Fannie & Freddie's Friends In High Places

[BettorsChat]

Inside Look At How Influential Mortgage Financers Kept Regulations At A Distance
Comments 23
NEW YORK, July 15, 2008

(CBS) It was during the Great Depression that Fannie Mae was founded - in 1938 - with a simple purpose in mind: to give lower and middle income Americans more access to the Great American Dream, owning your own home.

It did it by guaranteeing if a homeowner defaulted on a loan the bank would get paid, CBS News chief investigative correspondent Armen Keteyian reports.

Today Fannie and its smaller sibling, Freddie Mac, hold a pivotal place in the home loan market - one that has grown to include special advantages, such as:

guaranteed lines of credits from the U.S. Treasury

exemption from state and local taxes

limited government oversight

Their privileged status is that of government-sponsored Fortune 500 companies, powered by a vast political machine.

"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."

A few years ago, Fannie was fined nearly $400 million after overstating earnings by $10 billion to maximize bonuses. In 2006, Freddie paid a record $4 million fine for illegal fundraisers.

Both Fannie and Freddy say they've changed their ways. But, more and more, it appears two companies designed to help average Americans have, in fact, been helping themselves.

http://www.cbsnews.com/stories/2008/...r=HOME_4264014

[BettorsChat]

Fannie, Freddie: Taxpayers on the hook
How big a burden taxpayers would bear if Uncle Sam lends a hand to the two mortgage finance giants depends on a lot of hard-to-estimate variables.


By Jeanne Sahadi, CNNMoney.com senior writer
July 16, 2008: 2:21 PM EDT

NEW YORK (CNNMoney.com) -- Saving Fannie Mae and Freddie Mac could cost the U.S. taxpayer. But so could letting the two mortgage giants collapse.

A rescue plan that uses federal dollars would risk increasing the deficit and possibly lowering the U.S. debt rating, making it more expensive for the government to borrow in the future. A decision not to intervene could lead to deep pain in the mortgage market and the parts of the economy tied to it.

The Bush administration is betting the first option is preferable to the second.

A proposal outlined by Treasury Secretary Henry Paulson - if approved by Congress - would offer explicit backing for the two government-sponsored enterprises (GSEs). It has three main elements.

Increase each company's $2.25 billion line of credit with the Treasury by an unlimited amount for the next 18 months.
Let the Treasury have the option of buying an unlimited amount of Fannie and Freddie stock over the next 18 months.
Give the Federal Reserve a consultative role with the GSEs' regulator to assess the companies' capital requirements.
In any rescue, Treasury would likely have to borrow billions of dollars. Exactly how much it would cost taxpayers is impossible to gauge because of several unknowns. Among them are extreme volatility in the companies' stock prices coupled with falling home values and rising mortgage default rates, which affect the value of the GSEs' assets and debt.

"Stuff's happening to the portfolio that we don't know about," said Lee Sheppard, a contributing editor at Tax Analysts. "It's a fluid situation."

And maybe the biggest unknown: just how much the government might spend on Fannie and Freddie.

"Let me stress there are no immediate plans to access either the proposed liquidity or the proposed capital backstop," Paulson told the Senate Banking Committee on Tuesday.

Paulson said he had a reason for not proposing a cap on the new line of credit or on the amount of GSE stock the Treasury could buy.

"By having something that's unspecified, it will increase confidence and decrease the likelihood that [the liquidity and capital backstops] will ever be used," he said. "If you have a bazooka in your pocket and people know it, you probably won't have to take it out."

Without specifying how, Paulson added that if and when the government does commit money, "we have to look carefully at ways to protect the taxpayers."

How the chips may fall
A number of senators on the banking committee - from both parties - characterized Paulson's request as asking lawmakers for a "a blank check," and they were none too keen on the idea, knowing they have to answer to taxpayers.

How lawmakers might alter the Treasury's proposals isn't clear yet. But if the government uses federal dollars to help Fannie and Freddie, the cost to taxpayers could be minimal if the rescue plan works. That is, if government efforts bolster the companies, they likely would be able to pay back what they owe.

