Fannie and Freddie: Worse Than We Thought

From Edward Pinto at the American

Fannie and Freddie entered into agreements accepting responsibility for misleading conduct discovered by the SEC, including:

1.    As of June 30, 2008, Freddie had $244 billion in subprime loans, while investors were told it had only $6 billion in subprime exposure.

a.    Freddie knew it was inadequately compensated for the risks it was taking. For example, it was taking on “subprime-like loans to help achieve [its] HUD goals” that were similar to private fixed-rate subprime, but the latter typically received “returns five to six times as great,” says the complaint.

b.    Freddie had concerns about risk layering on loans with an LTV >90% and a FICO <680. (Yet, in Freddie’s disclosures it only noted risk layering concerns on loans with an LTV >90% and a FICO <620. This is a major difference since only 10 percent of its loans fell into the LTV >90% and a FICO <620 category, while nearly half fell into the LTV >90% and a FICO <680 one.)

2.    As of June 30, 2008, Fannie had $641 billion in Alt-A loans (23 percent of its single-family loan guaranty portfolio), while investors were told it had less than half that amount ($306 billion, or 11 percent of its single-family loan guaranty portfolio).

3.    The SEC complaint disclosed that Freddie had a coding system to track “subprime,” “other-wise subprime,” and “subprime-like” loans in its loan guaranty portfolio even as it denied having any significant subprime exposure.

These suits are important because they demonstrate that Fannie and Freddie “told the world their subprime exposure was substantially smaller than it really was … and mislead the market about the amount of risk on the companies’ books,” said Robert Khuzami, director of the SEC’s Enforcement Division.

  • Noah

    Your basic incestual law suit as the SEC is spending taxpayer money to sue Freddie and Fannie who in turn will spend taxpayer money to defend themselves.

  • Matt

    The SEC spends our money to sue Fannie and Freddie. Who will spend our money to defend themselves. And if they lose, they'll spend our money to pay the judgment. Whatever happens, the American taxpayer is poorer for it, and no bureaucrat will ever face personal consequences, the way they would if they did the EXACT SAME THING

  • Matt

    ...as officers of a private corporation, post-Sarbanes-Oxley.

  • Anon

    Somehow I think that the Fannie & Freddie disclosures were drafted by Senate staffers with Boston accents.

  • Ted Rado

    More ewvidence to prove that the government should stay out of other lines of work.

    Before USG intervention, bankers were careful whom they loaned money to. One needed a substantial down payment, a steady job, and good credit references. The system worked fine. No banker wants unnecessary risk. Seldom did anyone get a loan that would get them into trouble.

    The USG, in their eternal wisdom, decided that this was being nasty to minorities, the poor, etc. and promoted the idea that everyone was entitled to a house they could not afford. The innocents that bit and got flaky mortgages have now lost their homes, their credit, and whatever money they paid in. Thus, the USG programs that were supposed to help the poor destroyed them. Someone should be shot!

  • jdt

    So is somebody going to jail for this?

  • caseyboy

    Not worse than I thought. The question is will it get worse. And yes, someone should go to jail. As noted above there isn't a way to extract a financial penalty from the entities themselves as it only serves to increase their need for federal funds. This one should be laid on the lap of Barny Frank, who fought anyone trying to reform these GSA's.

    Congressman Izza is putting together a nice little case regarding Countrywide and it's friends in high places.

  • Anon

    jdt: yeah, probably some scapegoat(s) who did exactly what Congress told them to do.

    Hint: it won't be Barney Frank.

    With elections coming up, you can be sure the politicos will shovel the blame for this (and everything else) onto "the 1%."

  • Smock Puppet, Frequent Fantasy Flyer

    **GASP**

    Government bureaucrats lied??

    I am appalled! Flabbergasted!! Bereft of words, at such an event!! Unable to come up with nary a lone, solitary word to express my voluminous dismay at the very idea that a wonderful and almost perfect individual who would take on the mantle of government power would prevaricate!?!?!?

    /sarcasm overload-meter restore-operation

  • Smock Puppet, Frequent Fantasy Flyer

    >>> So is somebody going to jail for this?

    Ah, does the Pope defecate in the Vatican's library?

  • Craig

    People often say you can't judge a president until a number of years have passed after he leaves office. The housing situation is case and point. It was caused by regulations promulgated in the Clinton years, but it didn't blow up until 8 years after he left office. It looks like it will take some more time for some people to lay the blame where it properly belongs.

  • John Cheek

    I believe that these are CIVIL suits so far;No one is going to jail!!

  • caseyboy

    John Cheek, falsifying SEC filings is a Federal crime.

  • Sebastian

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  • Mark

    "Ah, does the Pope defecate in the Vatican’s library?"

    Only if the Pope is an OWS.

    "...sealed boxes of 200 Grizzlies in Thermatron packaging."

    Can't wait to get myself some Grizzlies in Thermatron packaging. But how do they breathe?

  • ParatrooperJJ

    The worst part is that they are still pushing the bad credit loans. The smaller banks that stayed out of the subprime business are getting pressured had to make these risky loans...

  • Mark

    @Paratrooper: You ain't kidding.

    FHA loan:
    Basically 2 years with job. Bankruptcy 2 years old, foreclose 3 years, 620 FICO.

    Loans must be 3% but you can get a second to pay for 2% of that, and with up to 3% cash back at closing, you can actually get into the negative downpay territory, still!