Showing posts with label Fannie Mae Freddie Mac. Show all posts
Showing posts with label Fannie Mae Freddie Mac. Show all posts

Saturday, March 2, 2013

Black: Fraud 'pervasive' at 'most reputable' banks

Bill Black has been vindicated by a new study of global financial institutions:

The central point we have been arguing for years is now admitted -- and treated as a universally known fact: "mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth." The crisis was driven by liar's loans. By 2006, half of all the loans called "subprime" were also liar's loans -- the categories are not mutually exclusive (Credit Suisse 2007). As I have explained on many occasions, we know that it was overwhelmingly lenders and their agents (the loan brokers) who put the lies in liar's loans.

The incidence of fraud in liar's loans was 90 percent (MARI 2006). Liar's loans are a superb "natural experiment" because no entity (and that includes Fannie and Freddie) was ever required to make or purchase liar's loans. Indeed, the government discouraged liar's loans (MARI 2006). By 2006, roughly 40% of all U.S. mortgages originated that year were liar's loans (45% in the U.K.). Liar's loans produce extreme "adverse selection" in home lending, which produces a "negative expected value" (in plain English -- making liar's home loans will produce severe losses). Only a firm engaged in control fraud would make liar's loans. The officers who control such a firm will walk away wealthy even as the lender fails. 

And let's repeat: not a single officer of a major bank has been prosecuted or gone to jail for control fraud. 


By William K. Black
February 28, 2013 | Huffington Post

Saturday, February 16, 2013

Sunday, January 27, 2013

Bill Black: Loan fraud caused the Great Recession

Sorry, I hate to be that guy who keeps bringing up stuff that happened, like, six years ago, but getting the history right on the financial crisis that caused the Great Recession matters, 'cos this is gonna happen again.

I'm just going to quote two-fisted regulator Bill Black verbatim, because there is only so much condensing I can do:

The ultra brief version is (1) by 2006 roughly 40 percent of total mortgage loans originated were "liar's loans," (fyi, roughly half of all loans called "subprime" were also liar's loans -- the categories are not mutually exclusive, (2) the incidence of fraud among liar's loans is 90 percent, (3) an honest real estate lender would not make pervasively fraudulent loans because doing so would inevitably cause the firm to fail (absent a bailout), (4) liar's loans, however, are optimal "ammunition" for "accounting control fraud", (5) investigations (and logic) have confirmed that it was overwhelmingly lenders and their agents who put the lies in liar's loans, (6) no lender was ever required or encouraged by the government to make or purchase liar's loans -- the opposite was true, the government discouraged such loans and industry documents confirm this fact, (7) liar's loans make an excellent "natural experiment" because even Fannie and Freddie were not encouraged to make these loans -- because they did not aid them in meeting the "affordable housing goals", (8) Fannie and Freddie, eventually, purchased enormous amounts of liar's loans for the same reason that the investment banks (not subject to the CRA or any affordable housing goals did) they created massive (albeit fictional) short-term accounting income, which flowed through to the bonuses of many Fannie and Freddie executives. Let me put these data in another format -- by 2006, lenders were making over two million fraudulent liar's loans annually. Fraudulent liar's loans grew massively because lenders (and purchasers) created perverse incentives to make and purchase massive amounts of these fraudulent loans.

This level of fraud is massively greater than during the S&L debacle, where accounting control fraud never became a dominant national lending strategy. Liar's loans grew so rapidly, and became such a large share of the market that they constituted the loans "on the margin" that hyper-inflated the financial bubble, which drove the Great Recession.

A liar's loan, by the way, is a low-documentation or no-documentation home mortgage loan. This is not the same as a subprime loan, where the lender (usually a bank) knows the borrower has bad credit, sketchy employment history, etc., and therefore gives the borrower a higher rate of interest to compensate the lender for taking such a risk.  

So, the whole line that "lenders were greedy" during the housing bubble is only half true. Mobsters and bank robbers are also greedy, you could say. I'm greedy. You're greedy. Children are greedy with cookies and crayons. The difference is that robbers and banksters are also criminals. Financial fraud and lending fraud are crimes.

Besides the media and of course Wall Street actively covering up this fraud, Dubya and especially Obama deserve the most blame and contempt for referring zero fraud cases to the Justice Department for criminal prosecution. Sums up Black:

One of our mantras in white-collar criminology is: "if you don't look, you won't find." The Frontline documentary begins the process of explaining what those of us who are aware of what a real investigation is and what it requires have been saying for years -- neither the Bush nor the Obama administration has been willing to conduct a real investigation of the elite banksters whose frauds made them wealthy and drove the financial crisis and the Great Recession. This is one of the hallmarks of crony capitalism. It cripples our economy, our democracy, and our integrity.


[...] Any bank that is too big to fail and to prosecute is a clear and present danger that should be promptly shrunk to the point that it can no longer hold the global economy hostage in order to extort immunity from the criminal laws for the controlling officers who became wealthy by being what Akerlof and Romer aptly described as "looters."


By William K. Black
January 26, 2013 | Huffington Post

Monday, October 17, 2011

For the last time: Fannie did NOT cause financial disaster

Gee, I'm sure this well-researched article will put an end to the false belief that the FMs caused the financial crisis, which has become an article of faith among many, especially on the Right.

