Thread: About Time: Feds to Sue Banks for Falsely Pumping Mortgages

All you need to know is that mortgage underwriting relies upon DTI- debt-to-income ratios. Once upon a time, a conforming fannie mae/freddie mac mortgage loan used ratios of 28/36. 28% of GROSS income for principle, interest, taxes and insurance and 36% gross income for PITI + all other mortgage, installment and revolving debt.

Those values subsequently and insidiously inflated to as high as the mid forties for the back-end ratio over time.

Non-conforming loans? Forget it! Up to 60% on the back-end.

Now...consider, who pays their bills from gross income? I don't know about you but my NET monthly income has been as little as 62% of my gross. Never more than 80%. Huge difference and clearly impacts my ability to re-pay an obligation.

O.k. That's half of the ratio. INCOME. Now let's consider debt. The lenders only evaluated existing mortgage, installment and revolving debt as impediments to repayment. How about the electric bill, cable bill, sewage bill, water bill, gas heat bill, fuel bill, baby's shoes, etc? All, btw, paid from NET (not gross) income.

Nevermind the lenders and appraisers being in cahoots to drive property values up for refinances or down to qualify new buyers. Nevermind Zero-down purchases or 125% LTV (loan-to-value) refinances.

The underwriter, meanwhile, was thoroughly squeezed from every direction to get those approvals rubberstamped. Given that bottleneck, don't be surprised if more than a few leveraged the bottleneck to personal advantage. I know. I've seen it first-hand.

This was a long-looming recipe for disaster. It finally struck beginning in 2006 and hasn't let up.

Originally Posted by Parihaka

They were simply using previously illegal means to dispose of sub-prime mortgages, brought about by Freddy and Fanny. You've got to stop thinking of the market as a sentient being: it's just a puddle of water that will flow in any direction you let or make it. This failure lies squarely at the feet of the politicians from both sides who introduced breeches in some places and dams in others.

If you are talking about the deregulation in 99 I agree but still don't understand what fannie and freddie had to do with investment banks giving bad loans out then packaging them into securities rated triple a by s&P [who ironically have begone raiting sup prime mortgages triple a again] and selling them to private investors.

Originally Posted by Roosveltrepub

The investment banks who were the ones driving subprime were not required to give any preference.

Not so. Freddie Mac and Fannie Mae were the largest single investors in subprime mortgage-backed securities. During the height of the housing bubble, almost 40 percent of newly issued private-label subprime securities were purchased by Fannie Mae and Freddie Mac.

In 2001, HUD increased the low-to moderate-income goals significantly, raising them from 42 to 50 percent of purchases. HUD’s intention in this case was for the GSEs to at least match the market. Fannie Mae, for instance, increased its purchases of low- to moderate-income loans from 45percent in 1996 to 57 percent in 2006. Not only that, but they both also purchased the majority of mortgages from just 10 lenders, at the top of that list was Countrywide. Imagine that as to what kind of company they were keeping.

After Freddie and Fannie's accounting scandals in 2003 and 2004, both Fannie and Freddie were facing the possibility of substantial new regulation. Senate Banking Committee hearings on the GSEs between 2003 and 2009, many Democratic members of the Committee made very clear their belief that Fannie and Freddie were not currently meeting the needs of low-income borrowers, and that if Fannie and Freddie expected to continue receiving public benefits, it was in their best interest to comply with these demands.

With such a huge involvement with sub-prime mortgages, Fannie Mae and Freddie Mac would have required a massive bailout anyway, but their significant involvement in subprime made that bailout substantially larger.

Originally Posted by Julie

Not so. Freddie Mac and Fannie Mae were the largest single investors in subprime mortgage-backed securities. During the height of the housing bubble, almost 40 percent of newly issued private-label subprime securities were purchased by Fannie Mae and Freddie Mac.

In 2001, HUD increased the low-to moderate-income goals significantly, raising them from 42 to 50 percent of purchases. HUD’s intention in this case was for the GSEs to at least match the market. Fannie Mae, for instance, increased its purchases of low- to moderate-income loans from 45percent in 1996 to 57 percent in 2006. Not only that, but they both also purchased the majority of mortgages from just 10 lenders, at the top of that list was Countrywide. Imagine that as to what kind of company they were keeping.

After Freddie and Fannie's accounting scandals in 2003 and 2004, both Fannie and Freddie were facing the possibility of substantial new regulation. Senate Banking Committee hearings on the GSEs between 2003 and 2009, many Democratic members of the Committee made very clear their belief that Fannie and Freddie were not currently meeting the needs of low-income borrowers, and that if Fannie and Freddie expected to continue receiving public benefits, it was in their best interest to comply with these demands.

