Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare

Description

This book examines the role of Fannie Mae, Freddie Mac and other key players in the American mortgage market, in precipitating the current global financial crisis. From President Clinton's announcement of the 'National Home Ownership Strategy' in 1995 to its collapse in 2008, this book deftly explains the aims and consequences of extending mortgage lending to people who could not afford home ownership. Bankers, investment banks, rating agencies and derivatives have all been awarded their share of the blame, while politicians, regulators and government agencies have successfully avoided theirs. Fannie Mae and Freddie Mac have been implicated, but the true story of their marriage made in hell has never been told. Cover Half-Title Title Page Copyright Page Contents Acknowledgements List of Abbreviations Introduction Turning the dream into reality Using federal agencies and Government Sponsored Enterprises (GSEs) The Community Reinvestment Act, 1977 Fannie, Freddie and the Housing and Urban Development Department Timeline 1 The Seeds are Sown Introduction The Clinton era Racial discrimination and home ownership Changing the underwriting standards Using the Community Reinvestment Act (CRA) The implications of the Riegle-Neal Interstate Banking and Branching Act, 1994 The “surge” in mergers and acquisitions The importance of CRA ratings Performance and profitability of CRA-related lending The CRA and the subprime crisis The CRA and community groups 2 Two More Tools in the Tool-Kit The Federal Housing Administration (FHA) Changes in FHA requirements Seller down-payment program Congressional efforts to remove the down-payment requirement Lender perspectives on the FHA’s declining market share The human cost of increasing home ownership The true costs of FHA’s mortgage insurance The FHA to the rescue? Can the FHA rescue the mortgage market? The Federal Home Loan Bank (FHLB) System Origins of the system Changes following the 1989 Act Emerging concerns about the system and the Gramm-Leach-Bliley Act Lenders see the benefits of the system A chance to play the system The regulatory structure Problems at Seattle and Chicago Another risky federal agency FHA and FHLB contributions to the total subprime and Alt-A exposure 3 The Role of the Housing and Urban Development Department (HUD) Introduction The role of HUD during the Clinton administration Preparing the ground The partnership program Handling the risks of affordable housing Targets, not risks, were the order of the day More targets HUD during the Bush administration A Blueprint for the American Dream Federal help with the costs of home ownership Alphonso Jackson takes over at a difficult time HUD’s shortcomings in its oversight role The Inspector General attacks the FHA’s continuing failings Conclusion 4 Mortgage Data Sources of mortgage data The Home Mortgage Disclosure Act, 1975 and the American Housing Survey First American Loan Performance (LP) Lender Processing Services (LPS) The National Delinquency Survey (NDS) A brief history of the Home Mortgage Disclosure Act The purpose of the Home Mortgage Disclosure Act Gaps in the HMDA data Borrower’s income Loan-to-value ratios and the price of the loan Credit scores Type of mortgage Price of the mortgage Application of reporting requirements HMDA and the identification of subprime lenders Phases of the HMDA Phases one and two Phase three Recent developments Subprime mortgages 5 The "Mission Regulator" for Fannie Mae and Freddie Mac A brief introduction Setting the housing goals A cautious approach at first Defining the affordable housing goals Setting the affordable housing goals Goals for 1996–2000 Andrew Cuomo becomes Secretary for Housing Goals for 2001–2004 HUD’s failure to require data for its oversight responsibilities HUD’s lack of oversight and lack of resources No changes for the GSEs with a new Secretary for Housing Alphonso Jackson becomes Secretary for Housing Goals for 2005–2008 HUD’s aims and the GSEs But HUD ignored the risks Ignored the results of its own analyses HUD was committed to the “affordable housing” ideology HUD did not insist on accurate data for Low-Doc or No-Doc loans HUD backed down, when it should have insisted on being able to count the number of loans the GSEs purchased HUD did not insist on proper verification procedures for GSE loan purchases … HUD overrode risk warnings in favor of affordable housing goals HUD’s litany of oversight failures contributed to the subprime mortgage crisis 6 The GSEs and the Developing Crisis A little history The structure of the GSEs The advantages of GSE status HUD’s failed attempts to curtail Fannie and Freddie Implications of the GSEs’ benefits Costs and competition The size and composition of the subsidy Risks posed by Fannie Mae and Freddie Mac Recognizing systemic risk Repeated warnings on the systemic risk of the size of the GSEs’ portfolios The GSEs fight against any attempt to reduce the size of their portfolios The portfolios continued to grow and the warnings were more insistent Fannie and Freddie “voluntarily” agree to limit their portfolios after the accounting scandals HUD announces its own review The Administration again seeks to limit the portfolios And debt issuance More congressional efforts to regulate the GSEs effectively Proposed legislation in 2007 It was not until 2008 that a bill was passed, but it was too late 7 The Dominance of the GSEs The GSEs’ automated underwriting (AU) systems Fannie and Freddie: First in the market Developing and using the automated underwriting systems Flexible standards Using automated underwriting as an inducement Automated underwriting fails to measure default risk HUD’s demand for full loan level data Fannie Mae, Freddie Mac and Congress Making sure the 1992 Act did not impose unwelcome restrictions on the GSEs Preserving benefits: Treasury line of credit Fending off higher capital requirements A brief summary Inadequacies of the test Fannie Mae and the stress test The Fannie Mae Papers and the risk-based capital test Deflecting SEC registration 8 The Beginning of the End for Freddie Mac The GSEs’ commitment