I'm doubly sure that those who refute this article will come back with statistics or studies or something checkable to support their false claim that the FMs/GSEs caused the financial crisis.

Yep, I'm absolutely sure, because we're all reasonable, fact-based thinkers.


By Jeff Madrick and Frank Partnoy
October 27, 2011 | New York Review of Books

Amid the current financial turmoil, the causes of the crisis that just preceded it—the bursting of the housing bubble—are being badly distorted. Some analysts, including the authors of the book under review [Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, by Gretchen Morgenson and Joshua Rosner], are arguing that the housing and financial crises of 2007 and 2008 were the direct result of federal guarantees of mortgages, a program first created in the 1930s, and therefore less so the result of the aggressive creation of mortgages by private business than has been widely reported.

In particular, the authors accuse two quasi-public but profit-making companies, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), of adding risks to the mortgage markets that resulted in disaster. Much the same criticism has been made by Peter Wallison, a fellow of the American Enterprise Institute, who wrote an angry dissent to the findings of the Financial Crisis Inquiry Commission (FCIC), which was appointed by Congress to investigate the causes of the crash. Contrary to Wallison, the nine other members of the commission, including three others appointed by Republicans, concluded that Fannie and Freddie were not the main causes of the crisis.

Along with many other experts, the nine members pointed to considerable evidence that, despite large losses, these government-sponsored enterprises (GSEs), as they are known, bought or guaranteed too few highly risky loans, and did so too late in the 2000s, to cause the crisis. But in their new book, Reckless Endangerment, the New York Times reporter Gretchen Morgenson and mortgage securities analyst Joshua Rosner try to revive the issue of their responsibility.

The book boldly and passionately asserts that the risk-taking of Fannie Mae and Freddie Mac was a major element in causing the housing bubble. In particular, the authors blame the crisis on the goals set by the Clinton administration in the early 1990s to make lending "affordable" to more middle- and low-income home buyers. These goals were raised several times over the next dozen years so as to include more people, with the result that loans became cheaper. The authors write, "The homeownership drive helped to plunge the nation into the worst economic crisis since the Great Depression." They add, "How Clinton's calamitous Homeownership Strategy was born, nurtured, and finally came to blow up the American economy is a story of greed and good intentions, corporate corruption and government support."

This bold claim, however, is not substantiated by persuasive analysis or by any hard evidence in the book. The GSEs did generate large losses, but their bad investments in housing loans followed rather than led the crisis; most of those investments involved purchases or guarantees made well after the subprime and housing bubbles had been expanded by private loans and were almost about to burst.

Even then, the GSEs' overall purchases and guarantees were much less risky than Wall Street's: their default rates were one fourth to one fifth those of Wall Street and other private financial firms, a fact not made clear by the authors. A further review of other literature shows that Clinton's goals to increase "affordable lending" had little to do with the risks the GSEs took. The FCIC, for example, argued that in several years these goals were largely met by the GSEs' standard loans with traditional down payments.

Although they were set up originally by the federal government, the GSEs have been private companies for roughly the last forty years. They are traded on the stock market and were on a hunt for profits like much of Wall Street, in part because their executives' bonuses were linked to earnings per share. Even so, by comparison with other companies they restrained their risk. Private firms on Wall Street and mortgage companies across the nation, uncontrolled by adequate federal regulation, unambiguously caused the crisis as they expanded in the 2000s. They were the ones who "came to blow up the American economy."

This is not to say that the GSEs' way of doing business was sensible or that their losses—up to $230 billion—can be justified. The hybrid business model of a quasi-public but profit-making company, whose bonds were treated in the financial markets as if they were guaranteed by the federal government, was likely to lead to abuse and careless investment. Financial markets assumed that the GSEs were relatively safe partly because they were regulated by a federal agency, the Office of the Federal Housing Enterprise Oversight (OFHEO) and were subject to a web of rules. They also had a long record of backing safe mortgages. The authors describe well how, beginning in the 1990s, Fannie in particular betrayed its responsibilities. It aggressively minimized federal regulation of its activities and it fought off attempts to tax its profits, partly through extravagant favors to influential lawmakers. This is a story that needed telling. Reform of the GSEs should be an urgent part of a new federal housing agenda.

But the book's unjustified thesis that Fannie and Freddie were major causes of the financial crisis is being used by politicians and pundits to soften criticism of private business and by lobbyists and others who would water down the new regulations passed by Congress under the Dodd-Frank Act. The book is also being exploited by those who believe the federal government should have little if anything to do with support for the mortgage market, a view we find unfounded.

Reviving the housing market was a high priority for Franklin Delano Roosevelt when he took office in 1933. In 1934, he created the Federal Housing Administration, which guaranteed mortgage payments, and provided insurance for savers' deposits in the thrift institutions that then were the nation's leading mortgage writers. He had also created a government bank, the Home Owners' Loan Corporation, to make new loans to distressed home owners and buy bad mortgages from failing financial institutions. Finally, in 1938, he established Fannie Mae to guarantee mortgages that met adequate standards or buy them outright from private financial institutions; it issued its own debt to major investors to support its practices. The goal was to maintain a stable mortgage market with reasonable borrowing rates in all regions of the country.

