Monday, January 11, 2010

 

How Key Democrats Engineered The Fannie/Freddie Frauds

The U.S. housing mortgage crisis got bigger on Christmas Eve with the very quiet announcement that Obama's government was taking the lid off taxpayer's exposure to the subprime mortgage fraud. To put the gravity of that move into historical context, the Wall Street Journal's Peter Wallison wrote a December 30 exposé about Fanny/Freddy's central role in decimating the financial markets and almost destroying the world economy:

On Christmas Eve, when most Americans' minds were on other things, the Treasury Department announced that it was removing the $400 billion cap from what the administration believes will be necessary to keep Fannie Mae and Freddie Mac solvent. This action confirms that the decade-long congressional failure to more closely regulate these two government-sponsored enterprises (GSEs) will rank for U.S. taxpayers as one of the worst policy disasters in our history. ...

The GSEs had begun buying risky loans in 1993 to meet the "affordable housing" requirements established under congressional direction by the Department of Housing and Urban Development (HUD).

Most of the damage was done from 2005 through 2007, when Fannie and Freddie were binging on risky mortgages. Back then, [Congressman Barney] Frank was the bartender, denying that there was any cause for concern, and claiming that he wanted to "roll the dice" on subsidized housing support. ...

By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)--risky loans with a total principal balance of $1.6 trillion. These are now defaulting at unprecedented rates, accounting for both their 2008 insolvency and their growing losses today. Since 2008, under government control, the two agencies have continued to buy dicey mortgages in order to stabilize housing prices.

There is more to this ugly situation. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A. ...

It is easy to see how this misrepresentation was a principal cause of the financial crisis.

Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.

In addition, about 7.7 million subprime and Alt-A housing loans were in mortgage pools supporting MBS issued by Wall Street banks--which had long before been driven out of the prime market by Fannie and Freddie's government-backed, low-cost funding. The vast majority of these MBS were rated AAA, because the rating agencies' models assumed that the losses that are incurred by subprime and Alt-A loans would be within the historical range for the number of high-risk loans known to be outstanding.

But because of Fannie and Freddie's mislabeling, there were millions more high-risk loans outstanding. That meant default rates as well as the actual losses after foreclosure were going to be outside all prior experience. ...

[The roots of the financial crisis] go back to 1993, when Fannie and Freddie began stocking up on subprime and other risky loans while reporting them as prime.

Why Fannie and Freddie did this is still to be determined. But the leading candidate is certainly HUD's affordable housing regulations, which by 2007 required that 55% of all the loans the agencies acquired had to be made to borrowers at or below the median income, with almost half of these required to be low-income borrowers.
Via Power Line comes word that Pajamas Media is doing something with this story that the MSM of course refuses to do: they're investigating. And writer Tom Blumer has uncovered what appears to be a brazen scheme by Democrat insiders (think Jim Johnson, Franklin Raines, Jamie Gorelick, Chris Dodd, Barney Frank, Chuck Schumer and yes, Barack Obama, Rahm Emanuel and ACORN) to profit in manifold ways from a massive defamatory fraud on American capital markets, for which Congressional Democrats would then have the pretense to indict the free markets, and therefore Capitalism, as responsible for Democrats' crimes:

Before (former Fannie Mae chief credit officer Edward)Pinto's bombshell, we knew that Fan and Fred were used as instruments to "encourage" loans to undeserving borrowers. We knew that this "encouragement" was enforced through the Community Reinvestment Act (CRA), a law originally passed in the 1970s that was "progressively" given threatening teeth in ensuing years.

We have known for some time, as described in my September 2008 column, that Fan and Fred lowered the qualifying standards for conventional and subprime loans they would buy from participating lenders roughly as follows (quoting from that column):

The credit score threshold for conventional mortgages, which had generally been 670 or more, dropped to about 630. In the real world, a score of 630 indicates that you're having trouble with your debt load, paying your bills on time, or a little of both.

More ominously, the credit score threshold for subprime mortgages, which had generally been 630 or more, fell to about 590. A score of 590 is the credit scoring equivalent of barely having a pulse.
We know that in doing this, Fan and Fred, as well as those who underwrote or bought securities backed by these conventional and subprime mortgages, were taking a huge risk by hoping that borrowers with mediocre or poor credit histories would somehow keep up with their mortgage payments. ...

Incredibly, the Pinto paragraph above takes things one step further. It's bad enough that Fan and Fred lowered the loan approval thresholds. Pinto's point is that for 15 years, they doubled down by "routinely" misclassifying approved loans, effectively telling the capital markets and the public that these loans weren't as risky as they really were. Because of this, securities backed by these mortgages carried lower interest rates than they would have if the risks had been properly disclosed. Some of the offerings should probably never have been issued or should have been given junk bond pricing. Further, misrepresented loans Fan and Fred kept on their books enabled the two entities to continually make false claims of financial health.
And now Obama has just decreed that there is no limit to the claims Fannie and Freddie can make on the American taxpayer.

No.

Limit.

Kinda makes Obamacare pale in comparison as the tipping point for statist control, doesn't it?

No wonder the MSM is ignoring this story. So much scandal, so many friends in the Democratic Party, so much protective fawning for president Baby Jesus. Charles Gibson probably thinks this is "one for the cables": it certainly is one for the American voter to get to know before the congressional elections in November, by which time they may want an explanation not only from the shameless crooks populating the upper ranks of the Democratic Party Crime Family but their enablers and apologists in the Main Stream Media as well.

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