"The fact that David Boies, possibly the most prominent Democratic litigator in the U.S., not to mention Ted Olson of Gibson Dunne & Crutcher, arguably the most prominent Republican litigator, are both representing GSE shareholders in different lawsuits against the government, may be all the evidence anyone needs to see that these lawsuits are unlikely to be easily dismissed. But the requirement of Bernanke to testify, in what is arguably a more difficult case since Greenberg is largely on his own in bringing the lawsuit, nonetheless makes it appear even more likely GSE shareholders will get a serious hearing."
-- Written by Dan Freed in New York, TheStreet.com
There's been a lot of talk in recent months about the payment of billions of dollars to the Treasury by Freddie Mac and Fannie Mae (the GSEs). That's understandable. Freddie Mac's six straight profitable quarters show a remarkable reversal of fortune. And this reversal is one key reason people are wondering when the GSEs might go “net positive” with the taxpayers.
This new public attitude is not just gratifying, it's meaningful. For the housing markets are growing stronger, and Freddie Mac's new book of business – high-quality mortgages from 2009 and later – has grown to more than two thirds of our total portfolio.
But for all the deserved focus on our contributions to the taxpayers, people shouldn't overlook our other contributions that are no less essential. Freddie Mac's work to sustain the housing market through a five-year slog back from the depths of an historic housing crisis has its own immense value. And this value is measured in the tens of billions of dollars.
- Freddie Mac's benefits begin with liquidity – $1.9 trillion in funding for the combined single-family and apartment markets since the start of 2009. Freddie Mac and Fannie Mae provided roughly 70 percent of the residential market's liquidity in the first quarter of this year, and even more in earlier years after the crisis. Experts across the political spectrum have noted that without support from the two GSEs throughout this period, the damage to housing and the broader economy would have been worse by many billions of dollars.
- All this liquidity helps keep costs low and saves consumers money. Since the beginning of 2009, Freddie Mac bought or guaranteed nearly $1.4 trillion of refinance mortgages, helping more than 6.6 million homeowners. And for the Freddie Mac loans refinanced in the first quarter of this year alone, homeowners will save roughly $2.1 billion in interest payments over just the first 12 months of their refi.
- Freddie Mac's foreclosure avoidance efforts also carry huge benefits. Since the start of 2009, the company has helped more than 830,000 families avoid foreclosure. The value of saving that many homes from foreclosure reaches as high as $36 billion (an estimate that includes losses to borrowers and Freddie Mac, and the deadweight losses of foreclosures to the economy as a whole).
There are plenty of other examples of the same essential point. If not for the steady, vital work of Freddie Mac and Fannie Mae since the crisis, the damage to the housing market and U.S. economy would have been far worse. And the housing recovery might still be a hope, instead of a reality.
So make no mistake – after years of heavy losses and harsh criticisms, we're glad to be profitable again at Freddie Mac and to return funds to the Treasury and the taxpayers. But most of all, we are grateful for the opportunity to serve our vital housing mission, and to vindicate the decision by policymakers to keep us alive five years ago.
Freddie Mac's mission is to provide the housing market with liquidity, stability and affordability. That's what we do every day, thanks to specialized people and infrastructure. That's what enables the profits we are generating for the taxpayers. And for all the welcome value of our infusions to the Treasury, that housing mission remains the most fundamental and enduring value of Freddie Mac.
"Fannie and Freddie only bought mortgages of homeowners who were likely to make their monthly payment. That kept a lot of people locked out of their dream. Some couldn’t afford a down payment. Others had lousy credit."
"But the new mortgage lenders in California wanted to change all that. They wanted a chance to offer anyone a mortgage."
"They saw their opportunity when Fannie and Freddie became entangled in an accounting scandal and lost their dominance of the mortgage markets."
"When you look at an industry that was driven by Fannie Mae and Freddie Mac for almost two decades, suddenly you don’t have the leaders of the industry even around. They are in the penalty box."
"We thought that was a huge opportunity to do some of the things we wanted to do, which is change the rules."
"All Bill Dallas needed was someone to take Fannie and Freddie’s place, someone with huge amounts of cash who would be more willing to bend the rules."
"Who took over? Wall Street."