For roughly fifty years, Fannie Mae did its job. Home ownership rates rose from about 40 percent in the 1920s to about 60 percent and, in contrast to earlier, far more volatile history, the mortgage market was mostly stable. Freddie Mac was created in 1970 as a private company to package mortgages into securities that could be sold to institutional investors like pension funds.

That the GSEs were private began to draw increasing criticism as they grew larger. The implied federal guarantee of the debt of these private, profit-making companies, which lowered their borrowing rates, made it easier for them to grow and make new and riskier loans. Some urged that the GSEs be fully privatized and stripped of any advantage they might have because of federal regulation. Wall Street and mortgage firms wanted for themselves the business Fannie and Freddie were doing, including the packaging of mortgages into securities.

In the early 1990s, Congress recognized that Fannie and Freddie, which were growing rapidly, required closer regulation. President Clinton and Congress also were eager to channel more loans to lower-income Americans. Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which established a new agency to oversee the GSEs and set affordable lending goals.

From the beginning, the new oversight agency—OFHEO—was weak. And this is essentially where Reckless Endangerment begins, with sordid details about how James Johnson, Fannie's chief executive and an influential Democratic insider, fended off control by OFHEO during its first seven years. Johnson established an expensive twelve-person lobbying office, gave campaign money to powerful politicians, and made contributions to the favorite charities of influential congressmen. He opened local development offices in congressional districts as a public relations campaign to show how congressmen were helping their local constituents get mortgages.

By means of such measures, Johnson won congressional support and repeatedly resisted attempts by a handful in Congress to rein Fannie in, as did his successor in 1999, Franklin Raines, President Clinton's former budget director. Perhaps most important, Johnson tied his own CEO bonuses and those of other executives to the earnings of the company.

Morgenson and Rosner make a strong if one-sided case against Johnson. We never hear from any of his defenders, and he refused, the authors write, to be interviewed. But as they make clear, Johnson, partly by his egregious self-promotion, made Fannie virtually untouchable politically. Above all, he exploited the Fannie mandate to lend to lower-income Americans in order to expand the company's reach, and in the process increase both its earnings and his personal wealth.

They also note that Democrats ranging from Congressman Barney Frank, who got his partner a job with Fannie, to former Clinton adviser Lanny Davis were strong supporters of Fannie Mae. William Daley, a high-level adviser to President Obama, was on Fannie's board. They cite Republicans who were Fannie supporters or executives as well, including Newt Gingrich, Senator Christopher Bond, and Robert Zoellick, legal counsel of Fannie and currently head of the World Bank.

The authors make no serious charges of outright fraudulent corruption on the part of these people, however. The one potential exception is Angelo Mozilo, the flamboyant head of Countrywide Financial, the nation's largest mortgage originator, who offered beneficial mortgage rates to some influential politicians. But the authors add nothing new here. The "friends of Mozilo," who got cut-rate VIP loans, included Johnson, Senators Chris Dodd and Kent Conrad, and the late Ambassador Richard Holbrooke, among others. But while Mozilo did favors for them, Morgenson and Rosner cite no specific favors returned to Mozilo by Dodd, Conrad, Holbrooke, or the others mentioned.

In these and other cases, the authors tar with a broad brush. They write that they conducted interviews over more than a decade and amassed a "mountain of notes," but many sources quoted are anonymous and the book does not cite references in footnotes so there is no way to assess many of their assertions. They almost never deal with counterarguments to their many claims, if only to show them wrong.

They make some odd errors as well, such as stating that Walter Mondale was "sitting out" the 1980 presidential election, when as vice president he ran again as Jimmy Carter's running mate. Their scathing criticism of a Federal Reserve Bank of Boston study published in 1992, which demonstrated prejudice against minorities in the distribution of mortgages in the Boston area, is an especially disturbing example of their one-sided reporting. They assert that this study, which they say influenced Congress's adoption of affordable lending goals, was deeply flawed. They mock the primary author of the study, the economist Alicia Munnell, and state that the Boston Fed made "a fool of itself."

But they don't point out that the Boston Fed's study was later subject to a stringent peer-review process and was published in 1996 in the respected American Economic Review. Indeed, few research papers have been as closely scrutinized. The published results, which corrected some methodological errors, showed persuasively that there was in fact a bias in the mortgage markets. In 1998, another peer-reviewed paper—also ignored by the authors—analyzed the criticisms of the Boston Fed study, as well as other research on mortgage bias, and concluded that the study was fundamentally correct. "The bottom line is that the results related to race are extremely robust," wrote the author.

The one claim that Morgenson and Rosner depend upon most for their extreme conclusions about Fannie and Freddie is especially poorly documented. Fannie, they write, started influencing the private sector in damaging ways beginning in the 1990s, when the GSEs reduced the down payments required for mortgages in order to help poorer Americans acquire housing loans. Fannie's lower standards "set the tone for private-sector lenders across the nation." In support, they cite two quotes from one unidentified former Fannie executive. They offer no empirical evidence, or even telling illustrations or anecdotes. A more recent paper by economist Edward Pinto offers more supposedly illustrative anecdotes about reduced down payments but remains unpersuasive. In fact, the loans guaranteed by Fannie in those years were always privately insured.

