It's Time To Disband Fannie Mae And Freddie Mac

[Rage for Order]

This entire situation can be traced directly back to those two government sponsored enterprises. They were initially created by Congress to make the market for mortgages national rather than local, thereby making it easier for people to get a mortgage. You no longer had to rely on your local community bank for the money to buy a house - Fannie Mae would buy the mortgage and sell it to an investor. These companies have outlived their usefulness and screwed us all over in the process. With modern technology and communication, the buying and selling of mortgages can be done without their help and without the inherent risk that taxpayers will have to pick up the tab if the company does not properly assess the risks associated with the loans they buy.

Fannie & Freddie buy nearly all of the loans that are originated by mortgage companies, and they publish underwriting guidelines that the mortgage companies adhere to when underwriting loans. If the loans don't conform to Fannie & Freddie standards, they won't buy them. No mortgage company wants to be stuck with a bunch of loans that they can't sell, so they are very careful about following Fannie & Freddie guidelines.

In the past, Fannie & Freddie wouldn't buy a loan if your house payment was more than 28% of your gross monthly income and your total monthly obligations (as listed on your credit report), including your mortgage,were more than 36% of your gross monthly income. In recent years these percentages were changed, and in some cases you could get a mortgage if up to 60% of your gross monthly income went to pay your mortgage and the bills listed on your credit report. In addition, alternative documentation methods were introduced to verify a borrower's income, including bank statement analysis. That is, add up the total amount of deposits to a borrower's bank account in a month to determine their monthly income. This method was wide open to possible fraud, for obvious reasons. Then, as if that weren't enough, they did away with income and asset verification entirely for some loan programs, e.g. Stated Income/Stated Asset (SISA) or No Income/No Asset (NINA). For the icing on the cake, private mortgage insurance http://www.lowermybills.com/tipsadvice/pmi.jsp">(PMI) is required on prime loans with a Loan-To-Value > 80%, but there was no PMI requirement on sub-prime mortgages. The reasoning was that the higher interest rates and discount points paid by sub-prime borrowers compensated for the additional risk. This system obviously did not work.

I am of the mind that Fannie and Freddie need to be disbanded. As long as there is an implicit guarantee that their bad loans will be covered by the government - that is, you and me - they will continue to buy bad debt. If private companies had to buy these loans without the implicit promise of government backing they would be much more diligent in making sure that the loans had a good chance of being repaid. However, since Fannie & Freddie have too much political clout for that to happen, they at least need to return to sensible, sound underwriting standards for the loans they buy.

[calmblueocean]

1. What do you propose to replace their function in the housing market?

I'm no economist, but I understand that Fannie and Freddie bought mortgages on the secondary market to free up banks to make new mortgages. Without them, aren't you just deflating the housing market? What would you do instead?

[Rage for Order]

2. The mortgages would still get bought

The securitizations would be handled by private companies instead of Fannie and Freddie, just like it is done in the commercial mortgage sector. Commercial securitizations are rated by Moody's, Fitch, and/or S&P. The price is determined by the level of risk assigned by the rating agencies. Companies that got a reputation for selling packages of junk would find themselves out of business very quickly.

[Warpy]

4. Rubbish. Fannie and Freddie were privatized in 1968

That's part of the problem.

[Rage for Order]

6. Only in theory, not in fact. n/t

[bigtree]

9. The House republicans are proposing privatizing them in their alternative bill

. . . they hope to present in the next few days

[Rage for Order]

14. I don't want privatization

Revoke their charters and liquidate their assets. Let banks lend money rather than government sponsored entities. If the federal government wants to remain in the mortgage business they can do so through FHA loans which have much stricter underwriting requirements.

[soothsayer]

16. right now, Fan and Fred are the ONLY ones providing liquidity. If not for them,

mortgages are estimated to be at 10% right now. NO ONE in the secondary market is lending, except for the GSEs.

[Warpy]

3. That's the stupidest idea I've heard in a long time.

The only thing that made home ownership a reality for middle class Americans was the creation of those two banks.

Local banks have only a limited amount of money to lend. Unless they can sell the mortgage to a holding bank like Fannie or Freddie, they strictly limit the number of mortgages they write and trust me, the fixed 30 year morgtgage doesn't get written at all. No local bank can afford to have money lent out for that long.

