Tuesday, September 9, 2008

Fannie, Freddie, Foreclosures, and the Federal Funds

Freddie Mac and Fannie Mae are largely invisible entities to the general public. They could even be mistaken as a Mom and Pop grocery store or male and female dolls sold as a couple. But these two highly influential institutions own or guarantee about half of the US mortgage market, with combined holdings amounting to $5.3 trillion. The sub-prime mortgage crisis that wreaks havoc on the US economy and affects the global financial system, hastened the decline of the prevailing economic structure, and exposed the malady of unscrupulous practices and malignancy of loosely organized models and methods. The untold misery and ruined lives of millions of Americans as a result of this crisis, rooted in the deception and greed that accompanied the rise of sub-prime mortgage lending, is the tragedy that will see no alleviation nor bailout.

Traditionally, banks financed their own mortgage lending and dealt directly with the home buyer, using their deposit funds for the purpose. The concern of the bank in safeguarding depositor funds was evident in its meticulous home evaluation and income capacity checks on the borrower. This process limited the amount of funds for home mortgage lending and was considered a slow process that would not meet demand. A new model was adopted where banks sold mortgages to bond markets and used the funds generated to grant mortgage loans without taking from their customer deposits. This increased the volume of homes sold that required the creation of 3 layers independent of the banks; the home appraisers, mortgage brokers (both dealing with the bank and the home buyer), and the rating agencies ( those who evaluate a bank's operations and provide reports to the mortgage bond market).

Freddie Mac (a nickname for the acronym FHLMC or Federal Home Loan Mortgage Corporation) and Fannie Mae (a nickname for for the acronym FNMA or Federal National Mortgage Association) are both GSE's (Government sponsored enterprises) but both privately owned and run entities authorized to make loans and loan guarantees on behalf of the Federal Government. Freddie and Fannie buy and pool these mortgages from the bond markets and sells them in the open market worldwide, as mortgage backed securities. Because of the millions of homes involved, the possibility of defaults from a home buyer or a bank can easily be covered by the discounted rate at which Freddie and Fannie pay for the mortgages and the spread they add when sold in the open market. All these layers above the home buyer are profit centers which are added on to the cost of the mortgage the home buyer will pay for the duration of the loan.

Fannie and Freddie thus protected banks from default losses by guaranteeing the mortgages they sold to the bond markets which they possessed, provided, the mortgages followed their guidelines. But many of these loans, a little more than half of $12 trillion were outside these guidelines due to the fast and fat profit potential of selling more in the shortest possible time. Connivance between the home appraiser, mortgage brokers, bank personnel and other parties enticed unsuspecting home buyers with deceptive schemes to sign up for a home - taking advantage of their desire for a better life, and pounding in their heads the fulfillment of the American Dream - owning a home. It would provide quality living and show them to be upwardly mobile, without stating that they will suffer the fate of Icarus.

Home buyers were offered a low fixed interest rate for two years, to lure them into accepting the mortgage offered. They were told that after 2 years, interest will be on market rates which may be lower or a little higher, but that they had the first 2 years to increase their incomes. These were actually "balloon" mortgages where the interest rates were deliberately lowered at the outset and the difference added to prevailing rates plus additional interest on year 3. The interest rates after 2 years were at times more than double while incomes remained flat and cost of living rose. Last year, 1.7 million families lost their homes and up to 2 million more are expected to be foreclosed in 2008. While some home buyers may be part of the conspiracy to defraud, these are minimal at best. Misrepresentation and deception, in the type of mortgage offered, the re-financing promise before the 2 years expire, value of the property, and even the reporting of the buyers income to the bank, were the standard practice to sell more and pocket huge commissions.

There is a glut of 4 million properties on top of continuing foreclosures that brought home prices down. This has resulted in losses to the banks for loans without the GSE guarantee; losses to Freddie and Fannie, who hold mortgages whose values have crashed; and pension funds, foreign banks, and many other small investors worldwide who included these mortgages in their portfolios. The crisis has affected the global financial markets and has created a credit crunch that suffocates the flow of funds.

On September 7, The Federal government announced a conservatorship of Freddie and Fannie, a huge takeover of both financial institutions with the Treasury department contracting billions of shares paying at the rate of 10% a year. The total amount could go into hundreds of billions of dollars. Analysts praised the move after the stock market rose the next day which is a profitable event for stock brokers. But this is a knee jerk market reaction as evidenced by the sudden tapering and decline later in the same day. It is possible that bond markets holding these mortgages rushed in to buy, hoping others would follow - then resold when the prices were up.

