Jackson Jambalaya

Still trying to blame the Bush administration for the implosion of Fannie Mae and Freddie Mac as Obama and his lackeys are? The right-wing rag The New York Times reported in 2002 the Bush administration tried to reform the agencies while placing them under more adult supervision.

'Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. ......
At the time (1992), the companies and their allies beat back efforts for tougher oversight by the Treasury Department, the Federal Deposit Insurance Corporation or the Federal Reserve. Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families.....
The company is also likely to lobby against the efforts that give regulators too much authority to approve its products...... (We all know what happened because of this, don't we?)
Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.
Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.
''The regulator has not only been outmanned, it has been outlobbied,'' said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. ''Being underfunded does not explain how a glowing report of Freddie's operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.''
Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.
''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said."
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=all

Is any comment necessary?

Earlier posts:
Thinking of blaming Bush?:
http://kingfish1935.blogspot.com/2008/09/thinking-of-blaming-bush-for-fannie.html
McCain tried to reform Fannie Mae 3 years ago. Obama took $126,349 from Fannie Mae:
http://kingfish1935.blogspot.com/2008/09/mccain-tried-to-reform-fannie-mae-2.html
2006 OFHEO report warning of Fannie/Freddie abuses and reckless management:
http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF

OFHEO (Office of Federal Enterprise Oversight) published a scathing report in May, 2006 regarding the state of Fannie Mae and Freddie Mac. The Bush administration sought to reform the agencies as it documented a culture focused on hiding the truth while paying its executives hundreds of millions of dollars. The agencies waged total war against reform, seeking to destroy all opposition as they bullied their way into bankruptcy (See http://online.wsj.com/article/SB121677050160675397.html for a great read on Fannie's tactics.).

While the agencies stifled all criticism, they engaged in reckless lending policies. No down payment loans given to borrowers with 580 credit scores and 55% debt to income ratios with reduced mortgage insurance premiums. Mortgages were approved for borrowers requiring no verification of income or assets, yet the borrower only had to provide a five percent down payment. Borrowers could even buy TEN properties with only ten percent down on stated income programs (verified assets were required). Mortgages given to borrowers with 540 credit scores. Similar programs were provided to lenders and borrowers which encouraged an "anything goes" culture. However, all good things, if it can be called that, must come to an end and the Fannie Mae party is no exception to this cliche'. See earlier post: Fannie and Freddie's Ticking Time Bomb http://kingfish1935.blogspot.com/2007/12/fannie-and-freddies-ticking-time-bomb.html

The agency chickens have now come home to roost, as the Democrats have put us on the hook for HUNDREDS of billions of dollars, while former Fannie CEO and Clinton Administration official Frank Raines keeps nearly $100 million he received from Fannie Mae.

OFHEO's report stated:
Fannie Mae senior management promoted an image of the Enterprise as one of the lowest-risk financial institutions in the world and as “best in class” in terms of risk management, financial reporting, internal control, and corporate governance. The findings in this report show that risks at Fannie Mae were greatly understated and that the image was false.

During the period covered by this report—1998 to mid-2004—Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the Enterprise’s senior management with the aid of inappropriate accounting and improper earnings management.

By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders. Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003...

A combination of factors led Fannie Mae senior management, through their actions and
inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions. Those factors included the Enterprise’s enormous financial resources and political influence, the expectation that senior management could write the rules that applied to Fannie Mae, financial rewards tied to a measure of profits that management could easily manipulate, and the relative disinterest of senior executives in adhering to standards of prudent business operations....

The image of Fannie Mae communicated by Mr. Raines and his inner circle and
promoted by the Enterprise’s corporate culture was false. In the words of one current member of Fannie Mae’s Board of Directors, the picture of the Enterprise as a “best-in-class” financial institution was a “façade.” To maintain that façade, senior executives worked strenuously to hide Fannie Mae’s operational deficiencies and significant risk exposures from outside observers—the Board of Directors, its external auditor, OFHEO, the Congress, and the public. ...

The existence of a federal agency with the ability to regulate the Enterprise represented a
direct challenge to senior management. To deal with that challenge, Fannie Mae took the
extreme position that OFHEO simply had little authority over the Enterprise, while Fannie Mae’s lobbyists worked to insure that the agency was poorly funded and its budget remained subject to approval in the annual appropriations process. The goal of senior management was
straightforward: to force OFHEO to rely on the Enterprise for information and expertise to such a degree that Fannie Mae would essentially be regulated only by itself....."

Finally, in a statement quoted almost directly from Bernie Ebbers and Worldcom, OFHEO reports: "The message from Mr. Raines was clear: EPS results mattered, not how they were
achieved...."
http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF


Enjoy the trillion-dollar bailout while you worry about lipstick politics.