(Source: CNBC, A House of Cards, 2009)
U.S. Senate Investigations Subcommittee Releases Levin-Coburn Report On the Financial Crisis of 2008
Wednesday, April 13, 2011
"Using emails, memos and other internal documents, this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets," said Levin. "High risk lending, regulatory failures, inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest, contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets. Using their own words in documents subpoenaed by the Subcommittee, the report discloses how financial firms deliberately took advantage of their clients and investors, how credit rating agencies assigned AAA ratings to high risk securities, and how regulators sat on their hands instead of reining in the unsafe and unsound practices all around them. Rampant conflicts of interest are the threads that run through every chapter of this sordid story."
"The free market has helped make America great, but it only functions when people deal with each other honestly and transparently. At the heart of the financial crisis were unresolved, and often undisclosed, conflicts of interest," said Dr. Coburn. "Blame for this mess lies everywhere from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight."
The Levin-Coburn report expands on evidence gathered at four Subcommittee hearings in April 2010, examining four aspects of the crisis through detailed case studies: high-risk mortgage lending, using the case of Washington Mutual Bank, a $300 billion thrift that became the largest bank failure in U.S. history; regulatory inaction, focusing on the Office of Thrift Supervision's failed oversight of Washington Mutual; inflated credit ratings that misled investors, examining the actions of the nation's two largest credit rating agencies, Moody's and Standard & Poor's; and the role played by investment banks, focusing primarily on Goldman Sachs, creating and selling structured finance products that foisted billions of dollars of losses on investors, while the bank itself profited from betting against the mortgage market.
New Evidence. Today's report presents new facts, new findings and recommendations, with more than 700 new documents totaling over 5,800 pages. It recounts how Washington Mutual aggressively issued and sold high-risk mortgages to Wall Street, Fannie Mae, and Freddie Mac, even as its executives predicted a housing bubble that would burst, and offers new detail about how its regulator deferred to the bank's management. New documents show how Goldman used net short positions to benefit from the downturn in the mortgage market, and designed, marketed, and sold CDOs in ways that created conflicts of interest with the firm's clients and at times led to the bank's profiting from the same products that caused substantial losses for its clients. Other new information provides additional detail about how credit rating agencies rushed to rate new mortgage-backed securities and collect lucrative rating fees before issuing mass ratings downgrades that shocked the financial markets and triggered a collapse in the value of mortgage related securities. Over 120 new documents provide insights into how Deutsche Bank contributed to the mortgage mess.
"Our investigation found a financial snake pit rife with greed, conflicts of interest, and wrongdoing," said Levin. Among the report's highlights are the following.
- High Risk Lending. With an eye on short term profits, Washington Mutual launched a strategy of high-risk mortgage lending in early 2005, even as the bank's own top executives stated that the condition of the housing market "signifies a bubble" with risks that "will come back to haunt us." Executives forged ahead despite repeated warnings from inside and outside the bank that the risks were excessive, its lending standards and risk management systems were deficient, and many of its loans were tainted by fraud or prone to early default. WaMu's chief credit officer complained at one point that "[a]ny attempts to enforce [a] more disciplined underwriting approach were continuously thwarted by an aggressive, and often times abusive group of Sales employees within the organization." From 2003 to 2006, WaMu shifted its loan originations from low risk, fixed rate mortgages, which fell from 64% to 25% of its loan originations, to high risk loans, which jumped from 19% to 55% of its originations. WaMu and its subprime lender, Long Beach Mortgage, securitized hundreds of billions of dollars in high risk, poor quality, sometimes fraudulent mortgages, at times without full disclosure to investors, weakening U.S. financial markets. New analysis shows how WaMu sold some of its high risk loans to Fannie Mae and Freddie Mac, and played one off the other to make more money.
- Regulatory Failures. The Office of Thrift Supervision (OTS), Washington Mutual's primary regulator, repeatedly failed to correct WaMu's unsafe and unsound lending practices, despite logging nearly 500 serious deficiencies at the bank over five years, from 2003 to 2008. New information details the regulator's deference to bank management and how it used the bank's short term profits to excuse high risk activities. Although WaMu recorded increasing problems from its high risk loans, including delinquencies that doubled year after year in its risky Option Adjustable Rate Mortgage (ARM) portfolio, OTS examiners failed to clamp down on WaMu's high risk lending. OTS did not even consider bringing an enforcement action against the bank until it began losing substantial sums in 2008. OTS also failed until 2008, to lower the bank's overall high rating or the rating awarded to WaMu's management, despite the bank's ongoing failure to correct serious deficiencies. When the Federal Deposit Insurance Corporation (FDIC) advocated taking tougher action, OTS officials not only refused, but impeded FDIC oversight of the bank. When the New York State Attorney General sued two appraisal firms for colluding with WaMu to inflate property values, OTS took nearly a year to conduct its own investigation and finally recommended taking action -- a week after the bank had failed. The OTS Director treated WaMu, which was its largest thrift and supplied 15% of the agency's budget, as a "constituent" and struck an apologetic tone when informing WaMu's CEO of its decision to take an enforcement action. When diligent oversight conflicted with OTS officials' desire to protect their "constituent" and the agency's own turf, they ignored their oversight responsibilities.
