House of Cronies: Is Freddie Mac Incompetent or Corrupt?

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http://www.theatlantic.com/business/archive/2011/10/house-of-cronies-is-freddie-mac-incompetent-or-corrupt/246039/

Three years since the collapse of Lehman Brothers, we're not any closer to purging the rot at the heart of our financial-regulatory complex. Last December, Bank of America agreed to pay $1.35 billion to Freddie Mac for nearly 800,000 faulty mortgage loans that Freddie had bought from Countrywide, which has since been acquired by BofA. The full story, as told by the inspector general of the Federal Housing Finance Agency (i.e.: FHFA, Freddie's regulator), is a classic tale of institutional corruption.

The background is that Countrywide, then the country's largest originator of exotic mortgages, sold 787,000 loans to Freddie Mac. Under the terms of the sale, if it later turned out that some of those loans were defective, Freddie could sell them back to Countrywide for their full face value. Many of those loans were indeed defective due to inflated appraisals, fictional stated incomes, or other reasons.

By 2010, many of these mortgages had gone into foreclosure. This gave Freddie the option to sell the defective loans back to Bank of America, which then owned Countrywide. But proving that hundreds of thousands of loans were defective was a lot of work. Freddie only reviewed some of them, relying on a poor methodology that dramatically underestimated the number of defective mortgages. This increased losses to Freddie Mac -- losses that will eventually fall to Treasury and taxpayers.

[no_hypocrisy]

1. Both?

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2. indeed. but let's face it -- both BP & the wall street melt down

have pointed out -- we have an epidemic of incompetence.

maybe we could say cronyism increases the power of our new found incompetence.

[DCKit]

3. OK, but it's clear that regulation strangles business, so what choice do we have?

:sarcasm:

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4. ...

:spray: good one.