Tag: freddie mac

Government Housing Adventures

The Wall Street Journal is reporting that Fannie Mae and Freddie Mac, which have already consumed $112 billion in taxpayer bailouts, may have additional losses if they can’t recoup claims from struggling private mortgage insurers.

From the Journal:

Fannie Mae has about $109.5 billion of mortgage-insurance coverage in force, which represents 4 percent of all single-family home loans it owns or guarantees. Freddie Mac had $63.4 billion in mortgage insurance and $12.2 billion in bond insurance. Private mortgage insurance is required for any home loan with less than a 20 percent down payment, and the policies typically cover 12 percent to 35 percent of losses in the event of a default, according to HSH Associates, a financial publisher. Mortgage insurers have been forced to pay up as loan defaults escalate.

Escalating loan defaults are also likely to bite taxpayers through the Federal Housing Administration, which covers 100 percent of losses. The FHA is in deep trouble:

The reduction in private insurance coverage has contributed to the rise in the volume of loans backed by the Federal Housing Administration, a government mortgage insurer that backs loans with as little as 3.5 percent down payments. It could be required to ask for a federal subsidy for the first time in its 75-year history if the housing market deteriorates further.

Who is looking out for taxpayers here?

Ryan Grim at Huffington Post reports that the Federal Housing Finance Agency, which is in charge of Fannie and Freddie, has used a legal technicality to rid itself of its inspector general:

There is no independent auditor overseeing the federal agency responsible for some $6 trillion in home mortgages, because the Department of Justice’s Office of Legal Counsel ruled that the agency’s inspector general didn’t have authority to operate, according to internal memos obtained by the Huffington Post. The ruling came in response to a request from the Federal Housing Finance Agency itself — which means that a federal agency essentially succeeded in getting rid of its own inspector general.

The timing is curious:

Fannie and Freddie are burning through cash at a staggering rate. Fannie reported a loss of $18.9 billion in the third quarter of 2009, four billion more than it lost in the second quarter. FHFA requested $15 billion from Treasury to plug the hole. What’s it spending money on? “The company continued to concentrate on preventing foreclosures and providing liquidity to the mortgage market during the third quarter of 2009, with much of our effort focused on the Making Home Affordable Program,” boasts the press release accompanying the announcement of the massive loss. “As of September 30, 2009, approximately 189,000 Fannie Mae loans were in a trial period or a completed modification under the Home Affordable Modification Program.” Those are the precise programs that Kelley was looking into when his own agency shut him down.

See here for essays on the problems associated with the federal government’s housing market interventions. Also check out Johan Norberg’s book, Financial Fiasco: How America’s Infatuation with Homeownership and Easy Money Created the Economic Crisis.

Fixing Fannie Is Essential

This past week witnessed continued debate in congressional committees over changes to our financial regulatory system.  Perhaps catching the most attention was Fed Chairman Ben Bernanke’s appearance before House Financial Services. 

Sadly missing from all the noise this week was any discussion over reforming those entities at the center of the housing bubble and mortgage meltdown:  Fannie Mae and Freddie Mac.

While many, including Bernanke, have identified the “global savings glut” as a prime force behind the historically low interest rates that drove the housing bubble, often missed in this analysis is the critical role played by Fannie and Freddie as channels of that savings glut.  After all, the Chinese Central Bank was not plowing its reserves into Countrywide stock; it was putting hundreds of billions of its dollar reserves into Fannie and Freddie debt.  Fannie and Freddie were the vehicle that carried excess world savings into the United States.

Had this massive flow of global capital been invested in productive activities, or even just prime mortgages, it is unlikely tha we would have seen such a large housing bubble.  Instead, what did Fannie and Freddie do with its Chinese funds?  It invested those funds in the subprime mortgage market.  At the height of the bubble, Fannie and Freddie purchased over 40 percent of private-label subprime mortgage-backed securities.  Fannie and Freddie also used those funds to lower the underwriting standards of the “prime” whole mortgages it purchased, turning much of the Alt-A and subprime market into what looked to the world like prime mortgages.

Given the massive leverage (at one point Freddie was leveraged 200 to 1) and shoddy credit quality of mortgages on their books, why were the Chinese and other investors so willing to trust their money to Fannie and Freddie?  Because they were continually told by U.S. officials that their losses would be covered.  At the end of the day, Fannie and Freddie were not bailed out in order to save our housing market; they were bailed out in order to protect the Chinese Central Bank from taking any losses on its Fannie/Freddie investments.  Adding insult to injury is the fact that the Chinese accumulated these large dollar holdings in order to suppress the value of their currency, enabling Chinese products to be more competitive with American-made products.