With such a huge involvement with sub-prime mortgages, Fannie Mae and Freddie Mac would have required a massive bailout anyway, but their significant involvement in subprime made that bailout substantially larger.

and yet by 2006 they held 20 percent and you are also ignoring the fact the sub primes they held had 1/3 the failure rate of the Investment banks.

Originally Posted by Roosveltrepub

and yet by 2006 they held 20 percent and you are also ignoring the fact the sub primes they held had 1/3 the failure rate of the Investment banks.

The government-sponsored enterprises were THE largest single investor in subprime privatelabel mortgage-backed securities. During the height of the housing bubble, almost 40 percent of newly issued private-label subprime securities were purchased by Fannie Mae and Freddie Mac.

In 2005, (at the peak of the market) one out of every four loans purchased by Fannie Mae was from Countrywide. One of out every 10 for Freddie Mac was also from Countrywide. According to the Fannie Mae Foundation, almost half of Countrywide’s production was sold to Fannie Mae. Additionally, Countrywide used Ginnie Mae to guarantee another third of their production. Close to 90 percent of Countrywide’s loan originations were bought or guaranteed by some arm of the federal government. Countrywide could have only existed and prospered in an atmosphere of government guarantees.

Fannie and Freddie provided oxygen to the sub-prime mortage industry.

Second in overall sales to the GSEs was Wells Fargo, the nation’s seventh-largest subprime lender. Their third-largest partner, the now failed Washington Mutual (WaMu), was the nation’s ninth-largest subprime lender. The rest of the GSEs’ top sellers include such subprime lenders as Chase Home Finance, CitiMortgage, and Lehman Brothers.

Originally Posted by Julie

The government-sponsored enterprises were THE largest single investor in subprime privatelabel mortgage-backed securities. During the height of the housing bubble, almost 40 percent of newly issued private-label subprime securities were purchased by Fannie Mae and Freddie Mac.

In 2005, (at the peak of the market) one out of every four loans purchased by Fannie Mae was from Countrywide. One of out every 10 for Freddie Mac was also from Countrywide. According to the Fannie Mae Foundation, almost half of Countrywide’s production was sold to Fannie Mae. Additionally, Countrywide used Ginnie Mae to guarantee another third of their production. Close to 90 percent of Countrywide’s loan originations were bought or guaranteed by some arm of the federal government. Countrywide could have only existed and prospered in an atmosphere of government guarantees.

Fannie and Freddie provided oxygen to the sub-prime mortage industry.

Second in overall sales to the GSEs was Wells Fargo, the nation’s seventh-largest subprime lender. Their third-largest partner, the now failed Washington Mutual (WaMu), was the nation’s ninth-largest subprime lender. The rest of the GSEs’ top sellers include such subprime lenders as Chase Home Finance, CitiMortgage, and Lehman Brothers.

in 2006 it was 20 percent astralis already posted the source. You keep saying earlier dates but the crisis wasnt in 2003 or 4 or 5 it was 2007. You keep repeating facts I am not disputing but you are not sourcing. Are you sure you sure you are not conflating they financed 40 percent of all mortgages with they financed 40 percent of subprimes?

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:
• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.



• Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.



• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics


Read more: Private sector loans, not Fannie or Freddie, triggered crisis | McClatchy critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble


Read more: Private sector loans, not Fannie or Freddie, triggered crisis | McClatchy

And furthermore:

It is worth noting that the Administration's recent report on housing policy begins by blaming the private sector for initiating riskier lending practices:

Initially, Fannie Mae and Freddie Mac were largely on the sidelines while private markets generated increasingly risky mortgages. Between 2001 and 2005, private-label securitizations of Alt-A and subprime mortgages grew fivefold, yet Fannie Mae and Freddie Mac continued to primarily guarantee fully documented, high-quality mortgages.

This reveals a fundamental misunderstanding of how private markets work, and one that needs to be exorcised before we can move to better policies. The Administration's statement assumes that private lenders' business decisions and risk-taking activities occur in a vacuum. On the contrary, the very existence of Fannie and Freddie to subsidize and support home lending probably triggered private risk taking at the margin in that sector.

The long-standing and profitable operation of housing GSEs, their purchases of home-loans financed out of bond sales to the public at cheap rates because of the implicit government backing they enjoyed, generated a long-sustained upward spiral in home prices, reduced aggregate risk perceptions in home finance among private lenders, and attracted capital including foreign savings. That made Fannie and Freddie a part of the constellation of government policies that promoted a steep home price bubble. THAT eventually burst to deliver the Great Recession.