Frank Raines's politican donations: http://www.newsmeat.com/ceo_political_donations/Franklin_Raines.php

Fannie Mae recently disclosed that it was suffering from huge losses due to the turmoil in the mortgage markets: "WASHINGTON (Reuters) - Fannie Mae , the largest U.S. mortgage finance company, said on Friday its third-quarter net loss doubled from last year as slumping home prices and a credit squeeze drove down values of mortgage securities. "

Most experts opine that the current crisis in the mortgage markets was due to the turmoil involving subprime and "Alt-A" mortgages as well as a decline in home prices nationwide. Numerous lenders have gone out of business, layoffs in the industry are widespread, and borrowers have found that it is now much tougher to get a mortgage than a year ago as they are required to have higher credit scores and more money for down payments. The specter of subprime ARM readjustments has reared its ugly head as the latest bugaboo to spook Washington and Wall Street. Unfortunately, this may not be the worst of it as there is still another ticking time bomb that has nothing to do with ARM resets or a falling housing market.

Fannie Mae and Freddie Mac made the decision several years ago to lower the requirements approving a mortgage application. Fannie and Freddie mortgages (called conforming) are desirable as they have the lowest rates as compared to mortgages not backed by Fannie and Freddie (called nonconforming. At this point, Fannie and Freddie will be called the agencies.) In the past, a borrower had to put down 3-5% of the purchase price for a down payment, have a minimum credit score of 620, have a debt to income ratio (that is where monthly bills on the credit report, utilities are NOT included, are divided by the gross monthly income) of 36% as well as meeting other requirements.

However, the agencies decided to offer mortgages to borrowers who could not meet those requirements. These mortgages were called expanded approval loans. Credit score requirements were lowered. The agencies started taking credit scores in the 500's. Indeed, if a borrower had enough money to put down on a house (such as 50%), then very bad credit was overlooked. The criteria became more flexible. The minimum credit score was lowered if the borrower had more assets, had a low debt to income ratio, and the loan to value (value of the home) was lower. The agencies offered "flex 100" loans where the borrower did not have to put any money down. The borrower was still required to purchase mortgage insurance, which could be quite high depending on the credit score. The agencies then lowered the credit score requirements. It was not uncommon to see borrowers with credit scores of 590, 600, or lower approved by the agencies for mortgages with no money down. Keep in mind these mortgages are NOT ARMs but are fixed rate mortgages. However, the agencies DID raise the rates on these loans by grading them at certain levels: Expanded Approval I, II, III. Each level had a higher rate. One that was a III usually had a rate that was at least 1.5% above the regular conforming rates so the agencies did try to offset the higher risk with higher rates.

However, the aggressive lending did not stop there as the agencies rolled out their community lending programs in 2003. These weakened the requirements even further. Under the Flex 100's, the borrower still had to have 3% of his own funds for closing costs. Under the community lending standards, that requirement was abolished and replaced with a $500 minimum down payment requirement (It could be a gift from a family member). The mortgage insurance coverage rate was cut from the 35% required for a flex 100 to 20% for a community lending program. The rate was only slightly higher than a regular conforming loan, usually a quarter to a half of a point. The agencies approved these loans for borrowers that had credit scores as low as 570 and in rare instances, even lower. Debt to income ratio requirements were eased as the 100% loan to value mortgages were approved borrowers having ratios of 55%! (remember, that ratio is based off of gross income, not net income after taxes). No one wanted to ruin the party as these new programs became very popular among realtors, lenders, and mortgage companies.

However, this may be a ticking time bomb waiting to explode in the agencies' portfolios as defaults climb. One must ask if the agencies are losing money merely because of falling housing prices and lower levels of business or because of these loans that were approved under much easier underwriting standards. The mortgage insurance companies have quit (or soon plan to do so) insuring mortgages that have a credit score under 620 if the loan to value is more than 95%. This is to be expected as they have suffered huge losses in 2007 and it also tells you where the defaults may be coming from as most of these so-called experts have not realized most subprime mortgages DO NOT require mortgage insurance. Fannie Mae just announced that it is implementing a pricing increase for mortgages that have a credit score below 680 and a loan to value above 95% that will add approximately .500-.750 to the conforming rate. The agencies have also tightened their underwriting requirements (this contributing more to the housing slump) so that borrowers with lower credit scores with

Even with these price increases by the agencies and stricter underwriting guidelines, one must still wonder if they are closing the barn door after the horse has already left as the expanded approval and community lending mortgages sit on their books. If that bomb explodes, it will make the subprime explosion look like a firecracker.