But the key point—which is largely missing from Reckless Endangerment —is that private lenders made far riskier loans than GSEs bought or guaranteed, especially during the 1990s, when subprimes issued to borrowers with low income and poor credit were relatively new. You will not read in Reckless Endangerment that the GSEs bought very few subprimes in these years. Rather than leading the way, Fannie's market share of the low-income home buyers fell behind private industry's far riskier lending to poorer home owners and others.

The increased risk-taking of the GSEs during the 1990s, far more modest than what was to come in the 2000s in the private sector, had no bearing on the financial crisis of 2007 and 2008. The authors make it seem as if it did, however. They write:

Clinton's public-private partnership was ramping up…. To meet the goals Fannie and Freddie had to buy riskier mortgages, such as those defined as subprime….

Some $160 billion in subprime mortgages would be underwritten in 1999, up from $40 billion five years earlier. And in another four years, that figure would jump to $332 billion.

Many of those loans wound up in Fannie's and Freddie's portfolios. By 2008, some $1.6 trillion of toxic mortgages, or almost half of those that were written, were purchased or guaranteed by Fannie and Freddie.

As noted, the GSEs bought very few subprimes in the 1990s. But it might especially surprise the inexpert reader to know that the GSEs did not own almost half of the "toxic mortgages" written by private companies, a remarkable exaggeration on the part of the authors. As usual, no source for the estimate is given, but it is likely based on the analysis of Pinto, who was a former Fannie official and is a colleague of Wallison's at the American Enterprise Institute. To make the claim, Pinto radically redefined what qualified a mortgage to be subprime or an Alt-A, for which mortgage-holders were often not required to document their income, rejecting the conventional and widely accepted definitions. In his analysis, almost any mortgage held by Fannie and Freddie with modest above-average risk was categorized, to use Morgenson and Rosner's term, as "toxic."

If so, one would presume the delinquency rates suffered by the GSEs during the crisis would have been very high. But David Min, an analyst with the Center for American Progress, shows that the after-crisis delinquency rates on the large additional portion of GSE mortgages that Pinto claimed were high risk, and that was termed "toxic" by Morgenson and Rosner, was roughly 10 percent, far lower than the 25 to 30 percent default rate of true subprimes. In fact, the rate of delinquencies for all GSE securities in 2004 was 4.3 percent, compared to a delinquency rate in private industry of 15.1 percent of mortgages. In 2005, the GSE rate was 7.8 percent compared to 28.7 percent, and in 2006 and 2007, the rates reached 13.2 and 14.9 percent in the GSEs and 45.1 and 42.3 percent in the private market. None of these figures are cited in Reckless Endangerment. In fact, losses as a proportion of mortgages guaranteed or bought by the GSEs were far lower than in private industry.

When Wall Street was taking more and more risk in the 2000s, as the housing bubble expanded, the GSEs were, relatively speaking, sitting it out. Johnson had left Fannie at the end of 1998 with a $21 million pay package, joining the board of Goldman Sachs and eventually running the Brookings Institution and becoming a key adviser to Senator John Kerry in his run for the presidency. But serious accounting irregularities under Raines, perhaps initiated under Johnson, left Fannie subject to immense pressure years later to get its books straightened out. Overall mortgage debt grew by 11.9 percent a year from 2003 to 2007, but the amount funded by the GSEs grew by only 7.6 percent a year. The GSE market share fell from over 50 percent to 40 percent.6

The GSEs did buy subprime mortgages in the 2000s, but contrary to the impression given by Morgenson and Rosner, their purchases were always a distinct minority of those sold by Wall Street. As Jason Thomas and Robert Van Order of George Washington University further point out, the subprimes the GSEs bought in these years were from the safer triple-A tranches of basic mortgage-backed securities, i.e., the highest quality of groups of mortgages rated by their risk of default. The GSEs never bought the far riskier collateralized debt obligations (CDOs) that were also rated triple-A and were the main source of the financial crisis. (The triple-A classifications of some of those CDOs were conferred on them very dubiously by the credit-rating agencies, Standard & Poor's and Moody's.) It turned out that subprimes accounted for only 5 percent of the GSEs' ultimate losses, according to Thomas and Van Order.

Some, like Alan Greenspan, argued that the GSEs' purchases of subprimes, nevertheless, helped hold down mortgage rates and therefore pushed up demand for housing and housing prices. But Thomas and Van Order strongly dispute that as well, showing that there was so much demand for the healthier triple-A tranches the GSEs bought that the purchases of subprimes made virtually no difference.

What then caused the losses of up to $230 billion by the GSEs that required the Treasury to put them into conservatorship in September 2008—they are now run by the Federal Housing Finance Agency—and a federal bailout of up to $150 billion in capital? It had little to do with pursuit of the original goals of "affordable lending." The GSEs were far more concerned to maximize their profits than to meet these goals; they were borrowing at low rates to buy high-paying mortgage securities once their accounting irregularities were behind them. For example, they started aggressively buying Alt-A loans that did not generally meet affordable lending goals because they were made to higher-income individuals. This was irresponsible. Most disturbing about the GSEs, they refused to maintain adequate capital as a cushion against losses, despite demands from their own regulators that they do so.

The GSEs never took nearly the risks that the private market took. Still, when housing prices collapsed so sharply, even modestly risky and traditionally safe mortgages produced losses. The risky lending was not driven by the affordable lending goals; nor did it cause the crisis. Thomas and Van Order write convincingly that the downfall of the GSEs "was quick, primarily due to mortgages originated in 2006 and 2007. It…was mostly associated with purchases of risky-but-not-subprime mortgages and insufficient capital to cover the decline in property values."