While foreign investors have been willing to put considerable money into Wall Street, without the implied guarantees of Fannie and Freddie, trillions of dollars of global capital flows would not have been funneled into the U.S. subprime mortgage market.  As Washington seems intent on continuing to mortgage America’s future to the Chinese, that at minimum it seems that fixing Fannie and Freddie might help insure that something more productive is done with that borrowing.

CAP’s Proposal to Add ‘Public Members’ to Corporate Boards Is Flawed

Today the Center for American Progress rolled out its proposal that we add “public directors” to the boards of companies that have been bailed out by the government.  CAP scholar Emma Coleman Jordan argues that “public directors will provide a corrective to the boards of the financial institutions that helped cause the crisis.”

One has to wonder whether Ms. Jordan has ever heard of Fannie Mae and Freddie Mac.  If she had, she might recall that a substantial number of the board members of Fannie and Freddie were so-called “public” members appointed by the President.  Perhaps she can ask CAP adjunct scholar and former Fannie Mae executive Ellen Seidman to review the history of those companies for her.

Where’s the evidence that any of those Fannie/Freddie “public” directors, whether they were appointed by Republican or Democrat Presidents, ever once look out for the public interest?  In fact all the evidence points to these public directors looking out for the interests of Fannie and Freddie, often lobbying Congress and the Administration on the behalf of these companies.

I suppose CAP would tell us that having the regulators pick the directors instead of the president would protect us from having those positions filled with political hacks.  Ms. Jordan argues that “regulators should determine most of the details of the public directorships—after all, they have the most direct experience in trying to regulate private companies that have received public funds.”  We tried that route as well.  In contrast to Fannie/Freddie, each of the twelve Federal Home Loan Banks had to have a number of its directors appointed by its then regulator, the Federal Housing Finance Board.  It was well known within the Beltway that these appointments were more often political hacks than not.  For instance one long time director of the Federal Home Loan Bank of Pittsburgh was the son of a senior member of the US House Committee on Finance Services.  Once again we’ve gone down this road, we know how this story ends.

If we are truly interested in protecting the taxpayer, we should, first, end the ability of the Federal Reserve to bailout companies, and second, as quickly as possible remove any government involvement in these companies.  Having the government appoint board directors only further entangles the government into our financial system; and if Fannie and Freddie are a good guide, actually increases the chances of future bailouts.

Reform Needed, but Obama Plan Would Result in More Financial Crises, not Less

Today President Obama took his financial reform plan to the airwaves.  While there is no doubt our financial system is in need of financial reform, the President’s plan would make bailouts a permanent feature of the regulatory landscape.  Rather than ending “too big to fail” – the President wants us to believe that with additional discretion and power, the same Federal Reserve that missed the boat last time will save us next time.

The truth is that the President’s plan will result in a small number of companies being viewed by debtholders as “too big to fail”.  These companies would see their funding costs decline, allowing them to gain market-share at the expense of their rivals, making these firms even larger.  Greater concentration in our financial services industry is the last thing we need, yet the Obama plan all but guarantees it.

Obama also chooses myth’s over facts.  The President claims that de-regulation and competition among regulators caused the crisis.  The facts could not be more different.  Those institutions at the center of the crisis – Fannie Mae, Freddie Mac, Bear Stearns, Lehman –could not choose their regulator.

The President’s plan chooses convenient targets and protects entrenched interests, rather than address the true underlying causes of the crisis.  At no time have we heard the President discuss the expansionary monetary policies that helped fuel the bubble.  Nor has the President talked about the global imbalances – the global savings glut that poured surplus savings from the rest of the world into the US.  But then the President appears to hope that loose monetary policy and continued American consumption funded by China will get him out of his own political problems with the economy.  It is especially striking that the President makes little mention of the housing bubble, as if it was only the bust that was the problem.

The President continues to say he inherited this crisis.  While true, he did not inherit the same individuals – Tim Geithner and Ben Bernanke – who were at the center of creating the crisis.  All Obama needs to do is find a position for Hank Paulson and he will have completely re-assembled the Bush financial team.

Without real reform – fixing Fannie and Freddie, scaling back the massive subsidies for leverage in our tax code, loose monetary policy – it will only be a matter of time before the next crisis hits.  If we implement the President’s plan, we will, however, guarantee that the next crisis will be even larger and severe than the current one.

Shocking News: Fannie Mae Is Losing More Money

Yes, I know.  It’s hard to believe.  Fannie Mae continues to lose money and, even more surprisingly, isn’t likely to ever pay taxpayers back for all of the billions that it already has squandered.  Rather, it says it will need more bail-out funds – probably another $110 billion this year alone.