The takeover and bailout of Freddie and Fannie will save their stockholders and some of their investors who purchased their repackaged mortgages. Federal funds from taxpayers have been used to rescue the big corporations, but it will not be used to save the homes of these same taxpayers. The ambiguity of the Federal government's relationship with GSE's raises many ethical questions which are dismissed as mere conspiracy theories. Yet the taxpayers will be required to shoulder the cost of this bailout without clear indications of how much and how long - just like the balloon interest rates of the mortgages.

The automotive and Airline industries also suffered heavy losses, shouldn't they be entitled to a bailout too being big taxpayers? Has the United States become the bailout capital of the world for its decrepit business models, loosely structured operating systems, cross-eyed management vision, and unscrupulous business practices? Not if you are a home owner, a mere citizen who doesn't have the ear of the powers that be. One who cannot make significant contributions to their political coffers, and who cannot influence a bloc of voters whether these are bought, coerced, or convinced. Home owners, or former home owners, who need to wake up from this worst nightmare of their lives after being led to a mirage of their American Dream, will be voiceless, powerless individuals who have to bear the consequence of being duped for their ignorance.

Their loss is beyond money. It encompasses self-respect, dignity, self-worth, and crushes their spirit with a devastating blow to their belief in America and what it stands for. Their thoughts will be joined by billions of people all over the world, where no one understands what America really stands for.



Anonymous said...

I nearly bought into the housing market myself back when the going was good, but backed out after being a little *too* easily approved for a loan since it seemed to me that, at some point down the road, mortgage payments might become unpleasantly high. I didn't realize at the time that the practices of that bank were helping to sustain a 'housing bubble' which, upon bursting, would have an individual and international impact.
In retrospect, only the wealthiest, or those best situated to weather such a 'burst', had any accurate notion of this outcome, and pre-emptively took measures to be ready when it happened. This bailout is one manifestation of that, and whether this is conspiratorial or no, no one can question the ethics here - or rather lack thereof.

Zhu said...

You're right about these two being invisible, I had never heard of them just a few months ago.

The way the US economy is slowly collapsing is strange and disturbing...

Have you seen a movie called "Maxed Out"? It's very interesting... on the subject.

Artbeat said...

As usual well researched and informative. I think I have commented on the sub prime debacle on a previous post of yours.

My partner is a financial trader and explained the situation to me about 3 years ago.

I am astounded at the accuracy of his warnings of a pending catastrophe in the financial markets that would have world wide repercussions.

The architects of these schemes were motivated by greed and walked away millions in bonuses leaving the man in the street to bear the brunt of their ill conceived plotting.

Now the fed is demanding that the very people who have suffered catastrophic losses support these two monoliths.

The once esteemed Alan Greenspan who on many occasions was questioned during federal testimony about Freddie and Fannie now pleads ignorance.

Surly those responsible should at least be brought to book and made to repay the millions they were paid during the supposed good times.

durano lawayan a.k.a. brad spit said...

Hi "r",

The most affected segments of are the Hispanics, Blacks, Blue collar workers, and educated middle class Americans. That is the data available. On hindsight, aren't these groups the traditional Democrat voters? :-) Just a question, not a conspiracy theory.

What I cannot comprehend is that a lot of these people were educated, and yet were lured into a situation that impoverished them and ruined their lives and future.

Prudence in seizing what appears to be a huge opportunity is vital. You had that in you and were smart enough to analyze that an easy approval was suspect. I follow a principle which tells me to look closer a second time at things I was most desirous of the first time, and it has guided me well.

A lot of the scams in this world are those that cater to earthly desires, and people are blinded by the easy satisfaction of these cravings as well as the opportunity to acquire it Now and at a lower price. They forsake reality and embrace the fulfillment of a "dream" to mortgage the future for the present with disastrous results.

But this is also where the big boys come together and where the hypocrisy is evident. Republicans aver that there should be less government, but when one of their own is in trouble, they get bailed out with taxpayers money. And those poor taxpayer victims will have to pay on top of their already heavy losses.

Ethics has long been replaced by what is legally acceptable and what will be for the greater good. Greater good of course refers to their friends and political sponsors, they can always talk religion to the masses since those who suffer will inherit the kingdom of God. :-) --Durano, done!

durano lawayan a.k.a. brad spit said...

HI Zhu,

The decline of the US economy is truly disturbing, and looking at foreign policy, the rise in the number of wars they are facing is equally disturbing.

The military/industrial complex that former President Eisenhower warned against is well placed and deeply entrenched. It is moving the country into a dangerous direction which it believes it can triumphantly accomplish because of their self-proclaimed superiority. The real situation is uncertain but stirring up a hornet's nest is not the way to find out, especially if their intelligence services have had a lot of failed assessments and even false assertions that led to several failed endeavors.