After devoting roughly two thirds of their book to Johnson and the GSEs, Morgenson and Rosner comment, "Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street." The assertion is jarring, coming so late in the book and after so much blame has been leveled at the GSEs. The authors do not really try to prove their point. They do not seriously address the derivatives market—the highly leveraged securities based on other securities that were at the core of excessive risk-taking. They mostly present a random collection of examples of wrongdoing, and their points have largely been made elsewhere.

But they add some useful details. Earlier in the book, they tell very well the story of NovaStar Financial, a mortgage originator that began doing business in the 1990s and exploited home owners still more in the 2000s. The company's history can serve as a quintessential example of regulatory failure. Respected Wall Street firms fed NovaStar and other dubious mortgage-writing companies with more money than they could wisely use. The authors also show how Goldman Sachs supplied mortgage money to Fremont, which they call "one of the nation's most wanton mortgage originators." Goldman, however, was only one of the pack, and many Wall Street investment banks owned their own aggressive mortgage originators.

The authors, moreover, explain clearly how the prices of collateralized debt obligations were driven up by credit-rating agencies. They show how some banks used off-balance-sheet accounting that permitted them to stuff risky assets into hidden "Special Purpose Vehicles," or SPVs. But here they mix up SPVs with more complex "Structured Investment Vehicles," or SIVs, which resemble CDOs but have shorter-term debt. Both the book and its index mislabel SIVs as "Special Investment Vehicles." They incorrectly write that Citigroup's large losses were due to problems in their SIVs. The big bank's losses actually came from the highly rated parts of CDOs they retained as well tens of billions of dollars of guarantees they made to those who bought the CDOs they underwrote, known as liquidity puts.

Clearly, the GSEs must be reformed and, if they are allowed to have the advantage of a presumed government guarantee, their practices and profits must be controlled and limited. A federal presence in the mortgage market is required to maintain liquidity and adequate access for home buyers. As for poorer families, a system of mortgages based on affordable lending goals is not necessarily the most efficient way to enable them to purchase homes. Direct vouchers might be a better alternative. Finally, there is the larger and more controversial question of whether many people, and the financial system itself, might be better off if more homes were rented, not bought.

But these are different debates than the one this book has provoked. Contrary to many commentators on Reckless Endangerment, and to its chief claims, it was Wall Street, not the GSEs, that fundamentally caused the 2007–2008 crisis, which was driven not merely by a headlong pursuit of easy profit but also by ethically dubious practices. Morgenson and Rosner discuss a handful of these practices and raise appropriate questions about why Wall Street participants were not criminally prosecuted. We will turn our attention to this important issue in a second article.

—This is the first of two articles.

Friday, July 9, 2010

Rich defaulters: They're 'strategic;' you're still 'irresponsible'

The rich are America's biggest mortgage defaulters. They're sure as hell not falling for Freddie Mac's moralizing. See, they're not being "irresponsible" and "damaging their communities" like you peons are when you sadly walk away from the biggest investment in your life, they're being "strategic" and "ruthless." See the difference? No? Well, maybe that's why you're poor and they're rich.

Hey, if America's rich supermen think it's morally OK to do, then you can too. Think like a tycoon and walk away from your underwater home!


Biggest Defaulters on Mortgages Are the Rich
By David Streitfeld
July 8, 2010 | New York Times


URL: http://www.nytimes.com/2010/07/09/business/economy/09rich.html?pagewanted=1&source=patrick.net&_r=2

Friday, January 8, 2010

Taibbi: FMs didn't hoodwink Wall Street

Fannie, Freddie, and the New Red and Blue
By Matt Taibbi
January 4, 2009 | True/Slant

[...]

Now I know that that's not what Peter Wallison of the Journal is saying here; he's saying that even if the market saw that increase in subprime loans, even those numbers were understated thanks to Fannie and Freddie's deceptions. But the inference that the market was hoodwinked by the GSEs is absurd. It was plain to most everyone in the financial services industry that there was a bubble going on last decade, that something deeply fucked up was going on with the mortgage markets — just as it was plain to everyone in the late nineties that something was wrong with the stock markets, when companies like Theglobe.com with annual sales under $5 million could have a $5 billion stock valuation.

Everyone was involved in the mortgage scam. At the lender level the deceptions were myriad; liar's loans, fraudulent income documentation, negative amortization loans, HELOCs, etc. The rush to get as many loans written as possible and then get those hot potatoes moved to the next sucker in the line was furious and extended from coast to coast, sinking one lender after another in Ponzoid debt and indictments.

Then there were the countless deceptions that emerged from the securitization process, the bad math that allowed banks like Goldman to do $474 million mortgage deals where the average equity in the home was just 0.71 percent, and sell 93% of that deal as investment grade paper.

Are we really to believe that the people who did those deals didn't know what total crap they were selling? That the people who used CDO-squareds to magically turn BBB investments into AAA investments didn't know how nuts that was?

[...]

