Skip to comments.Freddie and Fannie compilation of history and facts (VANITY)
Posted on 10/04/2008 8:57:42 PM PDT by surfer
The rise and fall of our housing market and how did it happen?
This is a very high level overview of the pertinent facts.
Ok we have heard a lot of talk back and forth on what caused the problems that led to the economic meltdown this year. We have heard that it is both party's fault and that the Democrats share the blame equally with others. Additionally people want you to believe that Glass-Steagal is the main cause here.
What I am going to try to do is provide the core facts of this scenario all the way back to 1938 when Fannie was created.
Before we start with the creation of Fannie Mae a couple of points need to be made.
MBS's are at the center of the problems with the sub-prime market. Mortgage backed securities have been created to combine risky loans into traunches which then as a bundle are sold as an investment instrument to various financial institutions.
It should be noted from a historic standpoint that between Civil War and WWII in this country there were six failures of mortgage security schemes within this country. Economists of all shapes and sizes if they just reviewed history and learned from it would have known we would have problems with this. MBS's as a financial instrument alone are not the cause - they need an enabler.
The enabler for this meltdown is Fannie/Freddie and several Democrats hell bent on protecting this scheme for their political gain.
After reviewing the facts you can decide on who is at fault and to what degree.
1938 Roosevelt (D) created the New Deal which Fannie Mae was created to provide an opportunity of credit in a financial market where the "housing" market didn't exist.
NOTE: Many Great Depression Historians based on review of the cause and effects now conclude with some level of certainty that the "New Deal" only prolonged the most serious effects of the Great Depression.
A lot of people have forgotten that the DOW did not return to its pre-Great Depression levels until 1954 - think about that - if that were today it would mean we wouldn't be above 10,000 until 2035.
1968 Johnson (D) along with a Democratic controlled congress created one of the largest expansions of government called the "Great Society" which included spinning off Fannie Mae as a quasi-private organization. Even though it was now to be considered private it was always understood that the government would back it - translation: Fannie could take higher risks than any other private company because of the government backing.
1970 Nixon (R) Freddie Mac was created to compete with Fannie Mae
1977 Carter (D) created the CRA (Community Reinvestment Act) which provided for strong oversight. Well that oversight was to force banks to extend credit to low income people regardless of risk.
During the 80's and 90's Fannie and Freddie continued to grow but a very interesting event occurred which was the beginning of the launch of bad people that Fannie and Freddie would hold.
A Thrift in Illinois wanted to merge with another bank. ACORN through legal means challenged the merger on the basis that the Thrift was not providing easy enough access for low income based loans. The Thrift countered in the lawsuit that it wasn't prudent business practice and the loans would jeopardize the bank. ACORN prevailed through the courts to force banks in Illinois to allow these low income loans to be made available regardless of how reckless it was in support of CRA.
You can only guess who was the attorney in Chicago who worked directly with ACORN to make this happen.
DING DING DING you guessed it - Barack Obama (D) himself.
This was actually a landmark victory for CRA because it literally opened up every Thrift in the country to legal trouble if it didn't adopt the reckless provisions of CRA. Sub-prime lending was born and one its parents is Obama.
During the 1990's Clinton (D) really blew the support for CRA wide open and lowered the bar even more for more reckless loan giving. During the last few months of his administration they literally mandated Fannie and Freddie were to increase the mix of high risk and reckless loans to the level of 50%. Yep that's right - 50% of their loans had to be crap.
Two of the biggest defenders for Freddie and Fannie for many years have been Frank (D) and Schumer (D).
4/2001 Bush (R) during the budget request for the following year raised the first alarm about Freddie and Fannie that there was potential trouble there. Dot.com has just busted and then 9/11 all eyes unfortunately were elsewhere.
During 2002 WSJ Editorial page started writing stories warning of the impending disaster of Freddie and Fannie. Each time the editorial staff attempted to interview the key people either in Freddie or Fannie or close organizations like CountryWide they were told to butt out and in some cases were threatened. One of editorials even stated that Freddie and Fannie was going to be our next Enron.
2003 Bush (R) called for significant oversight on Freddie and Fannie. John Snow even made a speech directly on the floor calling for strengthening of the oversight of GSE's particularly Freddie and Fannie. Barney Frank (D) led the charge to kill any oversight on Freddie and Fannie and using his now becoming famous lines - nothing is wrong with Freddie and Fannie.
2004 Freddie and Fannie were caught cooking their books which mean they were making things look a lot rosier than they really were which in turn allowed picaroons like Reins (strong D supporter) the ability to pocket 10's of millions of dollars in bonuses.
2/2004 Greenspan even called for oversight of Freddie and Fannie.