I haven't seen the movie, or any movie for that matter since I was assigned to this devastated Asian country, but I will try to get a pirated DVD copy, many of which are available here, to watch it. Thanks for the visit. :-) --Durano, done!

durano lawayan a.k.a. brad spit said...

Hi Caroline,

I believe you have posted a comment on a similar subject involving the sub-prime mortgage market.

Your partner has a critical eye for assessing investment structures and must be a sought after expert on the subject. But I often wonder why some people seem to miss common sense when tempted to commit their savings to such schemes. There are so-called investment scams where they promise more than 30 to 40% return paid monthly to the investor. What sort of industry or productive activity can earn so much? Clearly a scam, but there are those who bite and throw common sense to the gutter. I suppose greed is part of it.

I agree that those responsible should be held accountable and be made to cough up the millions in profits that they took. If and when that would happen remains a question... and the answer is blowing in the wind.:-) --Durano, done!

Jenaisle said...

This is a very informative post for everyone because everyone needs housing and usually house loans are grabbed by excitedly by unsuspecting people.

Thanks for that great insight. Cheers.

Kim said...

it's a dreadful shame Durano..
it seems the average householder continues to be ripped off...the same has happened over here...

durano lawayan a.k.a. brad spit said...

HI Jenaisle,

Care must be exercised when purchasing a major ticket item such as a home. Prudence too.

Location is one thing, same with appearance. But the most critical are the roofing, piping, and levelling.

However, before making the final purchase, examine the terms and conditions of the mortgage. Make computations and evaluate if it's affordable, now and in the future.

Thanks for the visit. :-) --Durano, done!

durano lawayan a.k.a. brad spit said...

Hello Kim,

That's right Kim, it's always the hardworking income earner who bears the brunt of scams and rip-offs.

I know it is happening in the UK too, and they have applied the same practices as those of their US counterparts.

On another note...how's the arm? Has it healed already? Take care and have a nice weekend. :-) --Durano, done!

Anonymous said...

Hello !.
You re, I guess , probably very interested to know how one can make real money .
There is no need to invest much at first. You may start earning with as small sum of money as 20-100 dollars.

AimTrust is what you haven`t ever dreamt of such a chance to become rich
AimTrust incorporates an offshore structure with advanced asset management technologies in production and delivery of pipes for oil and gas.

Its head office is in Panama with offices around the world.
Do you want to become really rich in short time?
That`s your chance That`s what you really need!

I`m happy and lucky, I started to get income with the help of this company,
and I invite you to do the same. If it gets down to choose a correct companion utilizes your money in a right way - that`s it!.
I earn US$2,000 per day, and my first investment was 500 dollars only!
It`s easy to start , just click this link http://zagyzago.the-best-free-web-hosting.com/fegufi.html
and go! Let`s take this option together to feel the smell of real money

Anonymous said...

You may probably be very curious to know how one can manage to receive high yields on investments.
There is no need to invest much at first.
You may begin to get income with a sum that usually is spent
on daily food, that's 20-100 dollars.
I have been participating in one company's work for several years,
and I'm ready to share my secrets at my blog.

Please visit blog and send me private message to get the info.

P.S. I make 1000-2000 per day now.

[url=http://theblogmoney.com] Online investment blog[/url]

Anonymous said...

You may probably be very curious to know how one can manage to receive high yields on investments.
There is no need to invest much at first.
You may begin to get income with a sum that usually goes
for daily food, that's 20-100 dollars.
I have been participating in one company's work for several years,
and I'm ready to let you know my secrets at my blog.

Please visit blog and send me private message to get the info.

P.S. I earn 1000-2000 per daily now.

http://theinvestblog.com [url=http://theinvestblog.com]Online Investment Blog[/url]

Anonymous said...

Glad to materialize here. Good day or night everybody!

Sure, you’ve heard about me, because my fame is running in front of me,
my parents call me James F. Collins.
Generally I’m a venturesome analyst. all my life I’m carried away by online-casino and poker.
Not long time ago I started my own blog, where I describe my virtual adventures.
Probably, it will be interesting for you to utilize special software facilitating winnings .
Please visit my diary. http://allbestcasino.com I’ll be interested on your opinion..

Anonymous said...

Hi all

found this site just randomly..and as i love fashion and all the things that comes with it thought it would b a good idea to join...hope ur all friendly..:D

Look forward to 'meeting' you all, Dennis from [url=http://www.myonlinepayday.com]Personal Loans[/url] website!

Thomas said...

It can't work in actual fact, that's what I think.
Duncan real estate | retro lingerie | philly cheese steak recipe

Anonymous said...

buy ativan ativan nursing implications - side effects ativan xanax