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Fannie and Freddie Execs On The Carpet
I stayed up and watched the C-Span replay of the House Government Oversight Committee hearings on Fannie Mae and Freddie Mac. Appearing were the last two heads of Freddie Mac : Leland Brendsel 1987-2003 and Richard Syron 2003-2008 and the two former heads of Fannie Mae : Daniel Mudd 2005-2008 and of course the lovely and talented Franklin Raines 1999 -2004.
It was surreal. Not one of these guys took any responsibility for the outsized risks that their GSE's took on their watch. They were quick to blame the originators of the mortgages while being careful not to blame the borrowers themselves EXCEPT for middle and upper middle class speculators who placed the same bet these clowns did; that the housing market would keep going up.
This was NOT the House Financial Services Committee and it's little wonder why.
A lot of pants and panties would be down at a lot of Congressional ankles if it had been; especially Barney Frank and the always charming and scintillating Maxine Waters.
All in all Henry Waxman's soon to be former Committee did a good job of holding the former execs feet to the fire. Their own memos and e-mails clearly showed that they understood or should have understood the risks of Alt-A and sub-prime loans but bought or guaranteed them anyway to preserve "market share". For instance a 2004 memo addressed to both Raines and Mudd predicted both rising housing prices and the enhanced risk of the bubble bursting i.e. their own Credit Risk Mgrs. were TELLING them that the good times were NOT going to last. Fannie then went ahead and INCREASED its purchases of sub-prime and Alt-A mortgages BUT they didn't call them that. Since they LOWERED their underwriting standards ( at the same time their reserve requirements were also being lowered btw ) risky loans were carried on their books as PRIME and near-Prime mortgages !!!! This occurred despite Fannie and Freddie portfolio managers knowing and reporting that many of the Alt-A loans were NINA loans = "No Income No Asset" loans i.e no income verification and no asset verification. They abandoned long standing practices and requirements for equity and replaced that with a reliance on credit scores and then abandoned even those. Andrew Cuomo at HUD REDUCED the down payment requirement from 10 % to 2.5 %. Eventually under Raines, Fannie would take it to ZERO. And get lauded for it by Maxine , Barney and Chris Dodd.
Year after year, they were getting memo after memo warning them of increased default risks and then as early as 2005; increases in actual defaults. In partial response Mudd REDUCED the budget of Fannie's Credit Risk Office and fired the chief Credit Risk Manager although he claimed it was for unrelated reasons. In 2005 Alt-A and sub-prime loans were 14% of their "book". By 2008 it was 33%.
Alt -A loans have defaulted at 10 times the rate of traditional mortgages and Fannie and Freddie bought more of them than anyone else.
Couple the foregoing with a lack of regulation as neither Fannie nor Freddie was covered by the 1933 and 1934 Banking Acts. When they were eventually put under both (after Raines and the Dems fought it tooth and nail ) it was discovered that they had cooked their books. Fannie had overstated earnings ( on which Raines and other Fannie execs got bonuses ) and Freddie had actually understated them. This was when Raines was forced to resign; when Fannie's D & O insurer paid out millions on his behalf and when he had to return and forfeit 36 of his 90 million dollars in bonuses. All of the execs received far more in bonuses than they collected in salary. This was also where Raines perjured himself btw. He testified that his bonuses had no connection to Alt-A lending. But there are memos showing that Raines, Jamie Gorelick and RAHM EMANUEL knew that their multi-million dollar bonuses were based in part on the anticipateded "profitability" of inter alia, Alt-A loans.
Even more galling was Raines' claim that nobody at HUD and nobody in Congress was pressuring Fannie and Freddie to issue more loans to promote affordable housing. He also feigned ignorance of the massive lobbying effort by Fannie and Freddie to stave off further regulation as early as 2001. In fact Fannie was hiring some lobbying firms and having them sit on the sidelines just so they couldn't be hired to lobby in favor of increased regulation. Only Syron was man enough to admit that the HUD guidelines increased the need to take on riskier mortgages.