4/2005 Schumer (D) took major steps to block any new oversight on Freddie and Fannie - once again stating everything is great in the housing market - why does anyone want to legislate something that is working so well?
4/2005 Bush (R) pushed for more oversight on Freddie and Fannie - you can see the famous YouTube clips now of all the Democrats (D) blowing off ALL calls for any oversight of Freddie and Fannie.
The Senate Banking committee answered the call of President Bush (R) to adopt much stronger legislation which many view in hindsight that if this legislation had passed on the Senate floor it would have stopped the meltdown of this year. The Senate Banking committee voted on party lines to adopt the legislations ALL Democrats (D) on the committee voted against the new legislation and all Republicans (R) on the committee voted for it.
When it went to the Senate floor the Democrats (D) successfully blocked a vote on it. - The legislation died.
2006 Another Republican bill co-sponsored by McCain (R) hit the floor with McCain specifically warning all members that Freddie and Fannie posed a significant threat to our financial markets and ultimately the taxpayer. He clearly warned them of the impending disaster.
The Democratic (D) controlled killed the legislation. The bill voted down party lines. Democrats (D) against, Republican (R) for.
By the time 2008 came around Freddie and Fannie held over $4 trillion dollars worth of mortgage paper.
In July 2008 Barney Frank (D) told everyone that Freddie and Fannie were fine and going forward everything was going to be great.
Then we had our meltdown. I think it should be noted that the first bail-out bill had over $20 billion earmarked for far left organizations and that is the primary reason that Republicans couldn't stomach it. The bill failed the house by 12 votes. If the Democrats really wanted to pass it they had the majority to do it. It should be noted that 12 Democrat (D) members of Barney Frank's banking committee voted against the bill. Even at our darkest hours Barney's boys were still in denial.
All you have to do is look at the facts and it is pretty clear who bears the majority of responsibility here. (CLUE: Democrats!!!) It is also clear that Republicans are not getting enough credit for trying to fix this time and time again.
According to economists and business school professors Freddie and Fannie and the lack of oversight on their reckless practices is the primary cause for our financial meltdown.
Anyone who tries to tell you Freddie and Fannie were NOT the major cause are not being honest with you. Any politician that is telling you that Freddie and Fannie were NOT a major cause is not dealing with reality.
All we need to do is review history and we can stop these things from happening. Remember Roosevelt (D) raised taxes during the Great Depression and unemployment was at 25%.
One thing is for sure - we CANNOT under any circumstance raise taxes and we CANNOT increase government spending or we will see the Greatest Depression on our shores - and it took WWII for us to start to crawl out of the last one. We are doomed to repeat history unless we get honest and use straight talk with each other.
If you want to look at the entire picture it seems to be clear to me that our meltdown is really a result of almost 100 years of bad government socialistic tendencies and programs which the Democrats seems to want to continue to shove down our throats.
One thing is for sure WE CANNOT LEGISLATE RECOVERY!
If I have made any mistakes please clear them up for me with your comments. Thanks for reading.
You left off clinton - he pressured banks.
Here’s a new on on the subject; it’s new to me anyway.
But I'm afraid that none of this matters now, because the majority of our elected Republicans are far too interested in just getting along with the Dems than standing up and pointing the finger where it should be.
Also,there are far too many apathetic Americans out there who live only for NASCAR, or either the Life Time channel, and they hear a sound bite by one of the MSM, and that's all they will ever know about anything going on outside their little world.
And with an electorate like that, what hope do we have?
Thanks for the comment. The Clinton reference is in there. ACORN actually had much of a stronger impact forcing banks to make the bad loans and ACORN did it with an attorney who name is Obama.
Barney Frank and fannie mentioned together is a scary thought. :<(
Consider your editorial peer reviewed.
It passes muster.
LOL...well you know Barney will be behind you all the way!
The Fox news channel covered this earlier in the evening, some professor-like man talking to the guy whose hour, or half-hour it was...covered all the bases you covered here, from FDR, LBJ, Carter, right up the line. The mystery is why would the financial institutions buy all these risky mortgages, apparently group them together, and sell? them again in increasingly larger groupings of mortgages...and sell them to who? And why? Why buy mortgages that were rated at something like 50% chance they’d fail? And who would buy ‘em? Shrug.
The bundle is a way of mixing different grade paper.
For example you can bundle low risk mortgages with high risk mortgages to create a blended value and risk.
The biggest issue is that people like Reins thought that property was such a good investment that the risk ratio for these instruments only needed to be 2%. Huge mistake.
