FANNIE, FREDDIE ARE FRAUDS

FANNIE, FREDDIE ARE FRAUDS
(A classic analysis posted by Gary Jason in Orange County Register- Jan. 13, 2010)

At the root of the complex financial crisis America continues to endure are two giant GSEs, Fannie Mae and Freddie Mac. In 1993, both Fannie and Freddie –under pressure from Democrats, started buying risky mortgages so that people could have “affordable housing” – meaning affordable to them, not to the taxpayers of course.

During the 2005-07, under the aegis of Rep. Barney Frank D-Mass., in particular, these GSEs were buying all the risky business they could.

(Risky loans include Alt-A mortgages, which are essentially loans of poor quality, with either insufficient down payment or borrower documentation, and subprime loans to people with poor credit ratings).

By buying all this dicey paper, Freddie and Fannie created what economists call “moral hazard”: they made it rational for mortgage buyers and brokers to engage in economically bad behaviour, namely, getting people into inappropriate loans. The banks, which normally wouldn’t buy much of such paper, bought a lot, knowing that GSEs, in turn, would buy that trash.

By 2008, these Twin Towers of liar loans owed 10 million risky loans, totaling $1.6 trillion. Between the 10 million risky loans, and the other 5.2 million such loans held by other government owned almost 60% of prime and Alt-A loans in the country. This was a moral hazard on steroids. Yes. unscrupulous brokers sold bad loans to imprudent buyers, but it was all enabled by these GSEs.

As of now, Freddie and Fannie own or guarantee half of the $10 trillion in U.S. mortgages – the really lousy half. This is made all the worse by three things:

First, a former chief credit officer for Fannie Mae, Edward Pinto, has discovered that, starting in 1993; both GSEs habitually lied about these loans, presenting them as prime loans, presenting them as prime loans. The GSEs defrauded the public. Second, the losses are exploding exponentially at Freddie and Fannie. This is why the Obama administration on Christmas Eve quietly removed the $400 billion cap on potential losses. Peter Wallison, a former general counsel at the Treasury Department, notes this amounts to a government admission that the taxpayers are already out $400 billion; nobody can say what the final total will be.

Third, even as these GSEs from hell are chewing up our money, their CEOs are getting big salaries – upward of $6 million each of this year. This is amazingly hypocritical, coming from an administration that routinely bashes Wall Street bankers as fat cats, and set up a “pay czar” to tell private banks what they should pay their CEOs. CONVENIENTLY, FREDDIE AND FANNIE ARE EXEMPT FROM THE TARP RULES.

GSEs are inherently based on deceit and open to abuse by politicians eager to buy votes with other people’s money. They are not subject to any kind of checks on their behavior, because they are not subject to market discipline (when they screw up the government won’t let them fail)… they (Obama) ought to draft an amendment to the Constitution banning new GSEs, and set a time limit on those that exist.

George H. Kubeck, “I have no faith in Obama’s arithmetic and his blindness to further our national suicide via economic bankruptcy.” – Thurs. Jan. 21, 2010