Even more importantly, none of these turkeys acknowledged that what they were doing was itself inflating the housing market. Their purchases of Alt- A and sub-prime loans enabled lenders to make MORE such loans . They continuously increased the pool of available mortgage money which drove up home prices and occurred during a period of static middle class income. And they KNEW all this. Their staff economists and risk managers were telling them the housing boom would not last, that defaults would increase and that the whole lending spiral was unsustainable. In their defense, they did have a very limited ability to diversify i.e. their "mission" prevented them from buying higher quality mortgages.
Not one of these guys ever said that they recognized Fannie and Freddie were in trouble or ever did anything to find out and deal with the problem. This was despite the fact that while banks had typical loan reserves of 8 to 9 %; Fannie and Freddie had 2 % and fought effforts to raise it to 3 %. That means they were leveraged 50 to 1. Lehman Brothers was leveraged 30 to 1.
All of them acknowledged an inherent conflict with being a private company with shareholders that had a public mission. They had a duty to make profits for their shareholders while also having a mission to provide affordable mortgages. They were supposed to do three things : 1. Stay liquid. They failed. 2. Keep housing affordable. They failed by driving house prices UP. and 3. Promote stability in BOTH the housing and lending markets and they failed as we all know.
One silver lining is that a number of Congresspeople on both sides of the aisle are asking what I've been asking for months : " Why the hell is the Federal Government involved in the mortgage business at all ?" A few of the Committee members admitted that they'd been wrong in opposing conservatorship for Fannie and Freddie. Typical was one from Mass : "After listening to you guys with nobody taking the slightest bit of responsibility, conservatorship never looked so good."
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Re: Fannie and Freddie Execs On The Carpet
unless and until gov't policy regarding subsidized housing / home ownership for low income / urban / minority Americans changes, nothing else is likely to change either.
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Even more galling was Raines' claim that nobody at HUD and nobody in Congress was pressuring Fannie and Freddie to issue more loans to promote affordable housing. He also feigned ignorance of the massive lobbying effort by Fannie and Freddie to stave off further regulation as early as 2001. In fact Fannie was hiring some lobbying firms and having them sit on the sidelines just so they couldn't be hired to lobby in favor of increased regulation. Only Syron was man enough to admit that the HUD guidelines increased the need to take on riskier mortgages.
... and this fact is as unlikely to be reported in Mainstream Media after these hearings as it was the 'first time around' !!!
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Re: Fannie and Freddie Execs On The Carpet
Just how much did the 'perpetrators' personally earn while failing these institutions?
More reasonable management of loan guarantees, rather than just abandoning the concept, is a better thing to do. But this has needed frequent government oversight. Something this administration definitely has NOT been good at.
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
threlayer
Just how much did the 'perpetrators' personally earn while failing these institutions?
More reasonable management of loan guarantees, rather than just abandoning the concept, is a better thing to do. But this has needed frequent government oversight. Something this administration definitely has NOT been good at.
Didn't this administration directly propose more oversight on this issue, and it was killed by congressional Democrats?
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
jester214
Didn't this administration directly propose more oversight on this issue, and it was killed by congressional Democrats?
Definitely. Dodd, Frank et. al. have tried to claim that their opposition to Bush and Republican efforts to rein in Fannie and Freddie was to "preserve its mission" to provide affordable housing, that the Republican proposals they opposed would have limited lending. And to some extent increased reserve requirements WOULD have lessened the funds available to purchase mortgages. Maintaining or reinstituting a 10 % down payment requirement WOULD have limited lending. So would basic income and asset verification.
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Re: Fannie and Freddie Execs On The Carpet
Quote:
Originally Posted by
threlayer
Just how much did the 'perpetrators' personally earn while failing these institutions?
More reasonable management of loan guarantees, rather than just abandoning the concept, is a better thing to do. But this has needed frequent government oversight. Something this administration definitely has NOT been good at.
Raines was paid a multi -million dollar salary plus bonuses as high as 10 million a year. He is STILL collecting 2 million a year in bonuses and has a pension plan. The other three were paid more modestly but all were well into 7 figures.