And if THAT isn't enough, now the Obama administration seems increasingly willing to consider proposals that will further distort the housing market and seem to have the ultimate goal of preserving a major role for Fannie Mae and Freddie Mac.

The Obama Administration has outlined major policy initiatives to preserve a role for the same mortgage-lending giants that have had to be bailed out repeatedly since 2008 at taxpayer cost of $130 billion to date. The latest proposal would allow homeowners with underwater mortgages backed by Fannie and Freddie to refinance. This would be expected to transfer money from taxpayers to homeowners and, by increasing expected taxpayer burdens, is likely to delay economic recovery in consumer spending.

And if THAT isn't enough, if our Government deals with home mortgages in this way, how do you think Obamacare and the health industry is going to fair? And you wonder why consumer sentiment is so low? American's aren't stupid. They can add 2 and 2, and many of us can do a little algebra when we put our minds to it.

Originally Posted by Roosveltrepub

in 2006 it was 20 percent astralis already posted the source. You keep saying earlier dates but the crisis wasnt in 2003 or 4 or 5 it was 2007. You keep repeating facts I am not disputing but you are not sourcing. Are you sure you sure you are not conflating they financed 40 percent of all mortgages with they financed 40 percent of subprimes?

A Snapshot of Mortgage Conditions with an Emphasis on Subprime Mortgage Performance http://federalreserveonline.org/pdf/...hot-082708.pdf

Emphasis is placed on the subprime portion of the market because it accounts for 53 percent of all foreclosures, while only comprising 12 percent of first-lien mortgages.

Originally Posted by Julie

A Snapshot of Mortgage Conditions with an Emphasis on Subprime Mortgage Performance http://federalreserveonline.org/pdf/...hot-082708.pdf

Yes, I won't argue that but I didnt see where it disputed the facts I presented you. Where do you get fannie and freddie holding 40 percent of the market in 2006? You did catch that the forclosure rate on fannie and Freddies sub primes was 1/3 the rate of privately held sub primes because of higher standard/ Extrapolate it out and fannie and freddie didnt even own 10 percent of the forclosed sub prime loans. They were a piece of the problem NOT the market driver. All that is conservative anti goverment bunk to let wall st off the hook like somehow the goverment made them get greedy...

Originally Posted by Julie

And furthermore:

It is worth noting that the Administration's recent report on housing policy begins by blaming the private sector for initiating riskier lending practices:



This reveals a fundamental misunderstanding of how private markets work, and one that needs to be exorcised before we can move to better policies. The Administration's statement assumes that private lenders' business decisions and risk-taking activities occur in a vacuum. On the contrary, the very existence of Fannie and Freddie to subsidize and support home lending probably triggered private risk taking at the margin in that sector.

The long-standing and profitable operation of housing GSEs, their purchases of home-loans financed out of bond sales to the public at cheap rates because of the implicit government backing they enjoyed, generated a long-sustained upward spiral in home prices, reduced aggregate risk perceptions in home finance among private lenders, and attracted capital including foreign savings. That made Fannie and Freddie a part of the constellation of government policies that promoted a steep home price bubble. THAT eventually burst to deliver the Great Recession.

And if THAT isn't enough, now the Obama administration seems increasingly willing to consider proposals that will further distort the housing market and seem to have the ultimate goal of preserving a major role for Fannie Mae and Freddie Mac.

The Obama Administration has outlined major policy initiatives to preserve a role for the same mortgage-lending giants that have had to be bailed out repeatedly since 2008 at taxpayer cost of $130 billion to date. The latest proposal would allow homeowners with underwater mortgages backed by Fannie and Freddie to refinance. This would be expected to transfer money from taxpayers to homeowners and, by increasing expected taxpayer burdens, is likely to delay economic recovery in consumer spending.

And if THAT isn't enough, if our Government deals with home mortgages in this way, how do you think Obamacare and the health industry is going to fair? And you wonder why consumer sentiment is so low? American's aren't stupid. They can add 2 and 2, and many of us can do a little algebra when we put our minds to it.