- Inflated Credit Ratings. The Report concludes that the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody's and Standard & Poor's that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed to be as safe as Treasury bills. The result was a collapse in the value of mortgage related securities that devastated investors. Internal emails show that credit rating agency personnel knew their ratings would not "hold" and delayed imposing tougher ratings criteria to "massage the … numbers to preserve market share." Even after they finally adjusted their risk models to reflect the higher risk mortgages being issued, the firms often failed to apply the revised models to existing securities, and helped investment banks rush risky investments to market before tougher rating criteria took effect. They also continued to pull in lucrative fees of up to $135,000 to rate a mortgage backed security and up to $750,000 to rate a collateralized debt obligation (CDO) - fees that might have been lost if they angered issuers by providing lower ratings. The mass rating downgrades they finally initiated were not an effort to come clean, but were necessitated by skyrocketing mortgage delinquencies and securities plummeting in value. In the end, over 90% of the AAA ratings given to mortgage-backed securities in 2006 and 2007 were downgraded to junk status, including 75 out of 75 AAA-rated Long Beach securities issued in 2006. When sound credit ratings conflicted with collecting profitable fees, credit rating agencies chose the fees.
- Investment Banks and Structured Finance. Investment banks reviewed by the Subcommittee assembled and sold billions of dollars in mortgage-related investments that flooded financial markets with high-risk assets. They charged $1 to $8 million in fees to construct, underwrite, and market a mortgage-backed security, and $5 to $10 million per CDO. New documents detail how Deutsche Bank helped assembled a $1.1 billion CDO known as Gemstone 7, stood by as it was filled it with low-quality assets that its top CDO trader referred to as "crap" and "pigs," and rushed to sell it "before the market falls off a cliff." Deutsche Bank lost $4.5 billion when the mortgage market collapsed, but would have lost even more if it had not cut its losses by selling CDOs like Gemstone. When Goldman Sachs realized the mortgage market was in decline, it took actions to profit from that decline at the expense of its clients. New documents detail how, in 2007, Goldman's Structured Products Group twice amassed and profited from large net short positions in mortgage related securities. At the same time the firm was betting against the mortgage market as a whole, Goldman assembled and aggressively marketed to its clients poor quality CDOs that it actively bet against by taking large short positions in those transactions. New documents and information detail how Goldman recommended four CDOs, Hudson, Anderson, Timberwolf, and Abacus, to its clients without fully disclosing key information about those products, Goldman's own market views, or its adverse economic interests. For example, in Hudson, Goldman told investors that its interests were "aligned" with theirs when, in fact, Goldman held 100% of the short side of the CDO and had adverse interests to the investors, and described Hudson's assets were "sourced from the Street," when in fact, Goldman had selected and priced the assets without any third party involvement. New documents also reveal that, at one point in May 2007, Goldman Sachs unsuccessfully tried to execute a "short squeeze" in the mortgage market so that Goldman could scoop up short positions at artificially depressed prices and profit as the mortgage market declined.
Recommendations. The Report offers 19 recommendations to address the conflicts of interest and abuses exposed in the Report. The recommendations advocate, for example, strong implementation of the new restrictions on proprietary trading and conflicts of interest; and action by the SEC to rank credit rating agencies according to the accuracy of their ratings. Other recommendations seek to advance low risk mortgages, greater transparency in the marketplace, and more protective capital, liquidity, and loss reserves.
