US vows reform plan for Fannie Mae, Freddie Mac

[The Northerner]

WASHINGTON (AFP) – The US Treasury on Tuesday promised a plan to reform troubled state-backed mortgage firms Fannie Mae and Freddie Mac by January, firing the starting gun on what is likely to be a rancorous debate.

In a statement, the Obama administration said it would work toward "a comprehensive housing finance reform proposal for delivery to Congress by January 2011," setting a firm deadline, beyond November elections.

The two firms played a pivotal role in the mortgage-fueled crisis, which plunged the US economy into a long and painful recession.

Collectively they pumped 5.9 trillion dollars into the mortgage market, accounting for almost three quarters of the sector.

Obama and his Democratic allies have already come under fierce attack from Republicans for not including Fannie Mae and Freddie Mac in a sweeping financial overall that was signed into law last week.

Tuesday's announcement appeared designed to neutralize that criticism as all eyes turn to Congressional mid-term elections later this year.

Read more: http://news.yahoo.com/s/afp/20100727/bs_afp/useconomypropertyfinancestocks

[JuniperLea]

1. "under fierce attack from Republicans for not including"

Clearly the Freddy and Fanny deals required their own regulation.

"Tuesday's announcement appeared designed to neutralize that criticism as all eyes turn to Congressional mid-term elections later this year."

I call bullshit on this statement... you can't just pull regs out of your ass at a moment's notice... obviously this has been in the works for a while.

[notesdev]

2. bend over

here it comes again

[Warpy]

3. I call bullshit

on "The two firms played a pivotal role in the mortgage-fueled crisis," something that is clearly untrue since both firms bought only conventional 15 and 30 year notes. They only ran into trouble when the bust left even people who had qualified for conventional mortgages instead of the funny paper Indy Mac was soaking up under water and in serious trouble, as well as unemployed.

While both have been skating close to the edge by relaxing down payment requirements and percentage of monthly payment compared to income requirements, they weren't instrumental in causing the collapse, at all, especially since those requirements were relaxed only for the last few years of the bubble.

I don't think the bankers would like my idea to reform them. It would involve combining them and taking them out of the bankers' hands and putting them back under the auspices of the government.

[econoclast]

4. Sorry Warpy, but I think you are off base here...

Looking at the history of subprime lending it becomes clear that thare had always been private lenders in that market. Firms like the old Household Finance Co. That subprime lending peaked in 1999/2000. Some of the inital players went bankrupt. Also in 1997/1999 the Urban Institute issued a scathing report on subprime lending. Did they argue that it was dangerous and should be curtailed? No. They argued that the GSE's. Aja Fannie/Freddie weren't doing enough and that credit was not available to "underserved" low income borrowers and that HUD - the regulator responsible fir F/F should expand their mandate in those markets. That report coupled with additional reports of "greenlining" in the mortgage industry had two important effects:

One: Freddie and Fannie implemented the first "automated underwriting" systems. These were designed to make applying for a mortgage more efficient by removing the human underwriters from the process. Reading the press releases issued at the time they seem positively breathless over the progress this was. All you had to input was s few numbers and out would pop an underwriting decision. Private lenders quickly followed suit. Ever read the stories about subprime loans and wonder how someone could have looked at the application and thought this loan was a good idea? The answer is no person was involved except to input the data. They deliberately stripped the hhuman underwriters out if the system. The automated system couldn't "greenline".

Two: HUD expanded F/F "affordable housing" mandate in 2000. I think it was in 2000 that F/F bought their first no-money-down loans. HUD expanded F/F mandate to the point where before they went into receivership ther were REQUIRED by HUD to invest almost 50% of their portfolio to "affordable housing" ie. Subprime. So just when private subprime peaked in 1999/2000 our government stepped in to encourage it. And by 2004/2005 in the teeth of the bubble, instead of HUD putting on the breaks, HUD was stepping on the gas!

Coupled together, the automated underwriting and relaxing requirements to meet the new HUD mandates lead to a boom in suprrime lending.

And the huge presence in the market of Fannie/Freddie and their implicit guarantee gave confidence to the rest of the market. The thinking I heard in the bars and on the trains was basically " hey, if Freddie and Fannie think it's OK we'll be fine. They won't let anything happen to a market they are pushing!"
Ever read one of the prospectuses of those subprime CDO 's? I have. Know how lots of them describe their subprime collateral? "underwritten to the standards of FNMA and FHLMC". Meaning "These are loans that Fannie and Freddie would buy ... Why shouldn't you?"

so, yes. Freddie and Fannie and HUD were central players at the heart of the whole process.

[jtuck004]

5. Fannie and Freddie aren't blameless, but they were hardly

central players. The hedge funsds, shadow banks who leveraged only a part of the $13 trillion mortgage market to at over $160 trillion of complex mortgage securities, off the books of the regulated banks, hidden from public view until they spun apart, leaving pension funds, cities, states, and countries floudering.

With the help of foreign investments, a Federal Reserve who left interest rates too low for too long and an ineffective response when they finally did decide to act, thousands of mortage brokers jumped on the bandwagon, so much so that the investment banks, (with the help of $40 million dollars in lobbying money from Goldman Sachs) got Glass-Steagal overturned AFTER the merger of what became CitiGroup, and the floodgates opened.

While I realize that for most it is easier to blame Fannie and Freddie, if other lenders had been interested in making home ownership available to people of color there wouldn't have been a need for them to grow as they did. But redlining and other practices required that people find a source that could at least give them a chance. They sold loans into a market that was not defined by them but in which they had to operate. They were hardly the ones who set national policy, who set up the hedge funds whose reckless behavior would be far and away the largest single source of problems in our latest financial crisis, who brought in foreign investments seeking high interest rates in such quantities that it limited the ability of our government to slow the economy down with interest rates. They didn't set the tone for a housing boom that would mask the lack of job creation and the continued destruction of our manufacturing sector for the past 30 years.

And they didn't write the as yet unknown total of worthless paper taken in by the Federal Reserve, estimated to be in the tens of trillions, for which the Federal Reserve paid 100 cents on the dollar with Treasuries backed by the full faith and credit of the United States, turning that money over to banks tp be loaned out, which was instead used to pay billions in bonuses to the same hedge funds that caused (and continue to cause) and not loaned out at all, further costing American taxpayers their hard-earned money to try and prop up a failing economomy.

No, it wasn't Fannie and Freddie.

[Warpy]

6. Please recognize that the majority of paper there

was written before those "reforms" and that the poor people who bought houses have a much better repayment history than the upper middle class types with trophy houses, even if they could afford those trophy houses.

The problem wasn't the liberalization of the rules that allowed people of more modest means into the market. The problem was the collapse of the funny paper industry fueling Indy Mac that caused a chain reaction throughout the financial industry and resulted in high unemployment.

I benefited from that liberalization, putting 17% down instead of 20% when I bought so that I'd have a cash reserve cushion. I also paid the place off in 10 years. Poor folks putting 10% down weren't the problem. Poor folks who got thrown out of work after rich folks defaulted because they were under water were.

Blaming this mess on the working class or on Freddie and Fannie is short sighted and inaccurate. I realize this is the drumbeat of the mass media, but the mass media are frequently wrong and are so in this case.