The lobbying platform of Fannie Mae and Freddie Mac

The lobbying platform of Fannie Mae and Freddie Mac July 15, 2008

(In the midst of a deep mortgage crisis in this country, you’ve got to wonder whether somebody thought this fending off of regulation would eventually backfire. I personally believe that the worst is yet to come from the credit crunch…)

The two giants in the mortgage business seemed to have prevented regulation through strong lobbying efforts. Here are some names of the politicians involved in networking with Fannie Mae and Freddie Mac.

This is a paper from 2005 that talked about the need and how to reform the two GSEs:

Both Fannie Mae and Freddie Mac have proven exceptionally adept at lobbying Congress to pre­serve and enhance their privileges. Any effort that relies on new regulations will likely perpetuate the risk to the financial market and preserve their dom­inant influence. Indeed, if Armando Falcon, direc­tor of the Office of Federal Housing Enterprise Oversight (OFHEO), had not courageously per­sisted in exposing Fannie Mae’s suspect operations, often in the face of congressional hostility, former Fannie Mae President Franklin Raines would still have his job and Fannie Mae’s shaky finances and fabricated earnings would still be hidden.

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  • jonathanjones02

    Things really revved up in the early 90s with Government Sponsored Enterprises bills. Fannnie Mae and Freddie Mac agressively expanded their power and influence as Congress kept shoveling money. With a government-backed guarantee, this was very dangerous.

    Under the guise of “fair lending”, there was a dramatic lowering of credit standards — and as lenders loosened credit standards, groups like ACORN were happy – as were the politicans and lobbyists who had a cushy job later, and Bush lauded the commitment to “expanding homeownership.” Bush even proposed eliminating down payment requirements altogether! All were in bed with this monster (one so big that in the 80s Reagan was stared down – their lobbying power was beyond even the AARP). The unintended consequences of fell good sentiment, and now taxpayers will eat a huge bill. Anybody remember 2004?

    Feel good sentiment and greed (especially among the banks and former government officials who had a soft place to land like Jamie Gorelick) proved to be a toxic mix, and it is only going to get worse.

  • Fannie and Freddie have the top tier of mortgages. It would be nice if one trick ponies like Sailer would stop being treated like experts. From a Fannie transcript:

    Let me make just a few comments on the credit book characteristics and our key areas of focus. I‘d encourage you to review the credit information in investor summary including a great deal of additional data on Alt-A book. The first point is our overall book is still largely a traditional conforming fixed rate book with low LTV’s, moderate loan sizes, and high FICO scores, and a very low level of investor properties. The second point is our Alt-A book is a very key area of focus for the company. Slide 24 shows that 43% our credit losses in Q1 came for Alt-A book. We expect our Alt-A book will continue to drive an out-sized portion of our overall credit losses. But there are a few important distinguishments between our Alt-A book and the PLS Alt-A securities in the market. For example, slide 32 shows that for the 2005 through 2007 vintages, cumulative default rates at our Alt-A book were approximately one-half the default rates in the overall PLS Alt-A market. Moving onto point three, geography is an important part of the credit story. Part of this is because a high proportion of our Alt-A exposure is in states that saw the most severe price run-ups in recent years. Florida and California represent over 32% of our Alt-A book. The other geographic issue is, is that struggling economies in the upper Midwest, especially Michigan, Ohio, and Indiana have lead to high incidence of default and foreclosures. Michigan alone represented about 3% of our single-family book at the end of the Q1, but accounted for 23% of credit losses during the quarter.

  • jonathanjones02

    Fannie and Freddie have the top tier of mortgages.

    That may be a distinction without a difference. My sister was laid off from Countrywide and I imagine any other former employee would be happy to fill you in. Fannie and Freddie were /are exposured to approximately 3 trillion in mortgages via guarantee portfolios and almost 2 trillion in retained portfolios. There was sub-prime, but we are not sure yet how much.

    There was way too much loose money floating around, and all the big lenders had strong incentive to loosen standards (and with making money on the for a while correct assumption that value will increase that is a recipe for disaster).

  • There is a big difference. That you don’t understand it doesn’t make it trivial.

  • jonathanjones02

    Oh? Do you honestly believe that Fannie Mae and Freddie Mac were not knee-deep in both the sub-prime mess and the easing of credit requirements? Did you miss the big news in April 2007, for example?

  • Kevin

    Truly a bi-partisan achievement and a fine reminder of why voting in this year’s Presidential election is to be an accomplice to a farce.

  • Kevin

    Fannie Mae & Freddie Mac – “They now own or guarantee about $1.4 trillion, or 40%, of all U.S. mortgages, with $168 billion in subprime mortgages.”

    $168 billion. Wow.