to voluntary disclosure and registration Mortgage-backed securities Voluntary registration under the SEC Act, 1934 The Secondary Mortgage Market Regulation Act, H.R. 2575 Purpose of the bill Lukewarm support from the Administration What crisis? The GSEs’ “support” for a strong regulator Another bill bites the dust Federal Enterprise Regulatory Reform Act, S. 1508 Purpose of the bill An awkward passage Fannie on the attack Accounting irregularities at Freddie Mac Freddie announces the restatement of its earnings Top management goes OFHEO stumbles Much more to Freddie’s problems than met the eye Current and former staff members describe what really went on It was all about earnings management A total failure of governance The Board of Freddie Mac The issue of corporate governance More Congressional hearings on Freddie Mac House Subcommittee on Commerce, Trade and Consumer Protection Regulating the GSEs Freddie Mac struggles to reform itself A major fraud raises the question: Did Freddie really ever know what it was buying and selling? 9 The Beginning of the End for Fannie Mae 2004: A year of troubles for Fannie Mae The GSE implicit subsidy and the value of government ambiguity The Congressional Budget Office’s analysis Setting up the review was not plain sailing for OFHEO Fannie Mae’s outdated accounting systems A missing balance sheet Losses on derivatives Fannie Mae improperly accounts for its assets Fannie Mae’s co-operation “has been spotty” OFHEO’s report of findings to date “You must have 6.46 branded in your brain” Fannie Mae’s failure to conform to accounting standards How Fannie Mae accounted for derivatives Did the hedge accounting failures matter? The role of senior managers Testimony of the whistle-blower Standard & Poor’s gives top marks to Fannie Mae’s corporate governance A “political lynching” of Franklin Raines? Senior executive compensation at Fannie Mae The extent of systemic risk Fannie Mae’s defense Fannie Mae and the SEC Franklin Raines and Timothy Howard leave Fannie Mae Reactions to the restatement of Fannie Mae’s assets 10 The Years 2005 to 2007: Drinking in the last chance saloon Introduction Events in 2005 The two Chairmen Democrats’ doubts led by Barney Frank Another bill: The Federal Housing Finance Reform Act H.R. 1461 The Senate bill: Federal Housing Enterprise Regulatory Reform Act. S. 190 Barney Frank’s affordable housing fund makes its first appearance Chairman Greenspan evidence: Systemic risk and the GSEs More on systemic risk. Fannie Mae, Freddie Mac and OFHEO Retained portfolios Credit risk Interest rate risk Guarantee fees The bills were delayed until the summer Further warnings about the risks in the OTC market and the GSEs Progress on the House and Senate bills between July and December The Administration rejects H.R.1461 The House passes H.R.1461 Events in 2006 The Rudman report OFHEO: Report of the Special Examination of Fannie Mae Congressional hearings on the report But still no bill in 2006 Voices calling for reform were ignored The first signs of trouble in the mortgage market Events in 2007 Federal Housing Enteprises Regulatory Reform Act, S.1100 Federal Housing Finance Reform Act, H.R.1427 11 The Subprime Market Grew and Grew and No One Knew Confusion over subprime lending Conforming loans Conforming loans and credit quality Subprime loans and lack of data It’s too difficult to define subprime loans Subprime mortgages and borrowers Predatory lending and subprime lending The GSEs and the subprime market They knew the risks and went ahead anyway Some of their partnership arrangements Federal agency contributions to the subprime and Alt-A market 12 Why Did Fannie Mae and Freddie Mac Get Away with It for So Long? A weak regulator Limits of its authority By design Limited powers Lack of market discipline Discrediting OFHEO Partnership Offices The Fannie Foundation Other means Campaign contributions Friends in high places “Friends of Angelo” 13 The End Cometh The year 2007 Closure of subprime mortgage companies Congress only gradually realized what was happening Congress continues to miss the point A flurry of initiatives The year 2008 The collapse of Countrywide The Economic Stimulus Act Losses at Fannie and Freddie The collapse of Bear Stearns House prices and the mortgage market Fannie and Freddie providing liquidity to the market Fannie and Freddie could not cope The Housing and Economic Recovery Act (HERA) Abolishing OFHEO The Hope for Homeowners Act Conditions leading to the crisis. Why did the market collapse in 2008? The impact of the collapse of the Bear Stearns hedge funds A series of downgrades The role of the rating agencies Criticisms of the rating agencies The rating agencies’ failures were a significant contribution to the crisis From subprime lending to the financial crisis Subprime mortgages. A trigger or a cause? 14 What Next? Transferring the damage Counting the cost of Fannie and Freddie After conservatorship Congress acts Some examples Response from the FHFA The Treasury White Paper The context for radical reform of the US housing market Affordable housing ideology A very early warning What happened to those minority and low-income home buyers? The federal government and the housing market Fannie Mae and Freddie Mac should be phased out of existence And the rest of the world? Appendix Membership of the House Committee on Financial Services Membership of Senate Banking, Housing and Urban Affairs Committee Fannie and Freddie's contributions to members of the House Committee on Financial Services Fannie and Freddie's contributions to members of the Senate Banking, Housing and Urban Affairs Committee Years in which Fannie Mae was a top 100 contributor to the campaign fund of a member of the House Financial Services Committee Years in which Fannie Mae was a top 100 contributor to the campaign fund of a member of the Senate Banking Committee Contributions from Fannie Mae to Senate Banking Committee Contributions to presidential candidates Fannie's annual lobbying expenditure Real estate lobbying expenditure Lobbying reports for 2004, 2005, 2006 and 2007 Notes Bibliography Index A B C D E F G H I J K L M N O P Q R S T U V W Y Z