"Taxpayers may get it all back with interest," said Rudolph Penner, a former director of the Congressional Budget Office and currently a senior fellow at the Tax Policy Center.

But the taxpayer cost could increase if Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) default on their debt or if their stocks lose value. This year, they've already fallen over 80%, with the bulk of those losses coming this month.

The costliest rescue potentially would be if the government decides to take over the two companies. Both Paulson and President Bush on Tuesday stressed that they want Fannie and Freddie to remain shareholder-owned companies.

But if a takeover does occur - or even if the government just buys a very large equity stake - taxpayers would effectively take over the debt obligations of Fannie and Freddie.

Currently, the two companies own or back $5 trillion in debt. But the ultimate debt burden to taxpayers would likely be only a small percentage of $5 trillion because that debt is backed by assets with value - homes - and because the majority of the loans they own or back are the more stable 30-year fixed-rate mortgages.

At the end of the day, a taxpayer bill is "nothing to sneeze at - I wouldn't shrug it off," Penner said.

But, he added, it's unlikely the debt from a rescue would come close to some of the government's biggest fiscal burdens, such as Medicare. The amount of general revenue that will be required to pay for Medicare in the next three years alone approaches $600 billion, according to the Concord Coalition, a deficit watchdog group. And that's on top of the premiums and Medicare taxes Americans will pay in to the system.

Other possible costs
Long-term, the potential downside of a Fannie-Freddie intervention could increase taxpayer costs in other ways. One of them: It could help drag down the government's top-notch credit rating.

A report issued this spring by the credit rater Standard & Poor's estimates that if the U.S. economy hits a long recession, government help for the GSEs "could create a material fiscal burden to the government that would lead to downward pressure on its rating."

The danger to the credit rating wouldn't necessarily come just from the Treasury stepping in. Rather, it would result from a confluence of events stemming from problems at the GSEs, such as slowing economic growth and a reluctance among foreigners to buy more U.S. debt, said John Chambers, managing director and chairman of S&P's sovereign rating committee.

A downgrade in the U.S. credit rating would make it more expensive for the government to borrow. And that means the cost of public debt - currently $4.5 trillion - would grow more expensive.

Practically speaking, it's unlikely taxpayers would feel an immediate pinch from any unreimbursed costs of a rescue. "Would the taxpayer notice it? Probably not. But it will increase the amount of federal debt," Penner said.

And that will increase pressure on future administrations to either raise taxes or cut spending, or both.

http://money.cnn.com/2008/07/16/news...ney_topstories

[flarendep1]

Another reason to keep government out of the market.

Good post Monte. Wake up people, Joe taxpayer takes it up the ass again.

[atolunch]

Why is no one asking any questions about why Fannie/Freddie are in this mess??

They were not part of the sub prime mess. They only did conforming loans. You needed to have solid credit, and full documentation of income and assets to get one of their loans.

I can't understand why all of the sudden they are being lumped together with the Subprime mess.

Just another example of big business taking advantage of the system, and the little guy gets screwed again. Pathetic

[BackDoorCvr]

Why is no one asking any questions about why Fannie/Freddie are in this mess??

They were not part of the sub prime mess. They only did conforming loans. You needed to have solid credit, and full documentation of income and assets to get one of their loans.

I can't understand why all of the sudden they are being lumped together with the Subprime mess.

Just another example of big business taking advantage of the system, and the little guy gets screwed again. Pathetic

The main mission of Fannie and Freddie is to provide liquidity into the mortgage markets by purchasing loans made by local lenders and repackaging them into bond-market security pools that are sold to investors with the U.S. government's stamp of approval. Unfortunately they got greedy as the housing market heated up and purchased some of these pools for their own portfolio. They made alot of money along with everyone else who were buying up these mortgage backed securities when the housing market was hot. But once the bottom fell out they were stuck with a big pile of crap along with Citi, Bear, and countless others. That why they are in the position they are in now. Atolunch - actually many of the investments they kept in their portfolio instead of reselling were of the sub prime variety and other exotic loans. In the first quarter of 2008 Fannie and Freddie had $1.4 TRILLION of sub prime alt A and other paper in their portfolio.