Why Fannie and Freddie are Hesitating to Help Homeowners

Why Fannie and Freddie are Hesitating to Help Homeowners

by Cora Currier ProPublica

Answers to homeowners’ questions about the Independent Foreclosure Review.The administration’s website for the foreclosure prevention program. Provides an FAQ, homeowner examples, and other tools to see whether you might qualify for the program.A list of HUD-approved housing counseling agencies nationwide.Tips for homeowners from the Federal Trade Commission.These rules lay out how mortgage servicers are supposed to conduct the program.A finance and economics blog that provides news and metrics on the state of the housing market.

Earlier this week, ProPublica and NPR detailed how Freddie Mac placed bets against homeowners that paid off if borrowers were unable to refinance their mortgage loans. The story highlighted the conflicted role of the behemoth and now government-controlled Freddie Mac and Fannie Mae: They are at once supposed to maximize their profits and thus pay back taxpayers, but they are also now government wards and many feel should be helping the millions of Americans struggling to stay in their homes.

Here’s our attempt to explain Fannie and Freddie’s role in the housing market, and why it seems like their actions often go against the interests of homeowners.

What are Freddie Mac and Fannie Mae supposed to do?

Fannie and Freddie were created to make homeownership more accessible. They are Government-Sponsored Enterprises — private companies chartered by the government to expand access to credit, particularly for low and mid-income homeowners, and to foster stability in the mortgage market. Fannie Mae was founded as a government institution during the Great Depression and privatized in 1968. Freddie Mac has been private since it started in 1970. But “private” is not exactly the right word — Freddie and Fannie are exempt from most state and local taxes, some S.E.C. regulations, and they have access to a credit line from the federal government. And they still have their chartered obligation to make mortgages more available.

Fannie and Freddie can’t make loans directly. Instead, they guarantee existing mortgages, and repackage and pool them into bonds called mortgage-backed securities. Someone who buys the bonds from Freddie gets the interest and the original principal, even if a homeowner defaults. In exchange for that guarantee, Freddie collects a fee from the buyer of the bonds and can use that to guarantee more mortgages. (Or to buy mortgages that stay in their portfolio). This handy New York Times graphic shows the various flows of debt: The idea is that by basically ensuring that someone (often Freddie or Fannie) will guarantee a mortgage, it makes it easier for anyone to get a mortgage.

So how did they get so big?

Because Fannie and Freddie have been able to borrow lots of cheap money.

For years, investors have loaned them money at lower than average interest rates, allowing Fannie and Freddie to expand their portfolio of mortgages and securities. As a history compiled by the Congressional Budget Office shows, investors have treated Fannie and Freddie as essentially risk-free. The assumption, which turns out to be correct, was that the government would never let Fannie and Freddie fail. The two companies used that windfall not only to invest in more mortgages, but also tried to increase its profits by pouring money into a variety of fancy financial instruments.

Fannie and Freddie became, as the New Yorker’s James Surowiecki described them, the “duck-billed platypuses of the financial world;” strange institutions with the perceived safety of a government guarantee, and the high-risk strategies of a private corporation. And that led them to become the giants of the mortgage market, managing a massive portfolio of debt. In 2008 they had a combined $5 trillion in debt and guarantees.

Why are taxpayers on the hook for their mistakes?

The bubble burst — and Fannie and Freddie’s execs had overreached.

In the last stretch of the boom, the two companies had loaded up on iffy mortgages. When the housing market began to turn in mid-2006, delinquency rates rose, increasing the chance that Fannie and Freddie would have to make good on their guarantees. Compounding their problems, it became harder for Freddie and Fannie to borrow money as concerns mounted about the companies’ health. In the mid-2000s, they admitted to overstating earnings and billions of dollars’ worth of accounting errors.

By 2008, they were in trouble. That $5 trillion in debt and guarantees was backed by only $80 billion in core capital. The federal government took them over, becoming the major shareholders of both companies, while the Fed bought up most of their debt and the Treasury pledged to cover their losses. The taxpayer buyout of the two companies has cost roughly $169 billion to date.

The SEC filed a lawsuit against the companies’ executives this December, accusing them of misleading investors about the riskiness of their investments.

The companies’ high compensation of their executives has also been under fire from Congress. Although the bailout calls for Fannie and Freddie to wind down their portfolios of mortgages, they continue to make billions of dollars’ worth of risky investments, like the “inverse floaters” we described.

So do Fannie and Freddie actually help homeowners? And why can’t the government force their hand?

The companies say that by bolstering the companies’ finances, they are helping to stabilize the housing market as a whole, but Freddie and Fannie have hampered many of the administration’s plans for relief for struggling homeowners.

