Tag: Federal takeover of Fannie Mae and Freddie Mac

FM and FM Reloaded

A couple off weeks ago, the SEC indicted a number of executives from Fannie Mae and Freddie Mac for fraud. A detailed look at the indictment is here. Money quote is a long one, but I think you have to read it:

The SEC’s complaint against the former Fannie Mae executives alleges that, when Fannie Mae began reporting its exposure to subprime loans in 2007, it broadly described the loans as those “made to borrowers with weaker credit histories,” and then reported — with the knowledge, support, and approval of Mudd, Dallavecchia, and Lund — less than one-tenth of its loans that met that description. Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2 percent, or approximately $4.8 billion, of its Single Family loan portfolio. Investors were not told that in calculating the Company’s reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae towards borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or “EA” loans.

Fannie Mae’s executives also knew and approved of the decision to underreport Fannie Mae’s Alt-A loan exposure, the SEC alleged. Fannie Mae disclosed that its March 31, 2007 exposure to Alt-A loans was 11 percent of its portfolio of Single Family loans. In reality, Fannie Mae’s Alt-A exposure at that time was approximately 18 percent of its Single Family loan holdings.

The misleading disclosures were made as Fannie Mae’s executives were seeking to increase the Company’s market share through increased purchases of subprime and Alt-A loans, and gave false comfort to investors about the extent of Fannie Mae’s exposure to high-risk loans, the SEC alleged.

In the complaint against the former Freddie Mac executives, the SEC alleged that they and Freddie Mac led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure. Syron and Cook reinforced the misleading perception when they each publicly proclaimed that the Single Family business had “basically no subprime exposure.” Unbeknown to investors, as of December 31, 2006, Freddie Mac’s Single Family business was exposed to approximately $141 billion of loans internally referred to as “subprime” or “subprime like,” accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.

There’s a handy-dandy chart included. The two GSE’s claimed they had about $14 billion in subprime exposure. The SEC is alleging that the actual exposure was $360 billion. I know this must be shocking to the Left. We all know that government and its supported enterprises only lie when Republicans want to start a war. But there it is in black and white.

It has become an article of faith that Fannie and Freddie did not cause the financial crisis and the allegation they did is all part of a big Republican government hating lie (read here, here and here). And, to some extent, I agree. They didn’t “cause” the problem. But those analyses were based on numbers from FM-squared that turned out to be complete and total fabrications. Now, I agree that the financial crisis had multiple and complex causes. But even Krugman will have to admit that, at the absolute minimum, the GSE’s throwing hundreds of billions into subprime mortgages was adding serious fuel to the fire. FM2 may not have caused the crisis, but they made it a hell of a lot worse. And, seriously, what planet do you have to live on to have claimed, even before this came out, that the agencies guaranteeing half of the mortgages in the country had no culpability for the bubble?

But here’s the thing: let’s allow that FM2 were more of a “me-too” player, coming late to the subprime party. When you think about it, that’s almost worse. They couldn’t even time a bubble properly. They were the last sucker in the ponzi pyramid that was our national housing market. They gambled hundreds of billions — a bet the taxpayers ended up having to stand for — at the worst possible time. And saps like Krugman think they’re a model for healthcare?

And even if you don’t blame FM2 for the financial crisis, we can blame them for over a hundred billion in bailouts. We can blame them for paying for $100 million in executive salaries. We can blame them for lying their asses off by a factor of 25 in how exposed they were.

This isn’t a little deal. As Joe Biden would say, this is a Big Fucking Deal. But do you see the media screaming about it? Do you see a tenth of the outrage we see when some Wall Street asshole gets a $10 million golden parachute? Do you see all the FM2 defenders acknowledging that they were lied to? FM2 lost tens of billion of our money trying to buy into housing right before it collapsed. Shouldn’t that piss off someone on the Left?

Back to the Well

Just remember: according to the likes of Paul Krugman, Fannnie and Freddie had nothing to do with the financial crisis:

Mortgage finance giant Fannie Mae said it would ask for an additional $5.1 billion from taxpayers as a weaker housing market causes continued losses on loans made prior to 2009.

Since the firm was seized by the U.S. Treasury in 2008, it has needed about $104 billion in government capital injections, although it has paid back about $14.7 billion in dividends.

