Oh The Irony, Fannie & Freddie Sue Banks For Subprime Mortgages They Facilitated


Fannie and Freddie (GSE’s) are now suing the banks they conspired with in the subprime crisis.  Fannie Mae and Freddie Mac created, and remain highly involved in, the secondary market for mortgage-backed securities and they hope to put it all on the banks with this suit.

Reuters: A U.S. regulator sued more than a dozen major banks on Friday over losses on nearly $200 billion of subprime bonds, which may hamper a broader government settlement of the mortgage mess left over from the housing crisis.

The lawsuits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, came as a surprise to the market and weighed down bank shares.

The lawsuits could add billions of dollars to the banks’ potential costs at perhaps the worst possible time for the industry.

How ironic is it that the very government sponsored entities, Fannie and Freddie, that facilitated banks in giving mortgages to risky buyers, are now suing those banks. The government will probably just end up damaging the banks in the end. Certainly, it’s a win-win for the lawyers. This is a sue happy administration and I am sure they are creating jobs in the legal field.

Both political parties are to blame for the housing crisis, but Fannie and Freddie are also guilty as are the banks.

Irony of all ironies – the Dodd-Frank bill includes statements by Congress that GSE’s (government-sponsored entities, Fannie and Freddie) were not small time players as some would have us believe, and, also in that bill, Congress admits they have done nothing to change it. So, here we have the 300,000 word Dodd-Frank bill, and not a word enacts anything to reform GSE’s.

The bill includes this admission at the end: Section 1491 (b): “It is the sense of the Congress that efforts to enhance by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit would be incomplete without enactment of meaningful structural reforms of Fannie Mae and Freddie Mac.”

Here are Congress’ findings about GSE’s from the bill: –


(a) FINDINGS.—The Congress finds as follows: (Bold by Editor in sections below)
(1) The Government-sponsored enterprises, Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), were chartered by Congress to ensure a reliable and affordable supply of mortgage funding, but enjoy a dual legal status as privately owned corporations with Government mandated affordable housing goals.
(2) In 1996, the Department of Housing and Urban Development required that 42 percent ofFannie Mae’s and Freddie Mac’s mortgage financing should go to borrowers with income levels below the median for a given area .
(3) In 2004, the Department of Housing and Urban Development revised those goals, increasing them to 56 percent of their overall mortgage purchases by 2008 , and additionally mandated that 18 percent of all mortgage purchases by Fannie Mae and Freddie Mac be ‘‘special affordable’’ loans made to borrowers with incomes less than 60 percent of an area’s median income, a target that ultimately increased to 28 percent for 2008.
(4) To help fulfill those mandated affordable housing goals, in 1995 the Department of Housing and Urban Development authorized Fannie Mae and Freddie Mac to purchase subprime securities that included loans made to low-income borrowers.
(5) After this authorization to purchase subprime securities, subprime and near-prime loans increased from 9 percent of securitized mortgages in 2001 to 40 percent in 2006, while the market share of conventional mortgages dropped from 78.8 percent in 2003 to 50.1 percent by 2007 with a corresponding increase in subprime and Alt-A loans from 10.1 percent to 32.7 percent over the same period.
(6) In 2004 alone, Fannie Mae and Freddie Mac purchased $175,000,000,000 in subprime mortgage securities, which accounted for 44 percent of the market that year, and from 2005 through 2007, Fannie Mae and Freddie Mac purchased approximately $1,000,000,000,000 in subprime and Alt-A loans, while Fannie Mae’s acquisitions of mortgages with less than 10 percent down payments almost tripled.
(7) According to data from the Federal Housing Finance Agency (FHFA) for the fourth quarter of 2008, Fannie Mae and Freddie Mac own or guarantee 75 percent of all newly originated mortgages, and Fannie Mae and Freddie Mac currently own 13.3 percent of outstanding mortgage debt in the United States and have issued mortgage-backed securities for 31.0 percent of the residential debt market, a combined total of 44.3 percent of outstanding mortgage debt in the United States.
(8) On September 7, 2008, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, with the Treasury Department subsequently agreeing to purchase at least $200,000,000,000 of preferred stock from each enterprise in exchange for warrants for the purchase of 79.9 percent of each enterprise’s common stock.
(9) The conservatorship for Fannie Mae and Freddie Mac has potentially exposed taxpayers to upwards of $5,300,000,000,000 worth of risk.
(10) The hybrid public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, or abusive.
(b) SENSE OF THE CONGRESS.—It is the sense of the Congress that efforts to enhance by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit would be incomplete without enactment of meaningful structural reforms of Fannie Mae and Freddie Mac.

Fannie and Freddie knew full well that the bad mortgages were bundled as they bought 75% of them. It is evident that Congress knows it. If anyone questioned what was going on over the last couple decades, it was always bounced back as the complainers were bigots who didn’t want poor people and immigrants to own homes. My grandfather bought his first home when he was 60 years old. They rented until then because they were poor. They didn’t buy until they could afford it. Why is that a problem? Why is owning a home a right? What’s wrong with renting? Whatever, if I don’t tow the company line I risk being called some slur.

Fannie and Freddie’s cousin, Ginnie Mae (Government National Mortgage Association, a division of HUD) is also a bad joke. They were a major factor in the housing crisis of 2007-2008: Click here.

Take a look at the HUD site and tell me they aren’t looking for people who can’t afford mortgages to seek mortgages at taxpayer expense: HUD

This making owning a home a right is really stupid and it is unsustainable. Don’t we call this redistribution of the wealth? We need to make sure our less fortunate have a reasonable place to live, that’s it.

I’m not saying this is the only reason for the economic crisis, but it was a bigger part than many want us to believe. It accounts for trillions of dollars. Yes, there are dishonest mortgage lenders and yes, some people don’t want to be responsible for reading their mortgage requirements, blah, blah, blah, but it doesn’t change this reality, no matter how much the government tries to shift the blame solely to the banks as the government continues their class warfare.