Wall Street Banks suffered a huge 20.3% loss on private-label mortgage securities compared to just 3.7% for Fannie Mae & Freddie Mac, according to a recent Moody's report. (see table below)
Fannie Mae and Freddie Mac were triumphant in 3 recent lawsuits, with 14 more pending, against these same banks, for the banks' negligent misrepresentation on $200 billion in mortgage-backed securities, which they sold to Fannie and Freddie during the years leading up to the 2008 crisis. These institutions sent our country's financial system into a free fall by selling extremely complex and toxic paper, backed by subprime, Alt-A, option ARMs, and jumbo mortgages – misrepresenting these investment products as AAA paper. A large portion of Fannie Mae and Freddie Mac's losses were due to this bank-perpetrated fraud. Fortunately, for Fannie, Freddie, and American taxpayers, they have recently recouped $12 Billion from settlements; however, roughly $180 Billion remains to be recouped. Anyone would need a bailout after experiencing this magnitude of fraud (see document below).
Why are members in congress promoting the idea that we should eliminate the very institutions (Fannie & Freddie), which helped recover the world markets from the 2008 financial crisis? Why would they want to empower the players (Wall Street Banks) that caused this mess and then disappeared from it (the mortgage market), just when they (private capital) were needed the most? (See documents & charts below)
It is not simply a coincidence, that since congress has devised the bright idea of punishing the victims (Fannie Mae, Freddie Mac, and the tax paying employees and shareholders of these companies, as well as homeowners, and the American middle class), while crowning the criminals (Wall Street Banks), that their approval rating is at an all time low; nearly 6 in 10 Americans are seeking to replace their member's of Congress in the upcoming 2014 elections.
There’s a dangerous — and misleading — argument making the rounds about the causes of our current credit crisis. It’s emanating from Washington where politicians are engaging in the usual blame game but this time the stakes are so high that we can’t afford to fall victim to political doublespeak. In this fact-free zone, government sponsored mortgage giants Fannie Mae and Freddie Mac caused the real estate bubble and subprime meltdown. It’s completely false. Fannie Mae and Freddie Mac were victims of the credit crisis, not culprits.
Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.
Look at the numbers. While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003. Fannie and Freddie, which wouldn’t accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.
There’s a must-read study by staff members of the Federal Reserve Bank of New York analyzing the roots of the subprime crisis that came out in March(2008) [a more recent report is also available online and posted in the blog]. I don’t think it got much attention then as the conclusions seemed uncontroversial at the time. But now that Washington politicians are trying to rewrite history, it should be mandatory reading for every American interested in knowing how we got here.
The study identifies five causes of the subprime meltdown:
-Convoluted loan products that consumers didn’t understand.
-Credit ratings that didn’t do a good job highlighting the risks contained in subprime-backed securities.
-Lack of incentives for institutional investors to do their own research (they just relied on the credit ratings).
-Predatory lending and borrowing (which I think means fraud perpetrated by borrowers).
-Significant errors in the models used by credit rating agencies to assess subprime-backed securities.
You’ll note in the Fed’s five causes that there’s some culpability for lenders, borrowers, investors and credit raters. There’s no blame for Freddie Mac or Fannie Mae which had little or nothing to do with the entire situation.
It’s certainly fair to criticize Fannie and Freddie over real issues that contributed to their downfall. The companies had numerous accounting problems and inadequate safeguards covering their own investment portfolios. Those weaknesses came home to roost when the real estate market cratered. Fannie and Freddie purchased billions of dollars of subprime-backed securities for their own investment portfolios and got hit just like every other investor. But it’s some kind of crazy, politically inspired CYA to blame for the mess we’re in.
WASHINGTON (AP) -- Swiss banking giant UBS is paying $885 million to settle U.S. government claims that UBS violated securities laws in its sales of mortgage-backed bonds to Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency, which oversees the two government-controlled mortgage finance companies, announced the settlement Thursday. The agency had sued UBS and 17 other major banks over their sales to Fannie and Freddie of about $196 billion in mortgage securities that soured when the housing market collapsed in 2007.
UBS will pay about $415 million to Fannie and $470 million to Freddie.
The FHFA said the deal means it has now reached settlements with three of the 18 banks it sued. The agency previously settled with Citigroup and GE Capital. The others include Bank of America and JPMorgan Chase.
READ THE ARTICLE >>
"The GSEs have massive information, skills, systems and efficiencies. They also have an incredibly profitable core business. If you want to shutter the GSEs because they lost a ton of money (for which the government will be repaid), remember that they did not lose the money on their core prime business."
retired in May after 29 years of trading all types of mortgage backed securities, the last 13 years spent as head of mortgage-backed securities at Pacific Investment Management Company.