Fannie and Freddie: Why Government F's Up

[Ardentfrost]

http://www.nytimes.com/2008/07/13/business/13lend.html

Protected by Washington, Fannie and Freddie Grew

As the Bush administration scrambles to address the sudden decline of the country’s two largest mortgage finance companies, some of their longtime critics say the crisis has been building for years.

Among them is Jim Leach, a Republican former representative from Iowa, who argued two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.

They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.

“There are times in public policy making that one can feel like Don Quixote,” Mr. Leach said of his repeated legislative battles to rein in the two companies’ growth.

Congress established Fannie Mae during the New Deal to make homes more affordable for lower- and middle-income Americans, and Freddie Mac was established later with a similar purpose. Neither provides home loans. Instead, the companies buy mortgages from banks and take on the risks of possible defaults — allowing banks to make even more mortgages.

Today they own or guarantee about half of the country’s $12 trillion in mortgage debt, so the free fall of their share prices last week amid concerns that they were undercapitalized has created chaos for Wall Street and Washington.

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and federal taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.

[...]

The article goes on to name names and point fingers.

I always assumed the mortgage industry was held up by the government in more ways than just the fed rate (which reduces a bank's assessed risk through the capital it borrows to lend), but this is far more serious than I ever imagined. Had I known the whole story, I'd have been bitching about this for years. The government has completely fucked the housing industry, and worse, done so at the expense of the taxpayer.

I've pointed out a few times how subsidizing farms screws up our agriculture. If you have an idea that you think will make you money, then it is your job to convince investors or the bank that your idea will work. Sure, people often put up collateral (like a house or whatever) but there still exists a risk, and the bank/investors will figure out what that risk is and either lend money or not based on that risk. That is what they do. And in the case of farming, people have been turned down by the bank who decided that the person's idea of growing rice in the dessert was just too risky (as an extreme example, but more realistically a farm growing a product that the bank feels wouldn't sell because of a saturated market or whatever else). But then the soon-to-be farm turns around and goes to the government, who does NOT assess risk. They simply give out the money. And this farm with a risk too high for a bank to get involved with now exists... and we wonder why tax dollars are mismanaged?

Now I see that housing is no different, and hasn't been for quite some time. I knew FHA loans have been a bad idea (even though I do have one). Fannie Mae has existed since The New Deal! And they are in a position to take very risky investments because they are propped up by the government. They can deal with more defaulted loans because of their preferential treatment from the government. People have been getting houses for YEARS they should not have been at an indirect cost to the tax payer! (of course, I guess all costs are indirect to the tax payer who sees no itemized bill.)

And now finally we are having to deal with a more direct result of this practice. Fannie Mae and Freddie Mac can no longer afford to take all those risks. The rate of default is even beyond their ability to absorb it. And our economy is taking a huge hit as a result.

Before, I was blaming the fed for the housing bubble and the economic hit we're taking now as it collapses. But now I see that the bubble has been building for FAR longer than I realized. The fed is certainly a large contributing factor, but the federal support of Fannie Mae and Freddie Mac forced an unofficial centralization of banking and risk. The smaller banks, who classically have been more in-tune with the local issues and the local risk, were able to pass their risk along to someone else willing to take it... to someone who could AFFORD to take it when they couldn't.

To think this is anything resembling free market economics is simply ignorant. We all live in government housing, even the ones not under Fannie or Freddie. The entire mortgage industry uses these two companies to falsely decrease their own risk. Every bank is therefore held up by the government, and it is the government who is allowing us to purchase our houses (except for loans independently undersigned, which is a FAR minority).

I am disgusted by this, as should we all be. We have not been responsible with our own economy, and this is just one more reason it has been slowing. We don't deserve to have the #1 economy in the world, and as such, it's only a matter of time before we no longer are unless people start realizing that shit like this is exactly the opposite of what shot us to #1 post-Reconstruction.

[Ardentfrost]

U.S. plan to save Fannie and Freddie - Jul. 13, 2008

U.S. plan to save Fannie and Freddie

NEW YORK (CNNMoney.com) -- The Treasury Department and Federal Reserve on Sunday outlined a comprehensive government plan to prop up Fannie Mae and Freddie Mac - the two mortgage finance giants that play a crucial role in the U.S. economy.