Freddie and Frannie combined are about $143 billion in the hole to the taxpayers. Like the government funding them, they are assuring thus that everything will be just fine in a decade or so. But they’re losing money today, so…

It’s amazing that with all the deserved bile thrown at the banks, there are still those who hold back on the socialized monstrosities, run by and for political hacks. Or … maybe it doesn’t.

Things are far worse than they seem..

Yeah, that’s my new special post category, in honor of CM, which try as he might, seems to only use vague and generalized personal attacks to dispute my points, and makes the case that I am exaggerating how bad things are. Well, in honor of that I have this juicy revelation for today:

(CNSNews.com) – The Congressional Budget Office (CBO) says the real cost of the federal government guaranteeing the business of failed mortgage giants Fannie Mae and Freddie Mac is $317 billion — not the $130 billion normally claimed by the Obama administration.

That’s more than double the real risk/cost that they told us was involved here. Remember that Fannie Mae and Freddie Mac where the key instruments of the idiotic policy that forced lenders to give loans to bad risk, then guaranteed those risk at the tax payer’s expense, and pushed for the regulations to create the disastrous credit swap scheme. Neither organization, nor their role in causing this recession, was addressed by all the new regulation passed by Barney Frank and Chris Dodd, two of the key players behind the policies that allowed the shenanigans to go on. We already poured millions into these two to bail them out, and we might not be done at all, since Bloomberg predicted that the actual bailout amount for this disaster might even top a trillion dollars back when: a number I wouldn’t be surprised ends up being the low end. But back to the article in question.

In a report delivered to the House Budget Committee on June 2, the CBO said a “fair value” accounting of guaranteeing the two defunct mortgage companies – known as Government Sponsored Enterprises (GSEs) – was more than twice as high as the Office of Management and Budget had accounted for.

“Specifically, CBO treats the mortgages guaranteed each year by the two GSEs as new guarantee obligations of the federal government,” the CBO report said. “For those guarantees, CBO’s projections of budget outlays equal the estimated federal subsidies inherent in the commitments at the time they are made.”

“In contrast, the Administration’s Office of Management and Budget continues to treat Fannie Mae and Freddie Mac as nongovernmental entities for budgetary purposes, and thus outside the budget,” the report stated. “It records as outlays the amount of the net cash payments provided by the Treasury to the GSEs.”

The total of those cash payments is $130 billion, and is normally reported as the cost of the bailout of the GSEs to date. However, the CBO said that merely counting the cash payments, and not the cost of federal subsidies granted to the GSEs, obscures their real costs. Essentially, the CBO is accounting for the cost of the federal government guaranteeing the loans bought and securitized by the GSEs.

What this says in short is that the Keynesians have purposefully underestimated the debt they have straddled us tax payers with, because while they claim Freddie & Fannie are non governmental agencies, we the tax payers still are on the hook for their risk taking ventures, which I must again stress, remain untouched and ongoing. But don’t take my word for it: here is the CNS article:

Currently, Fannie and Freddie rely on explicit federal guarantees to continue to secure below-market financing rates. Because Fannie and Freddie are insolvent, the federal government must make up their losses when the loans they have guaranteed lose money in default.

However, the CBO counts not only the amount of federal funds spent to keep the GSEs operating but the cost to the federal government to subsidize the mortgage guarantees issued by Fannie and Freddie. In other words, the CBO counts as a federal spending commitment the subsidy given by the government to the GSEs.

And the CBO has to count that in, because our government, well we the tax payers, are responsible for those risky loans. And it gets better:

However, this subsidy cost could grow if the housing market continues to be weak. While the CBO expects it to recover, the difference between the agency’s own 2009 and 2011 estimates show that this may not be the case.

We haven’t heard the true numbers yet. Me, I wouldn’t e surprised that in the end it is closer to a trillion dollars of risky loans that will need to be written off and paid for by the tax payers, because in my personal experience the number of people that never should have been given a loan far surpasses those of us that didn’t buy more than we could afford, or worse, promptly took out 125% or more of the value of the homes they owned out to do other frivolous things.

Don’t worry though: Freddie & Fannie are in good hands. And don’t forget that we the tax payers are paying for the lawsuit by the government against the Freddie & Fannie execs too. Joy! All hail the Keynesians! Things aren’t all that bad….