They also didn’t account for speculators driving up new building and thus creating a surplus of homes in many markets this ultimately helped the bubble to pop and as soon as you have a home that is worth less than the mortgage and you have no down payment at stake you are now basically in the same position as a renter so you might as well leave and pay less for more somewhere else.
It amazes me that we continue to repeat history. Sheeple, sheeple, sheeple.
You see evidence of this with homes marked “below county appraisal” and “for sale less than the purchase price”. People are scrambling to get out of their properties and into cheaper houses.
Right now it is a buyer’s market and a lot of people are getting good deals.
Linking this to the Timeline Project / Link List of Bailout History
Why this isn’t shouted from the roofs over and over - I’ll never understand. But you are doing your part - so thank you!
Since McCain has no cred on the economy, can Palin the outsider start hammering on this stuff, or are they both shifting to Obama character issues?
Not defending Fannie/Freddie nor any of the Dims who enabled their fiscal tomfoolery, but there are other, maybe greater influences in the subprime mess, to wit----->Investment Banks Provided Subprime Lenders with Critical Funding.
Thanks for your comment. I agree there are many factors however if you look at the entire picture of cause and effect and remove the corrupt activities specifically of Frank and crew and Fannie/Freddie then none of this meltdown would have happened.
Ok if you don’t want to take that road then look at the calls for oversight,etc on Fannie/Freddie then if that was allowed to happen then this crisis would have been much less.
Then you add in the fact that we caught Freddie/Fannie red-handed cooking their books (and only god knows why the SEC is still investigating - I can give you a clue - too many people in Congress have their hands dirty) and yet we still do not provide oversight to this quasi-private company.
Regardless of the other factors - Freddie and Fannie are absolutely critical to how this financial mess occurred. This debacle dwarfs anything we have ever seen before and it will take decades to reverse this and in fact the more legislation we try to fix this will only prolong the agony around it.
See also http://www.youtube.com/watch?v=1RZVw3no2A4 for a really good 10 minute video about the problem.
Demoncrats - http://www.youtube.com/watch?v=_MGT_cSi7Rs
Doesn't sound like you read the article I linked. In case you haven't noticed, there have been several mega failures, that due to the amounts of $'s involved were most likely not related to the two GSE's problems. BUT, were caused by essentially the same problem - loans going south. The investment bankers have a lot more at stake than the GSE's because they have considerably more exposure. Not just in MBS's but derivatives also - which is the REAL killer. THAT'S who this bailout/rescue/boondoogle was designed to help - IMO of course.
I have not read the article you linked. I tend to look for a core component that if removed would have adverted this crisis.
And it keeps coming back to Freddie and Fannie. Primarily because of the corruption and protection surrounding them is like gasoline being poured on to the fire.
I will take a closer look at the link you sent and read on-thanks for the heads up.
I just watched it this afternoon - ABSOLUTELY FANTASTIC.
They went into much greater detail than me and it is something that everyone should watch.
I followed historical data points but FOX really, really nailed it. Multimedia is so much more powerful than just text.
Looks like the special will be available here at some point:
FWIW, I wanted to find out which came first, the chicken or, well, you know..... From what I've been able to gather, when Billy Jeff increased the pressure on financial institutions mid 90's, the only ones able to make those types of loans were banks or thrifts from their deposit base. There was little or no secondary market for the junk.
Apparently, investment bankers saw an opportunity to make some big bucks in packaging and selling this junk(they were already doing so with prime loans) through various means - including derivatives(insurance of sorts) on the packages to make them more attractive to institutional inverstors(themselves included). Anyway, mortgage bankers/brokers(being fee driven) also saw an opportunity, that is, if someone's gonna buy this junk, we'll originate it; LOTS of it. A partnership made in hell thanks in large part to Billy Jeff and his Fed laying the groundwork.
It wasn't until after Billy Jeff's gutting of mortgage underwriting standards via HUD in '99 that Fannie and Freddie jumped into the subprime market in a BIG way(thanks again BJ). One has to wonder if the changes may have come at the behest of Fannie and Freddie wanting to compete with investment bankers for this business - and make the big bucks too. One also has to wonder what part, if any, ACORN and their ilk, who stood to skim off millions by making loans to deadbeats, may have played in this raping of the taxpayers.
There's more but an interesting side note, GWB won the election in 2000 just as things were really heating up in subprimes. But instead of taking it upon himself to reverse the regs BJ had implemented in '99, calling down fire and brimstone from Dims and their media enablers for stealing deadbeats' chance to own a home, he opted to call for tighter legislation. Went nowhere of course. The Dims blocked calls for tighter legislation at every turn.
Keep in mind, the SEC's lack of oversight, and the rating agencies' lack of due diligence contributed in no small part. Maybe we'll get a kiss outta the deal.
