backed agencies to “assist insured depository institutions to meet their obligations under the (CRA).” The goal was to help banks meet lending quotas by buying their CRA loans.

But they had to loosen underwriting standards to do it. And that’s what they did.

Oh boy, this won’t play well in the press.

Fannie And Freddie CEOs Charged With Fraud

I have long held the belief that Fannie and Freddie were leading charge when it came to the housing boom and then bust.  Certainly there were other actors with fault viably assigned, but Fannie and Freddie were the agencies that led the way.

So hearing that they are being charged with fraud is a bit of vindication:

The Securities and Exchange Commission today brought civil fraud charges against six former top executives at Fannie Mae and Freddie Mac, saying they misled the government and taxpayers about risky subprime loans the mortgage giants held when the housing bubble bust.

And for what are they accused of:

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, SEC’s enforcement director. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk.”

And to what extent?

According to the lawsuit, Fannie told investors in 2007 that it had roughly $4.8 billion worth of subprime loans on its books, or just 0.2 percent of its portfolio. The SEC says that Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit, or 11 percent of its holdings.

Mudd told a congressional panel in March 2007 that Fannie’s subprime business represented less than “2 percent of our book.” He also said the company held subprime mortgages “very carefully.”

Freddie told investors in 2006 that it held between $2 billion and $6 billion of subprime mortgages on its books. The SEC says its holdings were actually closer to $141 billion, or 10 percent of its portfolio in 2006, and $244 billion, or 14 percent, by 2008.

In a May 2007 speech in New York, Syron said Freddie had “basically no subprime exposure,” according to the suit.


And how big of a player are they in the market today?

Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default and then sell them to investors around the world. The two own or guarantee about half of U.S. mortgages, or nearly 31 million loans.

Half.  The two agencies own or guarantee HALF of ALL the mortgages in the US.

And they lied.

Government’s Role In The Housing Bubble And Bust

It’s the classic tribal warfare.  The Republicans wanna blame the Democrats for the boom then bust of the housing bubble.  Specifically they wanna blame Carter for the CRA, then Clinton for accelerating it and finally Barney Frank for enabling Fannie Mae and Freddie Mac.

For their part, the Democrats wanna blame the Republicans for easing regulations and over site of the financial markets.  Most especially with regards to leveraging, allowing banks to act as investment firms and the existence of the derivative market.

I have long been a believer that it was Fannie and Freddie that drove us up to and then over the cliff.  And for a long time have held the Democrats responsible.  I am learning and need to amend my position.

It was government policy that drove us up to and then over the cliff.  Policy that began with the noble intention of  providing affordable housing to more and more people.

However, when government subsidizes, we often always get poor results:

It was perhaps a worthwhile goal, but it caused the financial crisis when it was done by lowering mortgage underwriting standards. In the end, it was a colossal policy error by Congress and two presidential administrations.

Data from the article demonstrates the government’s involvement:

The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

At first, this quota was 30%; that is, of all the loans they bought, 30% had to be made to people at or below the median income in their communities. HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30% to 50% under Clinton in 2000 and to 55% under Bush in 2007.

It is certainly possible to find prime mortgages among borrowers below the median income, but when half or more of the mortgages the GSEs bought had to be made to people below that income level, it was inevitable that underwriting standards had to decline. And they did. By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit. This continued through the 1990s and 2000s until the housing bubble–created by all this government-backed spending–collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages.

In short, the government created the criteria, or the supply, and then the government created the agencies, or the demand.

Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government.

So yes, it was the government POLICY that created this bubble.  But, back to Fan and Fred, did they have a role?

Of the 19.2 million subprime and low quality loans that were on the books of government agencies in 2008, 12 million (about 62%) were held or guaranteed by Fannie and Freddie.

Yes.  And a big one.

However, I’m forced to amend my position.  It was not the SOLE fault of Fan and Fred for the crisis, but they are certainly a major player.

To his credit, and to complete the Liberal tragedy, even Frank himself acknowledges his errors:

I hope by next year we’ll have abolished Fannie and Freddie … it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.


Mandatory Fun: We Own Hundreds of Thousands of Foreclosed Homes

Look, owning a home is a good thing.  I think everyone should buy a home.

In the same way that I think everyone should pay off credit card bills every month.

In the same way that I think everyone should contribute to their retirement.

That is, I think that you should do all these things IF YOU CAN.

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We Hate Banks! And Wall Street! But We L.O.V.E. Us Some Fannie!

It continues to continue.

Each and every day we hear from Washing that we hate banks and business.  And look, there’s a lot to hate.  When it comes to shady deals and crooked crooks, banks and Wall Street are full of ’em.  We all want ’em gone.

But serious.  If you’re gonna call out greedy crooks, you should make sure you call out ALL greedy crooks.

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Fannie and Freddie Done

Thank gawd!  To finally see the two agencies almost single-handedly responsible for the financial crisis of the last 2 years on the ropes almost makes up for last night’s horror show.  Almost.

“It’s clear that Fannie and Freddie, as they currently exist, should be put out of existence, which means the important question is what combination of entities public and private will replace them,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

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