No, I think you don't understand the banks jumped in with both feet no one made them, no market forces forced them. They werent doing it till they were allowed by deregualtion. Greed got them into the market, greed and the fact the Bush taxcuts freed up all that investment capital looking for a return. That is how that works isn't it? Excess capital spurs the economy on with investment that have high returns like say triple aa sub prime bonds? the whole the market isnt a vaxuum arguement is predicated onon the idea those investing capital have no choices. The capital sought high returns it was in sub primes not fixxed rates

Originally Posted by Roosveltrepub

Yes, I won't argue that but I didnt see where it disputed the facts I presented you. Where do you get fannie and freddie holding 40 percent of the market in 2006? You did catch that the forclosure rate on fannie and Freddies sub primes was 1/3 the rate of privately held sub primes because of higher standard/ Extrapolate it out and fannie and freddie didnt even own 10 percent of the forclosed sub prime loans. They were a piece of the problem NOT the market driver. All that is conservative anti goverment bunk to let wall st off the hook like somehow the goverment made them get greedy...

from 2004-2006, the GSE share of new mortgages was 47%, 41%, and 40%, respectively. By the end of 2006, the volume of outstanding mortgages financed by PLS had grown to over $2.6 trillion, or more than 27% of all residential mortgage debt. The most explosive growth occurred in 2004 and 2005 when the outstanding mortgage debt financed by PLS increased by 49% and 44% respectively. It is important to note that these growth rates reflect net annual changes in total mortgage debt; when refinancings of existing PLS-funded mortgages are included, the growth rates on gross PLS issuance during these years exceed 90%.

According to the Government Accounting Office (GAO), “nonprime” mortgage loans (subprime plus Alt-A) accounted for 34% of the overall mortgage market in 2006. From 2001 to 2005, the dollar volume of subprime mortgages increased from $100 billion to $600 billion, while Alt-A mortgages grew from $25 billion to $400 billion over roughly the same period. As with the growth in PLS outstanding, the volume of subprime and Alt-A mortgage origination increased most dramatically in the middle of the decade. Combined annual subprime and Alt-A origination grew from an estimated $171 billion in 2002 to $877 billion in 2005, an annualized growth rate of 72%.

In 2000, securitization vehicles (entities classified as asset-backed security issuers and finance companies by the Federal Reserve) financed $572 billion in residential mortgages, equal to nearly 12% of all household mortgage debt outstanding. By the end of 2006, the volume of outstanding mortgages financed by PLS had grown to over $2.6 trillion, or more than 27% of all residential mortgage debt. The most explosive growth occurred in 2004 and 2005 when the outstanding mortgage debt financed by PLS increased by 49% and 44% respectively. It is important to note that these growth rates reflect net annual changes in total mortgage debt; when refinancings of existing PLS-funded mortgages are included, the growth rates on gross PLS issuance during these years exceed 90%.

http://research.stlouisfed.org/confe.../Van_Order.pdf


Page 5:

By acquiring 40% of all PLS collateralized by subprime mortgages, Fannie and Freddie stoked demand for risky mortgages that contributed directly, in Greenspan’s telling, to the housing bubble and subsequent financial crisis. Similar points were made in Rajan (2009).

Originally Posted by Julie

http://research.stlouisfed.org/confe.../Van_Order.pdf


Page 5:

Julie, I never disputed that they weren't part of the problem I just said they werent the root cause. That report in no way undermines what I posted or Astralis nor does it make a case that wall st. was required to give out those loans or be in that business. I think anyone who cant see that the rating agencies calling junk mortgages triple aa safe was a huge problem as well as the extremely low standards evidenced by a three fold higher default rate on the private bond issuers mortgages

We explore the role of housing policy in the collapse of Fannie Mae and Freddie Mac, the role of Fannie and Freddie in subprime markets and the sources of their default losses. We do not find evidence that their crash was due much to government housing policy or that they had an essential role in the development of the subprime mortgage-backed securities market, which occurred outside of the normal mortgage origination channels and which was funded by non agency or “private label” securities (PLS). They did build a large portfolio of AAA-rated PLS, probably in response to affordable housing goals, but such investments were unlikely to have had much of an impact on subprime mortgage origination volume because the AAA pieces f PLS deals were not the important part of the deals. Rather than brewing for a long time, their downfall was quick and had to do with purchases of risky-but-not-subprime mortgages and insufficient capital to cover the decline in property values

or in other words they werent the boogey man

Originally Posted by gunnut

Banks were forced by law to make crappy loans. Banks weren't happy. Feds said we'll insure them with Fannie/Freddie. Banks said OK that's good enough for us.

These loans were guaranteed by the federal government through a quasi government enterprise.

I cant buy this. I and nearly everyone I knew were inundated with "cheap loan" offers as the banks were actively fishing for new loans. Now your saying the feds were twisting the bank's arms and making them call me at home to offer me a "really great ARM" I don't think so. Closer to the truth is that the banks saw some short term profit and went at it "whole hog" knowing that there was little/no risk to them.