Can you help me understand Fannie Mae’s role in the mortgage meltdown?

Can you help me understand Fannie Mae’s role in the mortgage meltdown?Can you help me understand Fannie Mae’s role in the mortgage meltdown?
asked 9 years ago

Fannie Mae was created years ago to buy mortgage loans from investors in order to keep the supply of mortgage money moving and boost home ownership..

The most dangerous of the mortgages loans made during the housing bubble were Alt A (Alternative A) loans which require little or no documentation. And most of these are adjustable rates.

As of 2007, Fannie Mae owned 52% of all mortgages in the U.S.,doing what they were set up to do.
Fannie Mae traditionally shunned Alt A and other very high risk loans but did make some loans to comply with the Community Reisvestment Act which mandated that a percentage of loans purchased by Fannie should be to people whose income level was below the median of the particular community. However, a credit score of 680 was required and full documentation of income so most of these purchasers were responsible people, just not as well off as their neighbor and the default rate very low.

But in 2007 at the height of the housing bubble, Fannie Mae only owned 12% of the time bomb Alt A mortgages which blew up in our face. The majority of Alt A and other extremely high risk loans were made by banks and mortgage companies who sold these loans to Wall Street investors who in turn sold them as bonds to Pension Funds, Mutual Funds, Hedge Funds and other wealthy investors.

So I am having trouble understanding all the rage toward Fannie Mae. I understand that having 12% of a mortgage portfolio invested in Alt A if these loans are highly leveraged, which they were, will cause an explosion, the leverage multiplying the losses should a borrower default.

But my point is that if Fannie only had 12% of these Adjustable Rate Liar Loans on their books, then out there somewhere there are the other 88% of these loans and they were made by banks and by Wall Street investment banks. And we know how that turned out.

So how can people justify their claims that Fannie caused all this with only 12% of the toxic mortgages?

Am I missing something?

Holy crow .. I darn near fell off my chair when I read this one!

Is this a good deal for the taxpayer – buying the toxic mortgages for far, far more than their worth, and letting the banks determine how much the taxpayer will pay for them?

Read this fascinating article before you answer. I’ll quote it here for people who don’t follow links.

The Free Market, Financial Style
How the Scam Works

URL: dubya dubya duba dot counter punch dot org slash
hudson03272009 dot html


Newspaper reports seem surprised at how high banks are bidding for the junk mortgages that Treasury Secretary Geithner is now bidding for, having mobilized the FDIC and Fed to transfer yet more public funds to the banks. Bank stocks are soaring – thereby bidding up the Dow Jones Industrial Average, as if the “financial industry” really were part of the industrial economy.

Why are the very worst offenders – Bank of America (now owner of the Countrywide crooks) and Citibank the largest buyers? As the worst abusers and packagers of CDOs, shouldn’t they be in the best position to see how worthless their junk mortgages are?

That turns out to be the key! Obviously, the government has failed to protect itself – deliberately, intentionally failed to do so – in order to let the banks pull off the following scam.

Suppose a bank is sitting on a $ 10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $ 2 million as defaults loom on Alt-A “liars’ loan” mortgages and subprime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting operators taking out mortgages at far more than properties were worth and pocketing the excess.

The bank now offers $ 3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $ 5 million. (In practice, friendly banks may bid for each other’s junk CDOs.) The government – that is, the hapless FDIC – puts up 85 per cent of $ 5 million to buy this – namely, $ 4,250,000. The bank only needs to put up 15 per cent – namely, $ 750,000.

Here’s the rip-off as I see it. For an outlay of $ 750,000, the bank rids its books of a mortgage worth $ 2 million, for which it receives $ 4,250,000. It gets twice as much as the junk is worth.

The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85 per cent. So the strategy is to overpay, overpay, and overpay. Paying 15 per cent is a small price to pay for getting the government to put in 85 per cent to take the most toxic waste off your books.

The free market at work, financial style.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002)

(end of quote)

Please someone … how do people intelligent enough to rise to the positions of financial advisers to the Administration and Treasury make such errors?

Are they truly errors, or is this an example of what happens when you let the wolves guard the hen house?

middleclassman replied 10 years ago

Derivatives should of never been allowed outside of farming.

Zack replied 10 years ago

In my opinion, it’s just the name recognition. The other 88% of those loans were likely split among many, many companies. While you’re right, 12% isn’t that high, you must take into account the public’s familiarity with the Fannie Mae name and the fact that an entire 12% rested with ONE company.

john r replied 10 years ago

fannie mae had nothing to do with the sub prime /wall street fiasco/mortgage meltdown.

banks like bear sterns, citibank and AIG were not forced to make sub prime loans by anyone (Barney frank) or any law (CRA) or by Fannie mae

banks like bears sterns willingly made sub prime loans (foolishly) thinking those loans would lead to profits.

not all banks got into the sub prime lending practice…..which is why not all banks took the TARP bailout money…only the inept banks that got into sub prime lending, needed and took the TARP funds.

grandma zaza replied 10 years ago

They packaged their mortgages into securities and then sold them off. When the market collapsed, so did the value of the securities. The mortgages were not the problem. The value of the mortgage backed securities was.

robzuc97 replied 10 years ago

Fannie and Freddie sold off those assets as bundles (which the others willingly bought up before the crash) and are currently the only institutions exempt from both financial “reform” and pay-back of TARP monies as the Darlings of Redistributive Wealth… The government created the circumstances through adverse/disparate impact ratios to create those high risk loans, Freddie and Fannie bundled them with Barney Frank saying it is all “okay” two weeks before the crash… Now maybe you can understand the rage!

Mathsorcerer replied 10 years ago

This wasn’t completely Fannie Mae’s fault. Mortgage lenders should not have been hawking subprime loans so much for the last few years, especially when interest rates were being artificially held low.

There were too many greedy lenders and too many greedy consumers–they are the primary cause of the current meltdown.

[email protected] replied 10 years ago

With the help of CHris Dodd and Barney Frank as well as a few others.

Pete T replied 10 years ago

The taxpayers got scammed , and that other word that starts with an S.

Jerry H replied 10 years ago

You got to have a kind of respect for the bankers. Knowing they don’t have any real productivity in our society, the majority believes their blood-sucking greed is legit. I got to give the bankers credit for the control they have. Government obviously is not working. It either trusts bankers too much, or are gambling in this game because they have no solution.

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