Fannie and Freddie: Not Much Has Changed

Morgen on April 1, 2009 at 11:23 pm

Many of us on the conservative side of the aisle have been frustrated with the lack of mainstream media attention on the central role that Fannie Mae and Freddie Mac, and their Democrat sponsors in Congress, played in causing the current financial crisis. Unfortunately, the liberal establishment has been pretty successful in creating the impression that “greedy” Wall Street execs and predatory lenders are mostly to blame. However, I believe the current mismanagement of Fannie and Freddie presents conservatives with a golden opportunity to shine the light back on their reckless lending behavior, and the liberal agenda driving it. Because guess what? Not much has really changed.

First, a quick primer. In September 2008, Fannie Mae and Freddie Mac were deemed insolvent and placed into conservatorship by the Federal Housing Finance Agency (FHFA), effectively nationalizing them. Combined, Fannie and Freddie incurred a massive loss of ~$108B in 2008 – greater even than AIG. To date, the federal government has committed to providing them with up to $200B (each) in direct capital injections, and is spending hundreds of billions of dollars more shoring up their balance sheets by purchasing mortgage securities from them. All in all, tax payers have assumed trillions of dollars of liability for mortgage loans and related securities held by Fannie and Freddie. And it gets worse.

We need look no further than public disclosures made recently by both Fannie and Freddie to see how their control by the current Administration is a recipe for disaster. From page 19 of Freddie Mac’s 2008 Annual Report (an identical disclosure was made by Fannie Mae):

Based on our charter, public statements from Treasury and FHFA officials and guidance from our Conservator, we have a variety of different, and potentially competing, objectives, including:

• providing liquidity, stability and affordability in the mortgage market;
• immediately providing additional assistance to the struggling housing and mortgage markets;
• reducing the need to draw funds from Treasury pursuant to the Purchase Agreement;
• returning to long-term profitability; and
• protecting the interests of the taxpayers.

These objectives create conflicts in strategic and day-to-day decision making that will likely lead to suboptimal outcomes for one or more, or possibly all, of these objectives. (emphasis mine)

In other words, government bureaucrats have mandated a competing and mutually exclusive set of business priorities for Fannie and Freddie. And note that protecting the interests of taxpayers is the last item on this list! Coincidence? I think not – in fact the list above seems to be ranked in order of priority based on this disclosure from Fannie’s 2008 Annual Report (page 9):

Currently, we are primarily focusing on:

• providing liquidity, stability and affordability in the mortgage market; and
• immediately providing additional assistance to this market and to the struggling housing market.

…Focusing on these objectives is likely to contribute to further deterioration in both our results of operations and our net worth, which in turn would both increase the amount that Treasury will be required to invest in us under the senior preferred stock purchase agreement and inhibit our ability to return to long-term profitability. (emphasis mine)

The reports contain several other disclosures which further highlight the perils of promoting lending at any cost. The important point is this: given the agenda of this Administration, does anyone expect the focus to shift any time soon away from promoting “affordable” housing? Will it ever? How much larger a burden will taxpayers ultimately bear given that minimizing losses is not even a priority at this stage?

Who can say…but of course it was the Congressional mandate to provide “affordable” lending that got us into this mess to begin with. I’ll save a detailed expose of current Fannie/Freddie underwriting standards for a future post, but to this day they continue to underwrite mortgages which do not require borrowers to contribute a single dollar from their own pockets. And would it concern you to know that they continued to underwrite stated income loans up through March 1 of this year?

Unfortunately, the ongoing mismanagement of Fannie and Freddie gives us every reason to expect that these massive losses will continue into the foreseeable future. Let’s seize the opportunity to draw more attention to the liberal ideology underlying this failure, and the impact this will have on current and future generations of taxpayers. This time around there is no one else for liberals to blame.

BONUS QUOTE:

From page 143 of the 2008 Freddie Mac Annual Report, discussing the factors which precipitated the mortgage crisis:

In recent years, financial institutions significantly increased mortgage lending and securitization of certain higher-risk mortgage products, such as subprime, option ARM and Alt-A loans, and these loans comprised a much larger proportion of origination and securitization issuance volumes during 2006 and 2007, as compared to prior years…Our expanded participation in these products was driven by a combination of competing objectives, including meeting our affordable housing goals, serving our customers and generating returns for investors. (emphasis mine)

There are those “competing objectives” again! Exit question: now that even Freddie Mac is admitting that meeting affordable housing goals was a root cause of the crisis, will anyone else on the Left?

Category: Economy |