Before the Depression, most home loans were balloon mortgages a lot like the interest only loans Countrywide was writing in the final days of the bubble. People would pay the interest for three years and then have to renegotiate the loan before the balloon payments kicked in, meaning people paid interest and never built up any equity, at all as they kept renegotiating before they had a chance to pay any principal.

I would strongly suggest you research what you're talking about before you suggest eliminating something that has helped so many ordinary working people build equity and financial security.

What needs to be done is to renationalize both banks. Privatization simply didn't work. However, eliminating them might be a libertarian's dream but would end up being the American family's nightmare.

[Rage for Order]

5. When were these two institutions privatized, exactly?

I don't mean in theory, I mean in fact. What other private company is exempt from the normal SEC reporting requirements? What other private company can borrow at 1/8th over the fed funds rate? What other company has the benefit of keeping Accumulated Other Comprehensive Income off of its balance sheet?

I have researched this issue. There is a profit to be made by selling pools of mortgage backed securities, and large banks, of which we now have at least 3 (B of A, JP Morgan / Chase, and Citi), would immediately step in and fill the void to create a national market for residential mortgage backed securities.

You are correct in saying that "the only thing that made home ownership a reality for middle class Americans was the creation of those two banks" (corporations, actually). However, that was 70 years ago, when capital was deployed locally rather than nationally or even globally. How's it working out for ordinary working people now?

[xfundy]

7. Vehemently disagree.

They need to be REGULATED, and ALL financial groups that can affect the nation's economy should be REGULATED.

You know, as they were prior to Ray-gun and the chimp in chief.

"Privatization" is a repug mantra. As we've seen, the public always gets screwed in the end. Yes, both meanings.

[IDsweetpea]

11. The Feds just need to bring back strict regulation. I was

a mortgage loan officer thru the 80s till 1990. Fannie Mae was the strictist and Freddie took loans from banks in the red. For a while, the bank I worked for could only sell to Freddie. Also, at that time Countrywide was the toughest to get a loan through. Deregulation leads to nothing but greed. Used to be you could not turn around with bumping into a regulator.

[anaxarchos]

8. More shameless Libertarian nonsense...

Fannie was set up by FDR in the 1930s and provided the possibility of home ownership for millions. It worked very well for 30 years. In 1968 it was privatized, in part to cover up the costs of the Vietnam War. Since then, every free market pirate has been trying to sabotage them and disconnect them from their public role - very successfully judging from the current "crisis". Privatization IS the problem.

Now, you want to disband them because they "don't work", without a single mention of the history. Social Security next?

May a "financial tsunami" hit your indoor plumbing...

[Rage for Order]

12. Tell me exactly how they were privatized

They issued stock. Okay, what else? What other company has board members appointed by the President of the United States?

http://www.sec.gov/news/testimony/2006/ts061506cc.htm

In July 2002, Fannie Mae took a step forward by announcing that it would voluntarily register its common stock with the SEC under Section 12(g) of the Exchange Act. The registration of its common stock became effective on March 31, 2003, and Fannie Mae subsequently began filing periodic reports with the SEC. Unfortunately, many of Fannie Mae's periodic disclosures have been late or incomplete. Most notably, Fannie has to date not filed an annual report (10-K) for either 2004 or 2005, and has not filed quarterly reports (10-Q) in any of the preceding seven quarters.

While our recent enforcement action has assuredly focused the attention of Fannie Mae's management on improving its disclosure to investors, there is no question that, in the future, Fannie Mae would be far more likely to maintain consistent compliance with our disclosure regime if the Congress were to terminate its special status of voluntary registration and reporting, and make its registration and reporting mandatory. That, in my view, is a far better way to protect investors.

I also wanted to bring the Committee up to date on a related issue of the New York Stock Exchange's rules, which authorize suspension and delisting when a listed company fails to file its annual report with the SEC in a timely manner. As you know, because of Fannie Mae's failure to file its 2004 and 2005 annual reports on time, the NYSE amended its general delisting rules to provide a unique exemption for Fannie Mae, though it is not specifically phrased in those terms.

Since NYSE put this new rule in place, questions have been raised about whether this exemption is appropriate. As I testified before this Committee on April 25, 2006, the exemption needs to be considered in light of the unusual circumstances not only of Fannie Mae's voluntary transition to Exchange Act financial reporting compliance, but also its massive restatement. I also expressed my view that this exemption must be temporary, only for the purpose of allowing Fannie Mae to come into initial compliance with Exchange Act reporting. To respond to concerns that this exception might become a permanent, rather than temporary, policy, I want to inform the Committee that we have encouraged the NYSE to amend its rule to put an expiration date on this exception, so that Fannie Mae-and its investors-understand that we expect Fannie Mae, like any other listed company, to remain in full compliance with NYSE's listing standards.