But what I don't see is how anybody can say that all of this happened because Fannie and Freddie rigged the game to get Mexicans in homes, and then the banks and the ratings agencies just reacted organically to the corrupted market and helped the bubble along through no fault of their own. That's just another (albeit more convincing) version of the early attempt to pin the disaster on the Community Reinvestment Act, which in turn is just another way of playing the red-blue blame game, which in turn is missing the point.

This GSE story is a big one, but if it gets used as a path back to a "The Market Reacted Rationally" version of history, we're screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.

[...]

I think in the end what we're going to find is that all the relevant actors had their own motivations for getting involved in the bubble. Two and now three presidential administrations let the Fed overheat the economy for political reasons that should be obvious. Alan Greenspan, hell, he did it because he loves seeing himself on magazine covers and wanted to keep getting invited to the right Manhattan parties. There were congressmen that converted the expansion of cheap credit into low-income votes. The bankers and lenders went along because the system of compensation on Wall Street is fucked and rewards short-term thinking while ignoring long-term consequences.

To me all of these people were equally guilty of making bad decisions to benefit themselves in the here and now at the expense of the whole in the future. When it comes to bubbles, It Takes a Village, and blaming the whole mess on the "socialist" aims of a pair of government agencies seems off base — particularly since the Randian protocapitalists running the banks benefited every bit as much from this socialism as actual homeowners, and perhaps even more, when one considers that homeowners get foreclosed upon, while bonuses are forever.

Wednesday, October 29, 2008

Taibbi's smackdown on cause of financial meltdown

Taibbi throws this National Review pseudo-intellect to the mat in this debate on what really caused the financial crisis.  Taibbi is my hero of the week for this.  Read this and weep, all you Fannie haters!

 


Matt Taibbi and Byron York Butt Heads Over Whether McCain Deserves Blame for the Wall Street Meltdown

October 14, 2008  |  New York Magazine

 

Every day (or close to it) until November 4, a series of writers and thinkers will discuss the election over instant messenger for nymag.com. Today, Rolling Stone's Matt Taibbi and National Review's Byron York argue over the headwinds facing McCain, what Phil Gramm had to do with the financial crisis, and the importance of credit default swaps.

 

M.T.: So how are you feeling about McCain's chances today?

 

B.Y.: I've just finished an article for National Review — the actual magazine — about the headwinds McCain faces. I was going to look at three, and then I started to list them. I stopped at ten. New Gallup numbers out today show that George W. Bush's job approval rating remains at 25 percent, while his disapproval rating has ticked up to 71 percent. How hard is it to succeed a two-term president of your own party who is at 25-71? We don't know because it's never been done.

 

M.T.: Yeah, that's a damned shame, too. I feel really badly for the guy. I suppose you think the media coverage is also a headwind?

 

B.Y.: Actually, I did not list media coverage among the headwinds. I listed the succeed-a-two-term-president problem, the right-track/wrong-track problem, the Republican-Democrat-enthusiasm gap problem, the Republican-Democrat-I.D.-gap problem, the financial meltdown, Iraq, Republican gloom on Capitol Hill, Obama's fund-raising advantage, and McCain's historical problems with the GOP base.

 

M.T.: But all of those "headwinds," or almost all of them, are the direct result of McCain having supported policies that are now unpopular. There is absolute justice in his facing a "headwind" from the financial meltdown, from the unpopularity of the Iraq war, and so on. How is that a "headwind"? That's just self-created unpopularity.

 

I mean, his onetime campaign co-chair and top economic adviser, Phil Gramm, basically created the credit-default-swap market back in 2000. Why shouldn't he get hammered on the financial crisis?

 

B.Y.: Did I suggest that headwinds are unfair? But on the financial meltdown in particular, if you're suggesting that that is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground.

 

M.T.: You don't think the unregulated CDS market was a major factor in the current crisis? Were you watching when AIG almost went under? Were you watching the Lehman collapse?

 

B.Y.: I think that Fannie Mae and Freddie Mac were also major factors. And I believe that many of the problems in the mortgage area can be attributed to the confluence of Democratic and Republican priorities: the Democrats' desire to give mortgages to people, particularly minorities, who could not afford them, and the Republicans' desire to achieve an "ownership society," in part by giving mortgages to people who could not afford them. Again, I believe that if you are suggesting that the financial crisis is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground.

 

M.T.: Oh, come on. Tell me you're not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm's Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That's like five times the size of the holdings in the NYSE. And it's all speculation by Wall Street traders. It's a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable. 


[Thank God Taibbi said in plain English what so many of you have smugly accepted as the truth: That black people who couldn't pay their mortgages destroyed the entire U.S. financial system.  That's what many of you have been trying to tell me.  Some have even claimed Wall Street was a "victim!"  But pinning this on blacks doesn't pass the smell test, or the brain test. I can almost understand why people like Al Sharpton are so paranoid, because at the first opportunity, blacks get blamed for everything that goes wrong in America.  - J]


B.Y.: I was struck by the recent Senate testimony of James Lockhart, who is head of the Federal Housing Finance Agency, about the sheer recklessness of Fannie in recent years. Despite "repeated warnings about credit risk," Lockhart testified, Fannie became more reckless in 2006 and 2007 than they had been in the scandal-ridden tenure of Franklin Raines (who departed in 2004). In 2005, Lockhart said, 14 percent of Fannie's new business was in risky loans. In the first half of 2007, it was 33 percent. So something terribly wrong was going on there, and it became a significant part of the present problem.