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Didn't this administration directly propose more oversight on this issue, and it was killed by congressional Democrats?
yes, several times in fact. But these attempts were quickly shut down by Democrat diatribes (with mainstream media support) about Republican efforts to limit FNM / FRE lending to low income / inner city / minority borrowers being based on 'racist' motivations.
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Re: Fannie and Freddie Execs On The Carpet
Yeah. That is oscene considering, and just extremely high regardless.
I agree FM and FM should have been throttled, regardless of whichever person or party did the diversion. But again that was only a part of the problem. THe low-incomed getting into housing was small compared with the higher-incomed speculators buying flipping and hoping for a continued bubble. Ignoring the high stakes gambling on Wall Street is what really perpetuated a situation that could have been handled without anywhere near this effect, worldwide.
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
Eric Stoner
Not one of these guys ever said that they recognized Fannie and Freddie were in trouble or ever did anything to find out and deal with the problem.
Gee, I wonder why. "Rep. Carolyn Maloney, D.-N.Y., grilled Freddie Mac's Syron about the company's decision to fire David Andrukonis, Freddie Mac's former chief risk officer." }:D
http://cbs2.com/business/freddie.fan....2.883397.html
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Re: Fannie and Freddie Execs On The Carpet
Bush administration, financial industry thwarted efforts to curb greed
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A number of factors contributed to the mortgage disaster and credit crunch. Interest rate cuts and unprecedented foreign capital infusions fueled thoughtless lending on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute.
One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology. (My emphasis)
The Bush Administration and many banks clung to what is known as "preemption." It is a legal doctrine that can be invoked in court and at the rulemaking table to assert that, when federal and state authority over business conflict, the feds prevail — even if it means little or no regulation.
Blame BUSH and the financial marketeers...
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
NWoD
Blame BUSH and the financial marketeers...
yawn......http://www.opensecrets.org/news/2008...-of-fanni.html
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Re: Fannie and Freddie Execs On The Carpet
^^^ as always, 'follow the money' !
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Re: Fannie and Freddie Execs On The Carpet
Plausible Deniability is another operative term
No matter the administration, so far, a lot of important stuff goes on behind closed doors; it is hidden because it's just not quite what can easily be explained to a doubting crowd. To say the least.
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Re: Fannie and Freddie Execs On The Carpet
There is no avoiding the 1995 changes to the C.R.A. REGULATIONS and their impact on Fannie and Freddie. These Regulations were invented by HUD. Congress did not pass them. HUD created them as many Federal agencies do to "implement " legislation ; in this case the C.R.A.
By 2005,, HUD REQUIRED that 45% of all loans bought by Fannie and Freddie be to low and moderate income borrowers. They were further required to buy 32 % of their loans from people in central cities and other "underserved" ( read POOR ) areas and that 22% of the loans be from "VERY low income families or families living in low income neighborhoods".
The CRA was designed and INTENDED to overcome the effects of decades of "red-line lending" and the development of Credit Scores make it easier than ever to lend money based solely on safety and soundness i.e. the borrowers ability to pay it back. It culminated in macabre loans like the California grape picker making $14,000 a year getting a no money down mortgage for $700,000.
When a lender ( or loan guarantor) is REQUIRED to have a substantial percentage of its portfolio consist of loans to people living in poor areas and worse yet with "low and very low " incomes ; that lender is virtually guaranteed to fail. Lending money to "VERY POOR" people ? Lending money to people living in poor areas I can understand. The Nehemiah Houses; the New York City Home Ownership Program and other similar type mortgage lending has been very successful with a very low rate of default. But lending hundreds of thousands of dollars to people living modest paycheck to paycheck ? With NO MONEY DOWN ?? With credit scores below 600 ??? With a history of default and or bankruptcy ?????????????? What were these people thinking ?
To avoid a repeat of this fiasco we have to return to borrowers chasing the money isntead of having lenders seeking out rikier and riskier borrowers to fulfill some ridiculous notion that :
Everyone is entitled to own a house regardless of their financial condition and other traits and abilities necessary to be a responsible owner. Some people are simply meant to rent.