Voluntary reporting? What private company has that option? Not to mention the exemption from the NYSE that kept Fannie Mae stock from being de-listed from the exchange, even though Fannie did not comply with the financial disclosure rules that every other company on the exchange has to comply with. How exactly is this a private company?


http://www.ofheo.gov/about.aspx?Nav=156

On July 12, 2002, Fannie Mae and Freddie Mac (the “Enterprises”) have announced that they would voluntarily register their common stock with the Securities and Exchange Commission (“SEC”) under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 12(g) enables companies, such as the Enterprises, that are not covered by the Exchange Act and its disclosure requirements, to submit voluntarily to SEC rules. On March 31, 2003, Fannie Mae voluntarily registered its common stock and has been subject to SEC reporting requirements and other rules and regulations since then. Due to its accounting and control problems, Freddie Mac has yet to complete the voluntary registration process although it remains publicly committed to doing so once it returns to timely quarterly financial reporting.

In April 2003, OFHEO adopted a rule, “Public Disclosure of Financial and Other Information,” to facilitate the process of voluntary registration by the Enterprises. This rule requires copies of all documents filed by the Enterprises with the SEC to be forwarded concurrently to OFHEO.

[anaxarchos]

22. "They" were not privatized...

Freddie Mac was created by Congress under Nixon's initiative in 1970, explicitly as a private corporation. The intent was to provide competition in secondary markets with Fannie Mae - i.e. to force Fannie to act more and more as if it were exclusively a private entity. This was in recognition of the fact that Fannie was a hybrid (a GSE). Every change in legislation and in regulatory dictate from that point forward was intended to force private behavior on the pair despite their original mandate.

You ask what else was "private" about Fannie Mae, other than the issuance of stock (dividends, prefered - the whole 9 yards)? What else defines a corporation? Many corporations have a million fetters on who can be appointed to their boards. While we are on the subject, who was actually appointed? Do you see the Veteran's Administration dealing in derivatives?

May the financial melt down start in your freezer...

[Rage for Order]

24. "It", "They", whatever....

You stated that Fannie Mae was "privatized" in 1968. I would counter that Fannie Mae was not truly privatized, i.e. subjected to the same rules and regulations as all other private companies in America that are listed on the New York Stock Exchange. Let's go through it:

1) Fannie Mae pays no state or federal income taxes.
2) Fannie Mae is not required to file quarterly and annual financial statements with the SEC, although a couple of years ago they decided to do so "voluntarily".
3) Fannie Mae is afforded the opportunity to borrow money from the Federal Reserve at a much lower rate than any other company in the US.
4) The NYSE created an exception to its reporting requirements for stocks listed on its exchange that kept Fannie Mae from being de-listed for failing to submit the required financial reporting.
5) Because it is a GSE, Fannie Mae, contrary to GAAP, is allowed to omit Accumulated Other Comprehensive Income from its balance sheet.
6) The President of the United States appoints 5 of the 17 board members of Fannie Mae, which are obviously given out of political patronage, not given to people who are experts in the mortgage industry.

I'm sure I've missed a few things, but this list should dispel the notion that this company operates like any other private company in the US. But besides all of the things mentioned above you're right, they did issue stock. Obviously, for all intents and purposes, they are a "private" company. :eyes:

No, the VA is not involved in derivatives. Neither is the FHA. I propose that Fannie & Freddie be disbanded, and if the government wants to be in the mortgage lending business it can do so via FHA loans. The underwriting requirements are much more stringent, and there is no doubt that it is a government administered program rather than a government administered program masquerading as a private corporation.

[anaxarchos]

25. It dispels nothing at all...

You have simply stated that Fannie "is a GSE because it is a GSE" (you conveniently left out Freddie). Your list ranges from the unique but irrelevent to the trivial. Fannie is not private because it has different accounting rules (GAAP yet)?

I've got one for you: what federal entity is allowed to lobby the federal government... on its own behalf?

Private stock, private behavior, a board of directors which is a revolving door to a combination of industry players and regulators - looks just like the Defense industries to me (no, don't bother to explain how KBR is not allowed to omit "Other Income").