 

M.T.: What a surprise that you mention Franklin Raines. Do you even know how a CDS works? Can you explain your conception of how these derivatives work? Because I get the feeling you don't understand. Or do you actually think that it was a few tiny homeowner defaults that sank gigantic companies like AIG and Lehman and Bear Stearns? Explain to me how these default swaps work, I'm interested to hear.

 

Because what we're talking about here is the difference between one homeowner defaulting and forty, four hundred, four thousand traders betting back and forth on the viability of his loan. Which do you think has a bigger effect on the economy?

 

B.Y.: Are you suggesting that critics of Fannie and Freddie are talking about the default of a single homeowner?

 

M.T.: No. That is what you call a figure of speech. I'm saying that you're talking about individual homeowners defaulting. But these massive companies aren't going under because of individual homeowner defaults. They're going under because of the myriad derivatives trades that go on in connection with each piece of debt, whether it be a homeowner loan or a corporate bond. I'm still waiting to hear what your idea is of how these trades work. I'm guessing you've never even heard of them.

 

I mean really. You honestly think a company like AIG tanks because a bunch of minorities couldn't pay off their mortgages?

 

B.Y.: When you refer to "Phil Gramm's Commodities Future Modernization Act," are you referring to S.3283, co-sponsored by Gramm, along with Senators Tom Harkin and Tim Johnson?

 

M.T.: In point of fact I'm talking about the 262-page amendment Gramm tacked on to that bill that deregulated the trade of credit default swaps.

 

Tick tick tick. Hilarious sitting here while you frantically search the Internet to learn about the cause of the financial crisis — in the middle of a live chat interview.

 

B.Y.: Look, you can keep trying to make this a specifically partisan and specifically Gramm-McCain thing, but it simply isn't. We've gone on for fifteen minutes longer than scheduled, and that's enough. Thanks.  [That's called tapping out, folks.  Byron York just cried "Uncle!" - J]

 

M.T.:  Thanks. Note, folks, that the esteemed representative of the New Republic has no idea what the hell a credit default swap is. But he sure knows what a minority homeowner looks like.  [Boo-yah!  - J]

 

B.Y.: It's National Review.  [Who cares? - J]

Tuesday, October 14, 2008

FMs didn't back Countrywide, other risky mortgage banks

Follow the link in the article below, where you'll see that the FMs had requirements that LIMITED their amount of loan generation to $200 million per month, although mortgage lenders like H&R Block were making 10x that amount of loans every month, i.e. they were out of compliance with the FMs.  

In other words, nobody in the federal gov't was forcing mortgage banks to make all those risky loans; nor were the FMs guaranteeing all those loans  (sub-prime and Alt-A loans made up only 17 percent of the FMs' portfolio by 2007).  

Countrywide, H&R Block, Option One Mortgage, and others were simply greedy, and betting that house values would continue to rise; meanwhile the Wall Street investment banks were making record profits packaging and re-selling those loans, in a deliberate gambit to "take on more risk." 

Now, tell me how I'm wrong.


Here's a more or less objective article on how much the FMs are to blame.

And here's a different "conspiracy" theory to explain the FMs' stark change in loan policy in 2005, (before which their loan criteria were stricter than the prevailing loan market's), that has nothing to do with Carter, Clinton, or throwing scraps to minority voters.


As I've said before, the real problem of the FMs was that they were neither fish nor fowl, neither governmental or private, but a little of both, with conflicting missions: ensuring more Americans got affordable loans; and pleasing shareholders with consistently high returns in a highly competitive lending market that was making record profits (see: Goldman Sachs; and Morgan Stanley) thanks to risky sub-prime loans.



Freddie Mac woes may hit Countrywide
By E. Scott Reckard
November 21, 2007  | Los Angeles Times

Note: This article includes corrections to the original version.

Countrywide Financial Corp. survived the first phase of the mortgage meltdown this summer thanks in part to a $2-billion investment from Bank of America.

But the Calabasas-based lender suffered a major new setback Tuesday when mortgage giant Freddie Mac posted a big loss and said it needed new capital – which could curb Countrywide's ability to make loans.

When the mortgage crisis began last summer, Countrywide said it would cut back making higher-risk loans to concentrate on the safer loans it could sell to Freddie Mac and Fannie Mae, the government-chartered buyers of home loans.

That approach is now looking dicey in the wake of Freddie Mac's surprising $2-billion loss and its announcement that it must raise more capital before its regulator will allow it to step up purchases of loans from lenders such as Countrywide, said Fox-Pitt Kelton analyst Howard Shapiro, who downgraded Countrywide shares.

"Countrywide's survival strategy has depended on access to the secondary markets" – the companies that, like Fannie Mae and Freddie Mac, buy loans and bundle them into securities for sale, Shapiro wrote. The approach won't work so well when Freddie Mac and Fannie Mae "are capital-constrained and may need to shrink."

Countrywide's shares traded as low as $8.21 during the day amid renewed speculation that the company was heading toward bankruptcy.

Company spokesman Rick Simon called the bankruptcy talk "absolutely false," and Countrywide said its cash and available credit were sufficient to pay its debts through the end of next year.

The stock ended at $10.28, down 29 cents, or 2.7%. Even so, shares are down 25% in the last five trading sessions and 76% since the start of the year.

