Do you recall that Fannie and Freddie - by underwriting and guaranteeing all the subprime loans - were the root source of the entire mortgage fiasco? (i.e., without their program of swallowing whole and guaranteeing the vast bulk of the questionable loans, bankers couldn't have caused the mortgage bubble)...
And do you recall that they maintained that position by bribing Congressmen of both parties, tho mostly Dems (highest payouts went to Obama, Frank, Dodds), and by providing high-paid positions to favored Dems (like Rahm Emanuel,
Jamie Gorelick and Franklin Raines)?
The result of which was that the Dems blocked the Repubs from all attempts to reign in Fannie and Freddie...
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Do you recall that Fannie and Freddie, now fully insulated from the regulators, were able to "cook the books" in order to report a (phony) profit, thereby paying out huge bonuses to Raines and Gorelick (signed off on by Emanuel). CEO Raines has had to pay his bonus back, but never served a day in jail (unlike Enron officials)...
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And are you now familiar with Barney Frank having blocked all of George's attempts to reign in Fannie and Freddie?...So don't even begin to think this is GW's fault. I would lay it at the feet of Barney Frank and Chris Dodd. Dodd has retired and Frank has admitted he was wrong.
Now back to reality. Conservative critics blame the sub prime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods. Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked out the poor and especially minorities, from homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they're lending and investing in their communities.
David Goldstein and Kevin G. Hall, in their article entitled Private sector loans, not Fannie or Freddie, triggered crisis, <http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not fannie.htmlhttp://www.opednews.com/populum/#storylink=misearch > wrote: "Only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the sub-prime loans."
These private non-bank lenders enjoyed a regulatory gap, allowing them to be overseen by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the sub prime loans.
Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems. "Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."
In point of fact the Government Chartered Enterprises (GCEs), that were Fannie and Freddie, were limited to repurchasing mortgage loans under $300,700 and were not allowed to initiate a loan. Krauthammer's assertion that the GCEs pressured the commercial banks "to extend mortgages to people who were borrowing over their heads" is ludicrous on its face, as no one had to pressure these greedy jerks into entering this lucrative market.
In a recent well researched and reasoned paper by David Fiderer entitled, The Real Reason Fannie and Freddie Lost So Much Money , points out that in 2000 HUD Secretary Andrew Cuomo, relying on a joint HUD/Treasury study said "Out of concern that mortgages with predatory features undermine homeownership by low-and moderate-income families in derogation of the GSEs' Charter missions". He then had the Clinton Administration draft regulations to shut Fannie and Freddie out of the segment of the sub-prime market dominated by Wall Street securitizations.
The new regulations specifically excluded loans with: (a) Excessive fees, (b) Prepayment penalties, (c) Single premium credit life insurance, or (d) Evidence that the lender did not adequately consider the borrower's ability to make payments, plus any loans that the HUD secretary deemed to violate good lending practices. The GSEs could not include any loans, from any lenders that steered prime borrowers to higher priced sub-prime products, or, acting as a loan servicer, failed to accurately report a borrower's repayment history. Cuomo's exclusion of prepayment penalties... made it almost impossible to buy into a mortgage securitization -" sub prime or otherwise -- comprised of ARMs.
Cuomo's HUD excluded ''Mortgages contrary to good lending practices'' from being counted toward meeting Affordable Housing Goals and lobbied for legislation to categorically prohibit many sub-prime lending practices. But at the end of the day, his influence only extended to the GSEs. Phil Gramm, Republican Senator from Texas and chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, prevented any legislation from moving forward. Alan Greenspan, who had the authority to oversee and regulate the mortgage lending business, continued his steadfast policy of refusing to do anything.
An FHFA comparison between GSE and private label loan performance confirms that mortgages financed by Wall Street's private label securitizations performed exponentially worse that the rest of the market. For private label deals the rate of nonperformance is 31.1% while for all other mortgages it's 8.6%.
In a book on the sub-prime lending collapse published in June 2007, the late
Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans
had interest rates high enough to be considered sub-prime and that, to the
pleasant surprise of commercial banks, there were low default rates. Banks that
participated in CRA lending had found, he wrote, "that this new lending is
good business."
According to the Federal Reserve Bank, of the $1.4 trillion in sub-prime
mortgages extant in 2008, approximately 40% of all US mortgages, only $168
billion or about 12%, were held by Fannie Mae and Freddie Mac.
However Fannie and Freddie were not completely blameless. David Fiderer goes on
to say that "The GSEs, like most private lenders, when faced with reduced
revenues and profits from their core business, became willing to make up the
shortfall by going down market.
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