Fannie & Freddie's Friends In High Places

[sabra]

Source: CBS News

Inside Look At How Influential Mortgage Financers Kept Regulations At A Distance

<snip>

"Fannie and Freddie have probably had more influence than any set of institutions in modern times," said former Rep. James Leach.

As the former chairman of the House Financial Services Committee, Leach tried for years to hold Fannie and Freddie to tougher financial standards.

"You'd have people in Congress that would make it very clear that they wanted nothing to touch Fannie and Freddie," Leach said.

CBS News has learned Fannie and Freddie now boast nearly 150 lobbyists - spending more than $5 million this year alone.

In addition, the mortgage giants have doled out about $2 million more in campaign donations in the last four years to key member of Congress.

"The view was always held that if they lost even a small battle, it might slide into something more meaningful," said former Rep. Richard H. Baker, R-La. "So every threat was taken seriously."



Read more: http://www.cbsnews.com/stories/2008/07/15/cbsnews_investigates/main4264014.shtml

[Warpy]

1. What keeps getting lost is what Fannie and Freddie did for US

They're the institutions that made the fixed 15 and 30 year mortgages possible, meaning that a lot more of us qualified for home ownership and could actually foresee a day when the place would be paid off.

Before they were founded in the 30s, mortgages were short affairs with low, interest only payments for a couple of years with balloon payments covering the principal later. People simply refinanced every few years before the big payments kicked in. The banks collected all the bloated interest payments and the homeowner owned nothing.

Allowing the banks to sell mortgages to Fannie and Freddie gave them the flexibility to write more and longer mortgages. They knew they'd get paid up front and the mortgage holding companies would collect the balance of the interest. For 70 years, even after privatization in 1968, this worked just fine. Everybody made money but the homeowner, and even he built equity.

The problem is that we had a real estate bubble and deregulation brought out the thieves. These thieves extended loans that never should have been extended and now the mortgage holding companies are holding a ton of bad paper and their stockholders are upset. The thieves are happily counting the money they've run off with.

Abandoning these two companies means abandoning the path to home ownership that so many of us have taken for granted for so long. Although nobody likes bailing out rich stockholders, they're not the main beneficiaries of these companies.

We are.

[WriteDown]

3. Exactly, more on origins

"During the Great Depression, as borrowers defaulted on mortgages en masse and banks found themselves strapped for cash, President Franklin D. Roosevelt and Congress created Fannie Mae in 1938 in order to buy mortgages from lenders, freeing up capital that could go to other borrowers. Although Fannie Mae began with just $1 billion in purchasing power, the agency helped usher in a new generation of American home ownership, paving the way for banks to loan money to low- and middle-income buyers who otherwise might not have been considered creditworthy. Fannie Mae grew so large over the years that in 1968, with the pressures of the Vietnam War straining the national budget, President Lyndon Johnson took Fannie Mae's debt portfolio off the government balance sheet; Fannie Mae was converted into a publicly traded company owned by investors. Two years later, Freddie Mac was launched, primarily to keep Fannie Mae from functioning as a monopoly. It went public in 1989. "

*edited to form thought.

[Trillo]

4. The longer the payback time

the higher real-estate prices can go and still be perceived as 'affordable'. There was a time not long ago when there was some buzz about moving to 60-year mortgages, this would effectively reduce monthly payments for equivalently priced homes versus 30-year loans.

I'm not certain that a house and small plot of land should cost so much that one must work for an entire lifetime to pay for it.

[WriteDown]

5. A lot of European countries...

have 100 year mortgages, but land ownership is much different there. It is extremely difficult to achieve and usually the same family lives in the property for several generations.

[Trillo]

9. Historically, Americans also used to live 3 or 4 generations per house.

That seemed to end culturally sometime after the Industrial Revolution and the Robber Baron era, as far as I've been able to discern. But they didn't have 100-year loans. In the early days, people could just 'stake a claim' to land the gov was giving away. "Go west".

I'd hate to see the European 100-year mortgage repeat here, incomes are already so polarized, that would just bury the poorer classes under even more debt.

[Warpy]

6. Not quite true

You're ignoring other factors: the pent up demand among boomers who were shut out of the market by double digit interest rates for over a decade; the deregulation of the financial industry that brought in thieves writing liar loans and preventing the marketplace from correcting (this is the biggest factor in the bubble--there is nothing to reduce an unrealistic housing price more than having people refuse to buy because they know they can't afford it); and deregulation that brought back the Depression era interest only mortgage scam. People were conned into taking on loans they had no hope of repaying on the theory that the housing would continue to appreciate enough to give them adequate "equity" to refinance in 3 years to a fixed rate mortgage.

Following the simplistic libertarian line that a government supported corporation caused all housing inflation won't get you far here.

[WriteDown]

7. You make some good points...

But you fail to mention the big factor or people who bought properties(or even worse, rental properties) that they knew they had no hope of affording. There are plenty of them out there who saw dollar signs when they thought they'd be able to flip a house for quick cash.

[Trillo]

8. I have no idea if it's a "libertarian idea" or not.

Simply my thoughts for some 30 years, but note that I didn't say, "a government supported corporation caused all housing inflation", that was your false interpretation when combined with your thoughts written in your prior post.

I can see a argument that all corporations are majority owned by the same uber-wealthy families, and consequently tend to act as one big corporation while appearing to have many different names that generally appear non-related.

The longer the payback time, the higher the ceiling of perceived affordability, because of the lower monthly payment for any given amount of money or loan. Sometimes smart people have this very common tendency to over rationalize something that's actually quite simple.

Some of your other points are quite true.

[Trillo]

2. By Paul Krugman

Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

In that case, however, how did they end up in trouble?

Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines.

Also, Fannie and Freddie, while tightly regulated in terms of their lending, haven't been required to put up enough capital -- that is, money raised by selling stock rather than borrowing. This means that even a small decline in the value of their assets can leave them underwater, owing more than they own.

http://www.alternet.org/workplace/91458/?ses=a5e77762074664cf8df451de05ca0f82

This appears as a market problem, not a lack-of-regulation problem.