Private label securities
This market structure, with government-sponsored enterprises at its center, was a tremendous success and attracted competition from other major financial institutions. After the government charged Freddie Mac and Fannie Mae several years ago with serious errors in complying with new accounting rules for derivatives, the major Wall Street firms launched an aggressive move into the issuance of mortgage-backed securities.
In 2003, the government-sponsored enterprises were the source of 76 percent of the mortgage-backed and asset-backed issuances; "private label" issues by major Wall Street firms accounted for the remaining 24 percent, according to Inside Mortgage Finance. By mid-2006, the government-sponsored enterprise share had fallen to 43 percent, with private label issues accounting for 57 percent. Among the large private label issuers were well-known firmssuch as Wells Fargo, Lehman Brothers, Bear Stearns, JPMorgan, Goldman Sachs, and Bank of Americaas well as several major lenders to high-risk subprime borrowers, such as Indymac, WAMU, and Countrywide.
Along with this radical, and rapid, shift in market shares came a similar change in underwriting standards. Whereas Fannie Mae and Freddie Mac were almost entirely "prime" mortgage lenders, the private label share grew in large part through the origination and securitization of high-risk subprime mortgages as well as "Alt-A" mortgages, which were made to borrowers who were more creditworthy than subprime customers but presented more risks than prime borrowers (see table).
The rise of subprime mortgage origination and securitization created a problem that had not arisen in markets centered on government-sponsored enterprises. How can such low-rated debt securities be sold? The major buyers of prime mortgage-backed securities were institutional investors, but their investment rules and guidelines sharply restricted their exposure to below-investment-grade securities. Small amounts of the $1.1 trillion in subprime debt, $685 billion of which was securitized as mortgaged-backed securities, could be sold to various high-yield-seeking investorsbut not nearly the entire amount.
Finding new investors
The key to moving subprime mortgage debt through the market was to divide up the risk, creating low-risk investment-grade segments and higher-risk (lower-rated) segments from the pool of mortgages. To do this, Wall Street used the collateralized debt obligation, which was created in 1987 by the now defunct investment firm Drexel Burnham Lambert as part of its junk-bond financing of leveraged buyouts.
The subprime mortgages were pooled into collateralized debt obligations, in which the securitized claims on the pool's payments were carved into various "tranches," or classes of risk. Like the underlying mortgages, the collateralized debt obligations paid principal and interest. In a simple three-tranche example, the least risky, or senior, tranche has the first claim on the payments from the pooled mortgages. The senior tranche has the highest credit rating, sometimes as high as AAA, and receives a lower interest rate. After the senior claims are paid, the middle, or mezzanine, tranche receives its payments. Mezzanine represents much greater risk and usually receives below-investment-grade credit ratings and a higher rate of return. The lowest, or equity, tranche receives payments only if the senior and mezzanine tranches are paid in full. The equity tranche suffers the first losses on the pool, is highly risky, and is usually unrated. It also offers the highest rate of return because of the risk. Each class of securities is sold separately and can be traded in secondary markets so that prices can be discovered for each level of risk.
In a collateralized debt obligation, approximately 80 percent of the subprime debt can be resold to institutional investors and others as senior-tranche, investment-grade assets. Hedge funds, the proprietary trading desks of Wall Street firms, and some institutional investors chasing high-yield investments found the lower tranches attractive.
FitchRatings warned in 2005, "Hedge funds have quickly become important sources of capital to the credit market," but "there are legitimate concerns that these funds may end up inadvertently exacerbating risks." That is because hedge funds, which invest in largely high-risk ventures, are not transparent entitiestheir assets, liabilities, and trading activities are not disclosed publiclyand they are sometimes highly leveraged, using derivatives or borrowing large amounts to invest. So other investors and regulators knew little of hedge funds' activities, while, as FitchRatings put it, because of their leverage, their "impact in the global credit markets is greater than their assets under management would indicate."
Press reports indicate that typical hedge fund leverage in the purchase of high-yield tranches was 500 percent. That means that $100 million in capital would be added to $500 million in borrowed funds for a $600 million investment in equity or mezzanine tranches of a subprime collateralized debt obligation. If these subordinate tranches were 20 percent of the total debt obligation, and the other 80 percent was sold as investment-grade senior debt to institutional investors, then that $100 million in hedge fund capital allowed originators and private label mortgage-backed securities issuers to move $3 billion through the subprime mortgage market$2.4 billion as investment-grade securities and $600 million as high-yield junk.
You'll note I was off on the market entrance dates for both the public and private entities. Still in all and as near as I can tell, the rest of the story remains the same.
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