Countrywide is under fire on many sides. Rising delinquencies, first seen in risky sub-prime loans, are now spreading to loans to borrowers with better credit scores. It is under pressure to help borrowers whose adjustable mortgages may become unaffordable, but says modifications are tricky because they must be approved by the investors who buy the loans.

And profit margins historically have been thinner on the so-called conforming loans that Fannie Mae and Freddie Mac buy.

The government-sponsored companies create huge pools of loans to back mortgage bonds that they sell to investors with a guarantee of payment. To compensate for this insurance against loss, they charge lenders a fee when they buy and agree to guarantee the lenders' mortgages.

As losses mount at Fannie and Freddie, they will have to compensate by raising those fees to lenders – an extra charge that Countrywide may have trouble bearing, said Frederick Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco.

"The question is whether Countrywide can pass the extra costs on to borrowers," Cannon said. "Right now there's a lot of competition" on the prime loans under $417,000 that conform to the standards of Freddie Mac and Fannie Mae.

Countrywide can keep some loans as investments for its Countrywide Bank subsidiary. But the bank is so small that Countrywide must sell most of its loans, Cannon said. It is originating $20 billion to $22 billion a month in new mortgages but has only about $120 billion in loans as investments.

By contrast, major banks like Bank of America – historically a second-tier company in terms of home-lending volume – have far more room to put new loans on their balance sheets, Cannon noted. And BofA is highly competitive, saying it wants to become the top mortgage lender in the country.

To advance that strategy, BofA made a $2-billion investment in Countrywide to gain access to its efficient loan-generation and customer-service operations. But Countrywide's sagging fortunes now have cost Bank of America almost half that investment – on paper, anyway.

Charlotte, N.C.-based BofA received preferred stock that can be converted to 111 million shares of Countrywide common stock at $18 a share.

The decline in Countrywide's shares has now left BofA down $858 million at Tuesday's closing price. BofA declined to comment Tuesday; its shares fell a nickel to $42.77.

Countrywide isn't the only lender in rough waters. On Tuesday, tax preparer H&R Block Inc. – which has a lending subsidiary – replaced Chairman and Chief Executive Mark Ernst with Richard Breeden, the former head of the Securities and Exchange Commission.

Breeden had led an investor group critical of Block's 1997 purchase of Option One Mortgage and its recent failure to complete a sale of the Irvine-based sub-prime mortgage lender, where losses have mounted into the hundreds of millions of dollars.

At the heart of the mortgage meltdown are rising defaults by borrowers who cannot make payments on their loans.

Saying they wanted to avoid foreclosures, Countrywide and competitors GMAC, Litton Loan Servicing and Barclays' HomeEQ unit said they were working to streamline their processes for modifying loans. The plan, worked out in conjunction with California Gov. Arnold Schwarzenegger, is the latest of a series of commitments Countrywide has made to modify loans.

Monday, October 6, 2008

Fannie & Freddie were victims, not culprits

Fannie Mae and Freddie Mac were victims, not culprits

By Aaron Pressman

September 26, 2008 | Businessweek.com

There's a dangerous — and misleading — argument making the rounds about the causes of our current credit crisis. It's emanating from Washington where politicians are engaging in the usual blame game but this time the stakes are so high that we can't afford to fall victim to political doublespeak. In this fact-free zone, government sponsored mortgage giants Fannie Mae and Freddie Mac caused the real estate bubble and subprime meltdown. It's completely false. Fannie Mae and Freddie Mac were victims of the credit crisis, not culprits.

Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That's right — most subprime mortgages did not meet Fannie or Freddie's strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower's income or employment history? All made in the private sector, without any support from Fannie and Freddie.

Look at the numbers. While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003. Fannie and Freddie, which wouldn't accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.

There's a must-read study by staff members of the Federal Reserve Bank of New York analyzing the roots of the subprime crisis that came out in March. I don't think it got much attention then as the conclusions seemed uncontroversial at the time. But now that Washington politicians are trying to rewrite history, it should be mandatory reading for every American interested in knowing how we got here.

The study identifies five causes of the subprime meltdown:

  1. Convoluted loan products that consumers didn't understand.
  2. Credit ratings that didn't do a good job highlighting the risks contained in subprime-backed securities.
  3. Lack of incentives for institutional investors to do their own research (they just relied on the credit ratings).
  4. Predatory lending and borrowing (which I think means fraud perpetrated by borrowers).
  5. Significant errors in the models used by credit rating agencies to assess subprime-backed securities.

You'll note in the Fed's five causes that there's some culpability for lenders, borrowers, investors and credit raters. There's no blame for Freddie Mac or Fannie Mae which had little or nothing to do with the entire situation.

It's certainly fair to criticize Fannie and Freddie over real issues that contributed to their downfall. The companies had numerous accounting problems and inadequate safeguards covering their own investment portfolios. Those weaknesses came home to roost when the real estate market cratered. Fannie and Freddie purchased billions of dollars of subprime-backed securities for their own investment portfolios and got hit just like every other investor. But it's some kind of crazy, politically inspired CYA to blame for the mess we're in.

(For a more fair and balanced — and detailed — recounting of Fannie and Freddie's subprime investing forays, see this post from the excellent Calculated Risk blog.)