Fannie and Freddie - Problems Date to 1993

[NoZed Avenger]

I haven't seen much made of this, but catching up on my reading this weekend, I noticed this from the WSJ:

There is more to this ugly situation. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.

* * *

For most people, that freeze-up is the beginning of the financial crisis. But its roots go back to 1993, when Fannie and Freddie began stocking up on subprime and other risky loans while reporting them as prime.

Why Fannie and Freddie did this is still to be determined. But the leading candidate is certainly HUD's affordable housing regulations, which by 2007 required that 55% of all the loans the agencies acquired had to be made to borrowers at or below the median income, with almost half of these required to be low-income borrowers.

http://online.wsj.com/article/SB100...81873427574.html?mod=rss_Today's_Most_Popular


Most of the damage is noted to be in the 2005-2007 period, but it looks like the problem began long before. As long as the real estate market could keep moving upward (or at least avoid any major downturn), the extent of the problem could be hidden.

If this is accurate -- if Freddie and Fannie were routinely misrepresenting these loans -- this looks to the untrained eye like actionable misrepresentation. Is it too late to hold anyone accoutable from the 90s?

 

[Francesca R]

You'd have to find specifics of officers who wrongly (fraudulently) designated lending scores (which is not in that story--it's highly plausible it happened though). You can't exactly punish the shareholders, who were already wiped out in Sept 08.

But Fannie/Freddie were quite intentionally lending to sub-prime borrowers in the 1990s under Clinton-era regulations, which were extended under GW Bush. People in the bond markets did not mind too much because they assumed that agency bonds had an implicit government guarantee (and they assumed correct)

 

[NoZed Avenger]

You'd have to find specifics of officers who wrongly (fraudulently) designated lending scores (which is not in that story--it's highly plausible it happened though). You can't exactly punish the shareholders, who were already wiped out in Sept 08.

Right. I'm talking exclusively about the officers making those representations, though a look at the persons at the top supposedly overseeing this -- to determine how much was encouraged or outright supported/ordered -- would not be amiss.

 

[Francesca R]

Probably hard to do. Many crimes (if they were crimes) may have timed out long ago. There is potential for a lot of fogging of investigation under "I was following policy from higher up" (which reaches as far as both houses of government and the potus) and "It was an honest error".

Conspiracy enthusiasts would likely see any conceivable outcome (short of incarcerating ex presidents) as either a whitewash or an exercise in punishing little-guy scapegoats.

Looks like that WSJ reporter is running with it for now though.

 

[NoZed Avenger]

Probably hard to do. Many crimes (if they were crimes) may have timed out long ago. There is potential for a lot of fogging of investigation under "I was following policy from higher up" (which reaches as far as both houses of government and the potus) and "It was an honest error".

Probably so - though some type of public "calling out" of the offenders would be nice.

Most are probably still in positions of responsibility. Heck, most have probably received multiple raises since then and quite a few retired into private life making oodles of cash elsewhere.

sigh.