Treasury Secretary Henry Paulson said the Bush administration plans to ask Congress to enact legislation to temporarily increase the line of credit that the companies have with the Treasury. It would also allow the Treasury to buy stock in the companies.

Paulson also said the Federal Reserve should be given a greater role supervising the finances of Fannie and Freddie.

In addition, the Federal Reserve announced Sunday that the mortgage finance companies can turn to the Federal Reserve Bank of New York for funds. The move gives Fannie and Freddie the same access to the funds as commercial banks and Wall Street firms. The agency granted investment banks such access earlier this year in the wake of a similar crisis of confidence when investors lost faith in Bear Stearns.

The decision by the government to step in come at a tumultuous time for the two shareholder-owned companies, which own or back $5 trillion in home mortgages and are counted on to play a central role in the recovery of the battered housing market.

At issue is the companies' financial condition and whether their balance sheets are strong enough to continue their business of buying and guaranteeing home mortgages. The plan by the Treasury and the Fed would provide Fannie and Freddie with needed capital. Beyond that, even the promise of government support could be sufficient to calm investors.

[...]

No surprises, but still outrageous (and not the good kind, like Jem).

It's just a matter of time before this can no longer be sustained. It will result in either the banks not being able to take the risk despite subsidization, or in the government taking further control of the housing and credit markets. (and those two things aren't mutually exclusive)

What else can happen though? The government doesn't have the resolve to stick to a hands off approach, because it would involve a period of time of fairly drastic economic downturn. And the people aren't willing to wait it out for the overall longterm benefits... they'd go crazy if they think the politicians should be doing something to help them.

It's a hole that has been dug for over a century, what will it take to turn it around?

[Ardentfrost]

http://www.nytimes.com/2008/07/14/wa.../14fannie.html

Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.

Second Link

Shares of investment bank Lehman Brothers Holdings Inc were up more than 14% in premarket trading Monday after the Federal Reserve said it would open the discount window to embattled government-sponsored mortgage companies Fannie Mae and Freddie Mac. Over the weekend, Treasury Secretary Henry Paulson said he will seek congressional authorization to buy stock in the two companies, which saw their shares plunge last week, and increase the government's credit line. Fannie and Freddie shares were up more than 30% ahead of the opening bell.

So now our government is going to buy up stocks. Of course those stocks are way up, people are buying cheap, will wait for the government to buy stocks, then sell at the ensured increased price. This is the definition of a bubble!

Am I the only one bothered here?

[thewise1]

Did you see the news about IndyMac?

BTW, I agree. The more I'm learning about this, the more I'm going

[Ardentfrost]

Originally Posted by thewise1

Did you see the news about IndyMac?

I just googled it, what's going on? Is the Fed taking it over completely?

[thewise1]

Originally Posted by Ardentfrost

I just googled it, what's going on? Is the Fed taking it over completely?

I'm not sure if it's the Fed or the FDIC to be honest. I just saw a blurb about it on MSNBC this morning but I'm working on a proposal for work at the same time so I'm going to research it more later.

[Fed Up]

IndyMac is now IndyMac Federal Bank.

Depositors were withdrawing 100 million a day (not in cold hard cash of course, lol).

I share your concerns with the Fed support of Fannie and Freddie Ardenfrost. The Fed cannot continue to support every single financial entity when they get themselves into trouble.

At some point the game will end IMO. And it won't be pretty for any of us.

But hey...we're not in a recession right? BBC NEWS | Business | Bush claims no recession for US

In reality, I'm afraid, when the going gets tough...the government goes to war.

Fed Up

[trevxenemy]

Why can't we just let businesses fail when they do stupid shit?

[Ardentfrost]

Originally Posted by trevxenemy

Why can't we just let businesses fail when they do stupid shit?

Yeah, but Fannie and Freddie have enjoyed many years of government support. 40 years for Freddie, 70 for Fannie! 50% of our entire mortage credit is tied up in those two companies, over $6 trillion worth. If they collapsed, the private banking market would have to reabsorb that debt, and the industry has become so reliant on Fannie and Freddie (as well as other forms of federal backing), they simply couldn't handle it. I could see people who are up-to-date on their mortgage payments getting foreclosed on because their assessed risk is more than the value of the property. I don't know if that would REALLY happen to people up-to-date, but I could SEE the possibility.

The economic downturn would be quick and devastating. The entire political structure would change because people would be looking for the government to do something about it... that is what nanny state has brought us: a citizenry too dependent on government action.