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Again the Republicans had a clear landing field for at least 4 years. If they thought it was so important they could have done something. Now they are trying to Blame a Democrat for something that was clearly a Republican mistazke/oversight/blunder/whatever. No matter what the origin was, a LOT of people had a big part in this fiasco, including the public. Just that the administration could have blocked the possibility and they didn't. In fact they let Wall Street get completely out of hand. I know several people who got out of the market over a year age because of fears of the consequences of such WS stupidity.
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Again the Republicans had a clear landing field for at least 4 years. If they thought it was so important they could have done something
Again, what republican senator or representative is willing to face a storm of 'racism' charges on the part of Democrats and the mainstream media by attempting to rein in FNM / FRE lending to poor credit risk low income minority inner city homeowners ? That was a formula for policital suicide (which occurred anyhow, but hey what the hell).
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Yeah. Probably right; most politicians are spineless. "Politically correctness" foils the populace again. Actually there probably are more poor working whites than poor working blacks looking for house ownership. But who needs mere facts when their minds are already made up.
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
jester214
Didn't this administration directly propose more oversight on this issue, and it was killed by congressional Democrats?
Actually Republicans held a majority in both houses at this time. There was a stealth lobbying effort aimed at a handful of Republicans and they, combined with the Dems, were responsible for the defeat.
Also Bush increased the target goal of loans to low and moderate income borrowers to 56%.
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http://www.slate.com/id/2204583/pagenum/all/
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In recent months, conservative economists and editorialists have tried to pin the blame for the international financial mess on subprime lending and subprime borrowers....
This line of reasoning is absurd for several reasons. Many of the biggest subprime lenders weren't banks and thus weren't covered by the CRA...
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I would never have guessed based on the stuff I've read on this site.
This is precisely the kind of success story that is needed. These are worthy enterprises.
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
threlayer
Again the Republicans had a clear landing field for at least 4 years. If they thought it was so important they could have done something. Now they are trying to Blame a Democrat for something that was clearly a Republican mistazke/oversight/blunder/whatever. No matter what the origin was, a LOT of people had a big part in this fiasco, including the public. Just that the administration could have blocked the possibility and they didn't. In fact they let Wall Street get completely out of hand. I know several people who got out of the market over a year age because of fears of the consequences of such WS stupidity.
One set of facts for everyone. Any change required S I X T Y ( 60 ) votes in the Senate. Dodd and others made sure the Republicans never did. He and Frank have been trotting around for months to favorable media outlets saying that they prevented the Republicans from changing the "mission" of the GSE's; that they opposed reform and increased oversight to "protect" Fannie and Freddie.
Dodd stiull hasn't explained how he saved $100 k on his mortgage. He still hasn't
released his HUD App.
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Re: Fannie and Freddie Execs On The Carpet
^^ In itself that would have done a LOT less damage than did those banking/finance execs playing Russian Roulette with our national economy. Nor have you factored in the effect of the speculative housingflips made by the mid or near well-to-do. I believe the amount of money involved in those is much larger in total. Those deals fell thru nwhen the inflated housing baslloon fell apart and they were left holding a lot of upside down loans; perhaps the inflation in gasoline and even food put even more pressure on them to turn to foreclosure or bankruptcy.
For example housing costs locally are not high and the rate of housing appreciation has been only moderate at best, as an average. Generally local banking is pretty conservative, but we have a lot of banks wit national coverage (Chase Citibank, BoA, HSBC, and a lot of mortgage-only facilities). Flipping has not been very active here. Further we have about the same rate of poor as nationally. And the same finance system applies here as to the rest of the US. As a result foreclosures in this area are at a low rate, but higher than previously. The local area is not nationally significant, yet the same factors apply here with out the same results. Thus the presence of the C.R.A. REGULATIONS alone is neither a necessary nor a sufficent condition to cause massive foreclosures found in much of the rest of the country. There are other more important factors at play.
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
threlayer
^^ In itself that would have done a LOT less damage than did those banking/finance execs playing Russian Roulette with our national economy. Nor have you factored in the effect of the speculative housingflips made by the mid or near well-to-do. I believe the amount of money involved in those is much larger in total. Those deals fell thru nwhen the inflated housing baslloon fell apart and they were left holding a lot of upside down loans; perhaps the inflation in gasoline and even food put even more pressure on them to turn to foreclosure or bankruptcy.