Reports the Washington Post:

Fannie Mae reported yesterday that it lost $23.2 billion in the first three months of the year as mortgage defaults increasingly spread from risky loans to the far-larger portfolio of loans to borrowers who have been considered safe.

The massive loss prompts a $19 billion investment from the government to keep the firm solvent, on top of a $15 billion investment of taxpayer money earlier this year.

The sobering earnings report was a reminder of the far-reaching implications of the government’s takeover in September of Fannie Mae and the smaller Freddie Mac. Losses have proved unrelenting; the firms’ appetite for tens of billions of dollars in taxpayer aid hasn’t subsided; and taxpayer money invested in the companies, analysts said, is probably lost forever because the prospects for repayment are slim.

But the government remains committed to keeping the companies afloat, because it is relying on them to help reverse the continuing slide in the housing market and keep mortgage rates low.

Even as the government bailout of banks appears to be leveling off, the federal rescue of Fannie and Freddie is rapidly growing more expensive. Fannie Mae said that the losses will continue through at least much of the year and that it “therefore will be required to obtain additional funding from the Treasury.” Analysts are estimating that the company could need at least $110 billion.

Freddie Mac, which has been in worse financial shape than Fannie Mae and has obtained $45 billion in taxpayer funding, will report earnings in coming days.

The response of policymakers in the administration and Congress to this fiscal debacle?  Silence.  No surprise there, since many of them helped create the very programs that continue to bleed taxpayers dry.

Alas, this isn’t the first time that the federal government has promoted a housing boom and bust.  Instead, writes Steven Malanga in Investor’s Business Daily:

This cycle goes back nearly 100 years. In 1922, Commerce Secretary Herbert Hoover launched the “Own Your Own Home” campaign, hailed as unique in the nation’s history.

Responding to a small dip in homeownership rates, Hoover urged “the great lending institutions, the construction industry, the great real estate men … to counteract the growing menace” of tenancy.

He pressed builders to turn to residential construction. He called for new rules that would let nationally chartered banks devote a greater share of their lending to residential properties.

Congress responded in 1927, and the freed-up banks dived into the market, despite signs that it was overheating.

The great national effort seemed to pay off. From mid-1927 to mid-1929, national banks’ mortgage lending increased 45%. The country was becoming “a nation of homeowners,” the Times exulted.

But as homeownership grew, so did the rate of foreclosures, from just 2% of commercial bank mortgages in 1922 to 11% in 1927.

This happened just as the stock market bubble of the late ’20s was inflating dangerously. Soon after the October 1929 Wall Street crash, the housing market began to collapse. Defaults exploded; by 1933, some 1,000 homes were foreclosing every day.

The “Own Your Own Home” campaign had trapped many Americans in mortgages beyond their reach.

Financial institutions were exposed as well. Their mortgage loans outstanding more than doubled from the early 1920s to 1930 — $9.2 billion to $22.6 billion — one reason that about 750 financial institutions failed in 1930 alone.

The only serious option is to close down all of the money-wasting federal programs  and laws designed to subsidize home ownership.  A stake through the hearts of Fannie Mae, Freddie Mac, Federal Housing Administration, and Community Reinvestment Act, to start.  Otherwise the cycle is bound to be repeated, again to great cost for the ever-suffering  taxpayers.

If You Like Fannie Mae, You’ll Love Auto Mac

While Bank of America and Citi grabbed most of the attention in the recently released bank “stress tests”  one of the biggest capital holes to be filled is that of GMAC, which under the stress test’s relatively light assumptions will need to raise another $11.5 billion in capital.

As one of the smaller of the stressed tested banks, and having almost no trading and counterparty risk – and hence little or no systemic risk, GMAC would hardly seem the candidate for any additional bailout funds.  Were GMAC to fold, our financial markets would hardly notice.  Who might notice is our auto manufacturers.

Just as easy credit inflated our housing market, it was easy credit – who can forget 0% financing – that lead the auto sales boom of the early 2000’s.  Just as many see Fannie and Freddie – along with help from the Federal Reserve – as leading us to a housing recovery, many also see GMAC as being at the heart of any recovery in the auto industry.

Given the state of the auto industry and the increasing level of defaults on auto loans, the safe bet is that GMAC will have a tough time rasing the needed $11.5 billion from non-governmental sources.

Once the government becomes a majority owner of GMAC, its only a matter of time until its focus shifts from re-bulding its financial health to expanding the American Dream of auto-ownership.