It might not be so doomsday like that if the gov't would use this troubled time to slowly pull support from Fannie/Freddie... at least then they could blame the resulting hard times on the downturn that already exists. But they STILL have to toss billions at these two companies else suffer truly devastating economic consequences.

But they won't even do that. They'll pump billions into the companies, offer them MORE support, and we remain in the same shitty situation.

It makes me

[thewise1]

Never thought I'd see this in my time



Hundreds of customers lined up Monday to withdraw money from IndyMac Bancorp, which reopened under federal control.

http://www.msnbc.msn.com/id/25673878/

[thewise1]

Originally Posted by Ardentfrost

Yeah, but Fannie and Freddie have enjoyed many years of government support. 40 years for Freddie, 70 for Fannie! 50% of our entire mortage credit is tied up in those two companies, over $6 trillion worth. If they collapsed, the private banking market would have to reabsorb that debt, and the industry has become so reliant on Fannie and Freddie (as well as other forms of federal backing), they simply couldn't handle it. I could see people who are up-to-date on their mortgage payments getting foreclosed on because their assessed risk is more than the value of the property. I don't know if that would REALLY happen to people up-to-date, but I could SEE the possibility.

The economic downturn would be quick and devastating. The entire political structure would change because people would be looking for the government to do something about it... that is what nanny state has brought us: a citizenry too dependent on government action.

It might not be so doomsday like that if the gov't would use this troubled time to slowly pull support from Fannie/Freddie... at least then they could blame the resulting hard times on the downturn that already exists. But they STILL have to toss billions at these two companies else suffer truly devastating economic consequences.

But they won't even do that. They'll pump billions into the companies, offer them MORE support, and we remain in the same shitty situation.

It makes me

How does that work? Could they theoretically - in a legal fashion - foreclose on someone before they are overdue? I thought there were protections against that now.

[kinggovernor]

Originally Posted by thewise1

Never thought I'd see this in my time



Hundreds of customers lined up Monday to withdraw money from IndyMac Bancorp, which reopened under federal control.

IndyMac reopens under eyes of government - Mortgage Mess - MSNBC.com

FDIC: Failed Bank List

[thewise1]

Yeah, I was just reading that actually from wiki

[Ardentfrost]

Originally Posted by thewise1

How does that work? Could they theoretically - in a legal fashion - foreclose on someone before they are overdue? I thought there were protections against that now.

What can you do legally when no one holds your loan? There is no company there, no one takes your loan. If Fannie and Freddie are closing their doors and your loan doesn't get reabsorbed, your home is an asset that must be liquidated.

[thewise1]

Originally Posted by Ardentfrost

What can you do legally when no one holds your loan? There is no company there, no one takes your loan. If Fannie and Freddie are closing their doors and your loan doesn't get reabsorbed, your home is an asset that must be liquidated.

I'm pretty sure that my mortgage contract doesn't allow them to foreclose unless I'm in default, though. Can they liquidate that which they can't foreclose on? I see where you're coming from, just trying to wrap my mind around this unthinkable situation.

[thewise1]

Isn't the contract for repayment attached to the property so that if they liquidate the property, the buyer also has to accept the terms of the loan? That makes logical sense to me but life isn't always perfectly logical like that

[Ardentfrost]

Originally Posted by thewise1

I'm pretty sure that my mortgage contract doesn't allow them to foreclose unless I'm in default, though. Can they liquidate that which they can't foreclose on? I see where you're coming from, just trying to wrap my mind around this unthinkable situation.

Who owns your loan if Fannie/Freddie close up shop (given that they currently own your loan)? Who are you being protected against? A company that doesn't exist anymore?

They can't just give you your house, they have to pay out all their debt... close out all their accounts payable.

They would PROBABLY give you advance notice. Like, make with the remainder of you loan or gtfo. Then you'd have to go get a new loan from an industry that has already deemed you as too risky at your current interest. So even if you don't get kicked out, you end up paying WAY more in interest.

[Ardentfrost]

Note that a lender is no different than a bank, and even if they're FDIC insured, that's only $100k. And all THAT does is protect YOUR money, not the lender's. You might get as much as $100k of your equity paid out by FDIC MAYBE but I wouldn't count on it in this extreme situation since who knows what your true equity is. Equity is only really what you sell your house for minus the remainder of your loan. If you can't sell your house, you have zero equity.