May the Wall Street short-sellers start with your furniture...

[2speak]

10. Using that logic

all banks should be disbanded.

[Rage for Order]

13. How do you figure? Please explain your reasoning

[crazylikafox]

15. "If private companies had to buy these loans without the implicit promise of government backing

they would be much more diligent in making sure that the loans had a good chance of being repaid"

Helloooo! You're joking, right? The private sector did buy these loans, and worse, (remember LIAR loans?) and they're now almost worthless. That's why we're in this mess.

Blaming Fannie & Freddie for this fiasco is just the latest right wing talking point to blame the GOVMENT for all our problems, as usual. Of course, their "solution" is more tax cuts and deregulation. Oh my. Don't fall into their trap.

Fannie & Freddie contributed to this fiasco, but they are by no means the main group responsible. Talk to the big boys on Wall Street.

[Rage for Order]

20. Did you read your own post?

I work in commercial mortgage. You would be amazed at the level of due diligence that banks put into these loans when it is their own money on the line. When banks know they can sell a loan to Fannie Mae as soon as it's funded they will underwrite to the lowest standards allowed by Fannie Mae. That's why we fund ourselves in the position we are in now. Fannie bought loans with no concern for the level of risk in an effort to boost the size of their loan portfolio, thereby bringing in larger bonuses for their executives.

Fannie & Freddie ARE the main players responsible for the current market crisis.

http://en.wikipedia.org/wiki/Fannie_mae#Business

Fannie Mae and Freddie Mac are required to hold less capital than normal financial institutions: e.g., it is allowed to sell mortgage-backed securities with only half as much capital backing them up as would be required of other financial institutions. Specifically, regulations exist through the FDIC Bank Holding Company Act that govern the solvency of financial institutions. The regulations require normal financial institutions to maintain a capital/asset ratio greater than or equal to 3%.<17> The GSEs, Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can, and often do, maintain a capital/asset ratio less than 3%. The additional leverage allows for greater returns in good times, but put the companies at greater risk in bad times, such as during the current subprime mortgage crisis. FNMA is also exempt from state and local taxes. In addition, FNMA and FHLMC are exempt from SEC filing requirements; however, both GSEs voluntarily file their SEC 10-K and 10-Q.

[soothsayer]

17. So why are you blaming Fan and Fred if these stupid banks wrote a bunch of nonconforming loans?

You said yourslef they had better standards. Thank goodness, or we'd REALLY be in trouble now. IT was the greedy banks that sunk the economy, not the GSEs. Blame derivatives.

[Rage for Order]

19. Um, no

The banks wrote loans to the standards set by Fannie Mae and Freddie Mac. Fannie & Freddie had better standards a couple of decades ago, but their underwriting standards have gotten more loose over the past decade.

[Hassin Bin Sober]

18. With all due respect, You are a little confused..................

Fannie/Freddie does not write loans without PMI attached if the LTV is over 80%.

Fannie/Freddie initiated programs to expand underwriting guidelines to take certain buyers out of the notoriously predatory sub-prime stream. They did this using risk based rate pricing but they were STILL conforming loans requiring PMI for LTVs over 80%.

so far I haven't seen the data that these loans were the problem loans - other than some YouTube videos edited to deliberately conflate Fannie/Freddie with the sub-prime fiasco.

[Rage for Order]

21. I disagree

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111_pf.html

In January 2007, as years of loose mortgage lending were about to send the nation's housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

Discussing the company's successes, Mudd said one of Fannie Mae's achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step "toward optimizing our business."

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Since then, Fannie Mae's exposure to loosely underwritten mortgages has produced billions of dollars of losses and sent its stock price plummeting, prompting the federal government to prepare for a potential taxpayer bailout of the company. This month, Fannie Mae reported that loans from 2006 and 2007 accounted for almost 60 percent of its second-quarter credit losses.

[2speak]

23. Your post

does not state Fannie Mae's percentage of the total bad loans made to people from all banks. The 60 percent is an internal figure. It has no value on the statement that "with that logic all banks should be disbanded."

[lligrd]

26. I'm Tired Of All The Blame Going To Sub-prime Loans

when the real culprit is predatory lenders. I know people with good credit ratings that bought into loans with arms that they are considering walking away from. In addition, not All people that don't have excellent credit are actually poor mortgage risks and that is where Fannie and Freddie came in. The entire credit industry is a scam making one borrow just to get a descent credit rating to borrow more.