Votes for MortgagesBy Joe Dantone
Fannie and Freddie have been in operation for decades without problems until recently. Fannie began in 1938 as a quasi-governmental agency making affordable homes available to people by making the financing easier and funds more readily available by establishing a secondary market for mortgages.
Previously banks had held onto their mortgages in a system called portfolio mortgages and were made mostly to their own account holders. With the homes as collateral, the banks then lent out that same money again to other local borrowers. If you remember the scene from It's a Wonderful Life when there is a run on the bank, you can visualize how that works when confidence in the system disappears. With a secondary market for mortgages, banks could recoup their money rather than keeping it tied up. The result was that banks could loan out the same funds 5-6 times. If there were a run, they could cover it. That stabilized the whole banking system in the eyes of the public. It also led to mortgage loans being more readily available, and the ability to do business with banks across the country and lenders whom borrowers never saw. Millions of people bought homes that way.
In 1996, Andrew Cuomo, then head of HUD for Bill Clinton announced that banking was going to change in the name of affordable housing. The government intended to see that more housing was available to the less fortunate in life. That's how the Subprime Crisis began.
The Community Revitalization Act of 1977, a law intended to stop redlining by banks, was used to pressure lenders to make loans to more and more people with ever lower credit scores.
With lender's traditional safeguards eliminated by government pressure, the resulting crash was inevitable. However, that explains only the high foreclosure rate.
What occurred to the bundled mortgages that Fannie and Freddie accumulated, then sold, is not their fault. That blame belongs to the financial investors and brokers on Wall Street. A brokerage firm would buy bundles valued in the hundreds of millions of dollars. After all, what better collateral is there than people's homes?
The brokers didn't do any due diligence though, so no problems ever showed up. Had the credit issues been revealed earlier, the market in mortgages would have dried up and the loans ceased to be made.
Even though there were three classes of borrowers by then, Prime, Alt-A, and Subprime, the mortgages from these classes were mixed in the bundles without any sort of inventory to account for them. The bundles were sold based simply on the face amount of the mortgages. That created an unknown level of risk for the buyers and was very different from the previous, all Prime, bundles. Without being able to sort out the mortgages, brokerages simply made assumptions about the number of mortgages in each bundle that would default. You always assume the worst, so revenue to Fannie and Freddie was reduced both short term and long term to compensate for that risk.
That's how the American General credit default swap came into being. The brokerages wanted to insure their bundles against loss, so they looked to a form of insurance to do that. Any company which insured a $600M loss would have to have available to it that amount in funds as long as the policy was in effect. That is a huge amount of money to have waiting idle. It's also a regulatory nightmare that the insurance commissions would watch very closely. But if it weren't really insurance, and wasn't sold by an insurance company, all of that could be avoided. What could go wrong doing it another way? People's homes were the collateral? It don't get no better than that.
So American General told companies that it would swap with them a previously defined amount of money for their defaulted credit. However, faced with the reality of a $600M loss, they couldn't live up to their end of the deal and defaulted themselves. That made it painfully obvious to others how shaky the value in their investments, by now called Collateralized Debt Obligations (CDO) really were.
It gets worse.
The CDO's were sold repeatedly, as financial instruments often are. That created more problems. The ownership of the underlying collateral, the homes and land, was never transferred on city and county property rolls as they were sold. Eventually, it became impossible, literally, to determine who owned an individual mortgage on a given piece of property. Worse, no one really wanted to jump into the tedious task of finding paper trails for hundreds of thousands of homes. That may still be true.
If a mortgage was actually paid off in this environment, the correct lender might not get paid as a result. That could, and did, cause legal problems and current homeowners sometimes faced eviction for not continuing to pay monthly notes on homes that they no longer owed money on.
Property titles weren't clear so no one could legally show as the owner of record, even if the home had been occupied by the same family for years. Responsibility for paying taxes was in doubt. That meant the homes could not be sold or even given away. Some families ceased paying and lived rent free because there was no one to evict them. If a lender thought they owned a mortgage, they had to construct a paper trail in order to satisfy a court before going beginning foreclosure proceedings. More than one lender was caught attempting to ignore that part of the process and just deem that it was the mortgage owner. That didn't go well with the courts when it came out and they were caught.
Nothing of significance has been done to date to correct the situation just described. Shutting down Fannie and Freddie, as recently called for by Obama, will have no impact on it at all. That is simply a distraction. It will only stop whatever government funding is going to those agencies themselves. They will be replaced in the secondary market because there is money to be made there and that is capitalism at it best.
The president thinks that the government will be able to dictate terms in that market without actually having a stake in it.
Maybe, but this won't do anything but create a venue for new kinds of interference.
In the wake of Obama's announcement, the FHA revealed that it is going to dictate the racial makeup of neighborhoods in the future. Neighborhoods will have to be in compliance with affirmative action dictates despite the Supreme Court's hinting that the days of affirmative action are near their end.
The houses that are sitting empty, that have residents who are living rent free, where the titles are clouded, or the owners are on the edge of foreclosure, are not likely to be in minority neighborhoods where people 'need' affordable housing. If the FHA wanted to do that, it could give away the city of Detroit.
The houses listed above are going to be taken by the FHA and given titles by the federal government since it thinks is already owns everything. It can't be sued later so the new owner/resident (?) will be safe on that account. My opinion, but it works and it fits.
The newly-titled houses will be given to others who most likely can't afford them without government assistance. That means that the funds that are claimed to have gone to Fannie and Freddie despite their making a profit will then be paid out in direct assistance to voters, voters who will then be obligated to the government. No votes, no house, the same way people get garbage cans in Chicago today.
Cronies may also buy the houses at giveaway prices and rent them out while paying nothing on them and leaving them unmaintained, sort of like a suburban Cabrini Green.
It seems that one crisis is normally accompanied by another incident or announcement in tandem. Which comes first in this, Fannie Mae and Freddie Mac, or the FHA announcement is beyond me -- if it even matters. But the two are connected. Of that there should be no doubt.
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