The two report to a regulator called the Federal Housing Finance Authority, which, since the bailout, has acted as their board of directors and shareholders, making their major decisions. In the wake of our story, the White House and several senators called for more oversight and an explanation as to why Freddie’s investment strategy seems to run counter to their mandate to help homeowners.

More broadly, the Obama administration and the head of FHFA, Edward DeMarco, have often clashed over the goals of the companies.

This week, Obama outlined a new set of initiatives aimed at making it easier for homeowners to refinance and encouraging loan forgiveness. But Fannie and Freddie have previously refused to participate in loan forgiveness programs, and they continue to tussle with the administration on the issue. (It seems unlikely that any of Obama’s proposals will get through Congress, and ProPublica has documented extensive problems with similar programs aimed at preventing foreclosures).

The two aims of Fannie and Freddie are continually at odds — policies encouraging refinancing and forgiveness for more mortgage holders can increase costs to the taxpayer-owned companies. While the administration has made relief for homeowners their priority, DeMarco says his agency’s priority is to protect Fannie and Freddie’s profits, aka taxpayers’ assets. Of course, many taxpayers are those same struggling homeowners, and that is at the heart of the dilemma over Fannie and Freddie’s future.

Sen. Barbara Boxer, D-Calif., told NPR she was shocked by a recent meeting with DeMarco. “It was the worst meeting I’ve ever had in my life,” said Boxer. “His interest is making sure Fannie and Freddie do well financially.”

Will they be around much longer?

Probably, even though there’s rare bipartisan consensus that they shouldn’t be.

Both the Obama administration and congressional Republicans want to get rid of Fannie and Freddie. Obama’s plan gradually winds them down to a position equivalent to private sector mortgage companies, while giving the market time to adjust to their removal, while the Republicans want a more immediate rollback of their influence.

These plans were unveiled almost a year ago, but the companies are still massively important to the mortgage market, guaranteeing approximately 70 percent of the country’s home loans. Their elimination might make it more difficult to get a mortgage loan, and it remains unclear what kind of assistance for homeownership could, or should, replace them.

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4closureFraud.org

Comments
14 Responses to “Why Fannie and Freddie are Hesitating to Help Homeowners”
  1. lvent says:

    I Guessed right! That the so called PRIVATE SIDE OF THE GSES WERE IN FACT THE FED….! BLOOMBERG NEWS REPORTED THE IMF IS THE BIGGEST SHAREHOLDER/BONDSHOLDER IN THE GSES….!!! DECEPTIVE BASTARDS…! THE GSES ARE ALLOWED ACCESS FROM THE FEDERAL GOVERNMENT??? WELL WHERE DOES THAT CREDIT COME FROM?? ALL OF US!! THE GSES HAD NO SKIN IN THE MORTGAGE LENDING…THE AMERICAN PEOPLE FUNDED THE MORTGAGE LENDING WITH OUR SIGNATURES….THE GSES INVESTED IN THE FRAUDULENTLY INDUCED MORTGAGES BY BUYING THEM BACK FOR PENNIES ON THE DOLLAR …… AND SELLING INTERESTS IN THOSE INVESTMENTS TO OTHER INVESTORS……LIKE THE IMF…! IF YOU GO TO MERS AND HAVE YOUR MIN# …..IT CLEARLY STATES ON MINE….FANNIE MAE IS AN INVESTOR…..! THOSE PURCHASES SHOULD HAVE NEVER BEEN ALLOWED BECA– USE THOSE PURCHASE BY A U.S. TAXPAYER SPONSORED ENTERPRISE….PRESENTED AN UNCONSTITITIONAL AND THEREFORE ILLEGAL CONFLICT OF INTEREST…. BEING THE LOANS WERE FUNDED BY ALL OF US.!…AND THE GSES INVESTED IN THOSE LOANS HAVING INSIDER KNOWLEDGE ABOUT EVERY ASPECT OF THE QUALITY OF THOSE FRAUDULENTLY INDUCED LOANS!!! STOP THE ILLEGAL FORECLOSURES!!!

    • Bobbi Swann says:

      @ Ivent – Please go to this posting (I have not seen you post a reply there so I don’t think you have seen it yet): http://4closurefraud.org/2012/02/02/mortgage-deal-would-give-states-enforcement-clout-but-will-they-use-it/

      The Hutmaster placed a response there from a retired judge (name withheld). Mind you, it is very long but oh so powerful. It will blow most people away but it substantiates everything you have said about the Vatican, Black Pope, etc. When the time comes, I am going to use it in my fraudclosure defense of securitization fail. I just wish he/she could disclose their name and it would carry so much more weight with educating the people….

