Saturday, December 24, 2011

Fannie and Freddie Scam

Fannie and Freddie were formed to assist in home ownership for citizens. Their mission was to increase homeownership through responsible lending. Note that I said responsible lending.

Since this mission was subverted, the mission of Fannie and Freddie became to create as many mortgage securities as possible and resell them rapidly. The mission of increasing homeownership became the excuse for the behavior that led to the subprime mortgage and bogus mortgage securities scheme.

It's like they said one thing to get approval, but the real motivation was different. Responsible homeownership includes making a payment if one exists. Getting people in homes for a few months or years and then foreclosure and then reselling the appreciated homes was the scheme, while the mortgage derivatives were worth more than the actual worth of the houses they were based on. Foreclosures only became a problem when houses stopped appreciating because the loan money dried up, because the problem with worthless mortgage derivatives had become apparent. It was quick money for a few, however.

It's interesting that anybody who did a short sale cannot get a loan for years, but the house they purchased after an appraisal was not worth what they paid, not then and not now. It was not like you could choose; all prices were sky high and if you wanted or needed to buy a house, you had to pay. The punishment of misled homebuyers is quite a phenomenon.

I would like to see a list of names and positions of those who originated the mortgage derivatives schemes and who are perpetuating them. Mr. Geithner, Mr. Paulson, Mr. Bernanke, and private sector people will probably be on the list. Is Federal Reserve money being used to purchase mortgage derivatives?

Since executives at Fannie and Freddie are rewarded with bonuses if they obtained a larger market share, that is apparently why the chief executives received some $12 million in bonuses, even though they are demanding billions in tax money to fund their deficit spending. I think Fannie and Freddie have 78% of the market share in housing loans now, which is a significant increase. What is wrong with this picture? This is deliberate direct competition with the private market in origination of more mortgage securities, which is the apparent prime goal of Fannie and Freddie. The people these government organizations are supposed to serve are forgotten or used as pawns in order to create more mortgage derivatives.

Obtaining a bigger market share? That was not the mission. Why are chief executives being rewarded for capturing a larger market share? How about paying the executives to do their job and no bonuses? Bonuses are being used by somebody making policy to direct the course of events, which has proven to be a bankrupt way to manage home loans. We need a comprehensive policy statement in Fannie and Freddie that states loans to institutions can be made if they loan it out to deserving homebuyers and that the mortgages originating from those loans will be serviced by those originating those loans. Responsible lending would immediately result, but of course the profits are modest.

I think mortgage derivatives should be relegated to casino bets and the institutions Fannie and Freddie and all their contacts should be disbanded. If a new government institution is created to 'help' homebuyers, no derivatives should be allowed.

It looks like foreclosures are up and I do appreciate the efforts of the law to recoup losses by forcing buybacks of delinquent mortgages packaged as wonderful investments by crooked rating agencies. The inflation in home prices was encouraged because the number of loans increased due to the dropping of lending standards. "If you could fog a mirror, you could get a mortgage", I was told. If they had stopped the scam with those who actually qualified for a mortgage, the foreclosures would have been within norms, but they had to have more mortgages to fuel their scam, so they just handed them out like popcorn to pigeons. Anything to keep the number of mortgages up so more mortgage derivatives could be sold. I knew people who would buy several houses at once and flip them 2-3 months later for tens of thousands more than they paid.

This inflation hit the consumer hard but the immediate effects were softened by various mortgage schemes that focused on the immediate payment the buyer would pay, rather than devious adjustable rate mortgages, interest only for a few years and other schemes designed to keep the payment low for a while, then escalating the payment to a level the buyer could not afford. Since by then there were no homes for sale the buyer could actually afford, these schemes became attractive since the buyers were assured their homes would continue to rise in value. Of course, that trajectory was unsustainable but what did the average schmo know?

It's amazing to me that the federal government is operating an agency that has as policy capturing a larger market share from the private enterprise market. The executives are awarded bonuses on the basis of market share statistics, rather than success in the mission to provide housing opportunities for the responsible buyer.

I suggest a review of the policies surrounding these 'bonuses', who wrote them and why and the consequences of encouraging particular courses of action without heed to future consequences.