For example housing costs locally are not high and the rate of housing appreciation has been only moderate at best, as an average. Generally local banking is pretty conservative, but we have a lot of banks wit national coverage (Chase Citibank, BoA, HSBC, and a lot of mortgage-only facilities). Flipping has not been very active here. Further we have about the same rate of poor as nationally. And the same finance system applies here as to the rest of the US. As a result foreclosures in this area are at a low rate, but higher than previously. The local area is not nationally significant, yet the same factors apply here with out the same results. Thus the presence of the C.R.A. REGULATIONS alone is neither a necessary nor a sufficent condition to cause massive foreclosures found in much of the rest of the country. There are other more important factors at play.
How about when Fannie and Freddie lowered their standards to the point where
down payments were no longer required ? When they lowered their standards so that FORMERLY sub-prime loans were carried on their books as prime loans ?
There certainly was a lot of speculation and flipping but at the heart of this mess were lenders willing to lend on an inherently shaky basis : low credit scores; no income or asset verification; sometimes, no job verification.
There were plenty of banks that resisted the CRA regs. and stuck to sound lending practices. Isn't it amazing that NONE of them are in trouble ?
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The law doesn't and didn't require banks to look away at repayment probabilities. The mortgage companies did that on their own. The whole de-regulation of the finance industry is what caused this to get out of control. The CRA Regs had at least 10-12 years to fall apart and not much happened, even with that stupid housing bubble, until the finance industry hit a bump in the road and their metaphorical shock absorbers suddenly didn't work--because they took shortcuts and didn't even install them. That's how we all got bumped off track. It wasn't the rain on the road; the rain had been there all long and we were doing OK until we hit that bump.
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Re: Fannie and Freddie Execs On The Carpet
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Originally Posted by
threlayer
The law doesn't and didn't require banks to look away at repayment probabilities. The mortgage companies did that on their own. The whole de-regulation this of the finance industry is what caused this to get out of control. The CRA Regs had at least 10-12 years to fall apart and not much happened, even with that stupid housing bubble, until the finance industry hit a bump in the road and their metaphorical shock absorbers suddenly didn't work--because they took shortcuts and didn't even install them. That's how we all got bumped off track. It wasn't the rain on the road; the rainhad been there all long until we hit that bump.
Yes and NO. The CRA was passed in 1977 and had little actual impact on lending UNTIL 1995 when Housing and Urban Development Secretary Andrew Cuomo CHANGED the HUD regulations and INCREASED the number and percentage of sub-prime loans Fannie and Freddie had to make. Everyone in the Lib camp including all Clintonista apologists would like everyone to forget how Cuomo joined hands with Janet Reno to threaten prosecutions under the CRA even though there never was any prosecutorial language or mandate under the CRA.
I hate to do this but in fairness to Fannie and Freddie's execs they were put in an almost impossible position. On the one hand they were running a for-profit corporation with shareholders and thus things like maintaining market share were important. But so were safe and sound lending practices. On the other hand
they were spin offs from Federally founded agencies with implicit Federal guarantees. They had a Federal mandate to provide mortgages to poorer neighborhoods and less affluent borrowers. There's nothing wrong with lending money to someone living in a poor neighborhood IF : they have a job ( or hit the Lotto ); can afford a down payment and are reasonably likely to repay the loan.
Where Fannie and Freddie REALLY got into trouble was with the bonus system that Raines instituted where everyone from the loan officers all the way up to his desk got bonuses based on the increase to the book of loans. This incentivized downgrading loan underwriting and eventual reduction and then elimination of down payment requirements and a radical increase in the leveraged position from
12 to 1 to 50 to 1.
You point to the deregulation of the financial industry , but the fact is that Fannie and Freddie were E X E M P T for a long time from almost all Federal banking regulations. OFHEO was continually underfunded and underpowered and one of Frank and Dodd's worst sins ( with some aiding and abetting from a few Republicans ) was to resist every attempt to beef up its regulatory and oversight
ability.