During the housing boom, Fannie Mae and Freddie Mac purchased or guaranteed roughly two thirds of all mortgages originated in the US. These, in turn, were funded by being sold to Wall Street bankers who bundled and sold them on to bond market investors as mortgage backed bonds; syndication by a fancier name.
Now, the Federal Housing Finance Agency (FHFA), the government entity which oversees Fannie and Freddie, has gotten involved and is trying to recoup some of the losses. The FHFA has sent out 64 subpoenas for loan files and documents to review them for any potentially false statements or omissions made by the Wall Street bankers. Fannie and Freddie had previously attempted to garner this information on their own, but to no avail.
Thus far, Fannie and Freddie’s poorly chosen mortgage purchases and guarantees have cost taxpayers approximately $145 billion, an amount rising monthly by the billions. Any money recovered will go toward offsetting these taxpayer losses. However, the FHFA may have problems obtaining the lenders’ files, as many of the mortgage companies that made these bad loans are no longer in business.
Fannie and Freddie are also forcing lenders to buy back mortgages that have gone into default and were fraudulently sold to Fannie or Freddie.
first tuesday take: Imagine if Fannie Mae and Freddie Mac did this investigative work before they entered into risky mortgages guaranteed by taxpayer money. Would the housing bubble have been so big or implode so dramatically? Would so many homes be currently underwater? Will even more tax dollars have to go into federal housing programs to help homeowners get rid of their negative equity?
Fannie and Freddie fed the boom by supporting shady mortgage lending practices. These government agencies lowered the standards for the mortgages they purchased and guaranteed in order to obtain billions of dollars of potential profits in dubious mortgage investments. The ripple throughout the housing market from this financial accelerator effect, set in motion by excessive lending, is at the moment endless. We have no way of knowing what state the housing market would be in today were it not for Fannie and Freddie’s unwise and unregulated lending practices. Without regulations limiting the parameters of mortgage lending, others would have certainly filled any gap that a regulated Fannie or Freddie would have created.
Thus, the government needs to get out of the mortgage business by ending its purchase and guarantee of mortgages by folding Freddie and Fannie — which may make mortgage rates rise 25 to 50 basis points without government guaranteed bond rates. However, Wall Street Bankers have fully demonstrated during the past 25 years that they are more than capable of providing all the mortgage funds necessary for the single family and apartment housing market – a financial crisis notwithstanding.
With the recent financial crisis, it was the Federal Reserve that came to the rescue by funding all the mortgages originated for nearly 18 months. Meanwhile, Wall Street bankers found their footing early in 2010 and got back to funding mortgages by peddling them through the secondary mortgage market, not Fannie or Freddie.
Re: “Government tries to recoup some Fannie, Freddie losses” from San Francisco Gate