  • Morning’s Minion

    First, let’s be careful not to swallow the myths and lies that the crisis was induced by “politically correct” regulation that encouraged banks to lend to poor credit risk individuals. See here:

    We also need to realize that Fannie and Freddie are not the villians here. Paul Krugman showed this pretty clearly:

    The issue with these two entities is that they fund themselves more cheaply than private sector alternatives, because of the implicit government guarantee. Although never formalized, nobody ever believed the government would allow them to fail. And we see that now: while share prices are collapsing, they are still able to roll over debt. Of course, this guarantee benefits consumers as it means lower mortgage rates across the board, and it fosters more stable, longer, safer, fixed-term mortgages (Note that countries without government-backed entities find it hard to do this– in the UK, a “fixed-term” mortgage means 3 years, no more).

    With a situation like this, though, moral hazard is always a risk– with government backing, the managers could take crazy risks, knowing they will be bailed out. But there is a simple solution to moral hazard: regulation. And Fannie and Freddie were tightly regulated with respect to the risks they could take. They were not in the subprime business. And, as Krugman notes, in response to some governance issues, regulators placed restraints on Fannie and Freddie just as house prices were taking off, curbing their ability to lend.

    So why are we in trouble today? Well, the private sector securitization market died, Fannie and Freddie have become even more dominant. Also, the sheer scale of the housing prices means that all classes of loans are being affected, not just high risk ones. Another issue is that its capital is far too low — and that is a result of the political machinations that this post describes.

    So what’s the solution? Well, the key problem is that rewards are privatized and risks are socialized. The government role is non-transparent (witness the administration go around in circles to avoid any mention of socialization– which is what is happening!). The cleanest solution is to make what is implicit explicit. Wipe out shareholders and bring Fannie on Freddie on government books. And keep them very tightly regulated.

  • Where do the silly names originate ?

  • Where do the silly names originate ?

    Hehehe… good question!

  • Kevin

    This crisis was caused by numerous factors; not the least of which, is that sophisticated fiancial products were designed that out-strip the capabilities of regulators and the understanding of the enginers that created them. After the tech-bubble burst and 9-11 the Fed was anxious to pull us out of a recession by encouraging a rea;-estate build-out based on cheap credit. The feel-good ruse of overcoming “racist” bankers and real estate agents gave it it’s impetus, but, you don’t have a disaster of this scale wihtout many factors.

    Still, it’s comforting to note your undying loyalty to the Party line. Send Charles Schumer a check. Everything will be fine.

  • Morning’s Minion

    Federal National Mortgage Association = FNMA = “Fannie Mae”

    Federal Home Loan Mortgage Corporation = FHLMC = “Freddie Mac”

  • Oh 🙂 Interesting. The cuteness DOES mitigate the ‘WE ARE ALL DOOMED !!!” sentiment, does it not ? Heh.

    Our political leaders really are scum. The only question is whether incompetence outweighs malice or vice versa.

    Speaking of incompetence cannot be done without mentioning Bush. I used to be moved when Bush shed a tear over fallen soldiers. Now I think, “Don’t cry you *#$!, you sent ’em there. He/she would still be alive if it weren’t for you, so *@*! cut it out.”

  • jonathanjones02

    If any organization has a government guarantee, it should not be anywhere near the traded market. If you read the Vanity Fair article about the fall of Bear Stearns, its frightening to realize that it is possible to make a destructive run on a bank based on little more than speculation:

    Second, it is becoming extremely difficult to deny the huge role that the continuous(!) loosening of credit standards since the mid-90s played in this crisis. And anyone who missed all the (more than a decade long) rhetoric about “expanding access” and so on simply wasn’t paying attention.

  • FHLMC = “Freddie Mac”

    Wow… not even close! The Fannie Mae is at least clearer 🙂

  • Greg

    I would disagree that Freddie and Fannie are not “villains”. Give me a break. Of course they are otherwise the management at BSC is innocent as well. Management is totally inept and deserve scorn for running these institutions into the ground. Morning’s Minion is wrong in saying that management took risks because they knew the gov’t would bail them out. They leveraged the companies to the hilt so they could meet the Street’s quarterly estimates and get their fat bonuses. That’s why they took such risks. Everybody knows the mgmt of these two companies were extremely well compensated. The same thing happens at every Wall Street firm — they leverage to the hilt to get fat bonuses.

    And if you want the Government to regulate the hell out of these two companies than they should be barred from being public companies.

  • I miss the days of blowjobs in the White House. At least those didn’t cost us.

  • RR

    The problem is that they weren’t completed nationalized. When taxpayer money is wasted on a government program, nobody blinks an eye. But when it’s semi-private like Freddie and Fannie, people cry foul when they’re bailed out.
    If you want to prevent moral hazard, completely privatize them. If you want to prevent public criticism, completely nationalize them.