      • lvent says:

        Thank You so much Bobbi…! I wouldn’t have wanted to miss that post by the Hutmaster! That says it all…! I think God knew I was growing weary of fighting the debunkers and trying to warn the people….! It is really hard for people to believe this stuff is true, coming from everyday people and trying to get the truth out there and getting people to believe it or do their own research is exhausting….on top of fighting 2 fraudclosures….!! That post made it all worth it though…and made me feel all of this yelling and screaming that I have been doing was not in vain….America is waking up!!!! You are right Bobbi….about using that info in the defense of fraudclosures…now we have the truth…from a very reputable source about what we have to do …prove these banks are imposters…fraudsters ….and strangers to the mortgages….!! Time to take our country back!

      • lvent says:

        I remember the day they were electing the new pope who is Pope Benedict…I thought it was strange the way that got full court press attention…Wall to wall coverage by the MSM..and something one of the reporters said while waiting to hear who the next pope would be …..she said…it is being said that the next pope will be a black pope…I am Catholic but I had never even heard of the black pope at the time but, that stuck in my head for some reason…little did I know, that reporter was warning us about all of this…and when she said the next pope will be a black pope she was not referring to the color of the skin!!! Again..the truth but, only if you knew the truth would you have known the meaning of that statement!

  2. Javagold says:

    now Demarco is worried about helping taxpayers profits by making those same taxpayers homeless….what a clusterfuck

  3. lies is all they tell says:

    they have overstated income in how many loans? @ years ago when i dug up my closing documents i noted a strange fact never did i make the amount stated on my mortgage application. they over stated my income by 700$ to all of you that might not seem alot but on the mortgage application it was 700$ over my gross income. Net income was approx 1k less then the gross due to inome tax, SS and medicare. so i was approved for a home that was approx. 50% of my income. how troubling. i did niot feel the effects. I had just sold a home due to my husband unable to find work in s. florida so we moved to nw florida. we put our 20% down. Wells farg new exactly what i had in my bank account and how long my money would run dry. they bwt my loan was going to fail but fixed it so they “NEW” it was going to fail. lost modification paper work, moved files, modification more then original mortgage, telling me not to pay my current mortgage, again losing paperwork moving files, telling me my investor denied me my hamp loan, telling me they could not tell me who my investor was (this was 2009), after writing all government entities wells fargo finally admitted to putting us in a stated income loan. so funny the wells fargo person incharge of telling me this wrote a whole paragraph about my salary and how they figured my salary. the bottom line is i didnt know what a stated income loan was, there were 2500 other homes for sale in the ocunty where i lived, i was truthful to the mortgage broker. i was a nurse, RN, fro 19 years (2006), and here is my paycheck stubs, and w2 forms, i told her i was basically a contract employee which meant i was on the schedule but could be canceled for low census. trusting this woman not to get me approved for a home i couldnt afford. unfortune to me it didnt happen that way. no verification of my slary of my appraisal was done just a quick 4 weeek closing. back in 1991 it took 2-3 months with the seller callin me everyday. then we have our president calling people who are current ‘responsible”. i was responsible. i sold my home when i could nt afford it i am not in denial. if i could sell my home right now i would. we are 150k upsidedown. what circle in my life i have come to. please pray everyone we need a higher pwoer to help us through this.

  4. talktotennessee says:

    Fannie has two of my loans. I filed a lawsuit so they are paying high dollar attorneys to defend their right to NOT modify my loans, having flatly refused. Now I am not talking about mansions or expensive digs. I am speaking of one home worth less than $100K and an investment duplex worth about $115K. They will pay their lawyers more than that over the course of fighting the lawsuit rather than allow me to modify the existing loan, reduce the principal, wrap the loan, etc. Having filed financial information that qualifies me to modification they have flatly refused!
    So, even with an attorney you can’t always get what the government has promised you. They rather pay their lawyers than let you have what is promised!

  5. Stan Burlap says:

    Hesitating? Not helping homeowners. Homeowners and the housing market are different things. I think Fannie has helped empty houses of their previous owners more than helping homeowners.

  6. readdocs says:

    None of this would have happened if the banks hadn’t been deregulated, falsely accused of redlining
    by entities as ACORN, the federal government hadn’t used tax monies to fund all the above. A total
    failure and massive fraud. Fannie and Freddie should have never been even a bad idea.
    NO ONE will go to jail!

    • Stan Burlap says:

      Why would a Bank be deregulated if they were redlining? Idiot. Deregulated as in they screwed the people they previously redlined. ACORN attacked predatory lending. Banksters hated ACORN.

      • talktotennessee says:

        Did everything they could to discredit ACORN by a vigilante investigator, supposedly independent, who discredited ACORN successfully.

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