Fannie and Freddie sueing banks over mortgages
Fannie and Freddie cry innocent over their investment in bad mortgage securities; it’s the big bad bankers’ fault! And now it’s time for the government to sue:
The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation…The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified…Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.
Believe me, I’m not defending the banks. But this will have a bad effect on the economy at a time when it certainly doesn’t need more to depress it.
Furthermore, didn’t everyone involved fail to exercise due diligence, including Fannie and Freddie? I mean, we’re not talking here about some 80-year old grandma who’s the victim of a sweet-talking con artist. And what of the ratings agencies? Not to mention the government’s role in all of this, which for decades has required that banks take on bad loans to benefit minorities? Talk about double binds!
Well, much further down in the article, there is acknowledgment of much of this:
The two mortgage giants acquired the securities in the years before the housing market collapsed as they expanded rapidly and looked for new investments that were seemingly safe. At issue in this case are so-called private-label securities that were backed by subprime and other risky loans but were rated as safe AAA investments by the ratings agencies…
In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.
“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.
In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.
Information has a habit of coming out during lawsuits, and these plaintiffs are not going to like it.
Further, there is a doctrine called ‘contributory neglegence’ that the defendents will undoubtedly emply.
http://legal-dictionary.thefreedictionary.com/contributory+negligence
The press will no doubt regard Freddie & Fannie as victims, or they can say it’s Bush’s fault. Don’t expect to hear much about ACORN or CRA.
New York Times reporter Gretchen Morgenson and financial analyst Josh Rosner wrote the book “Reckless Endangerment.” Read it.
Yes, it will have an effect on the economy. *It needs to.*
The economy won’t heal until the fraud-infested organs are cleaned out. Like cleaning a wound, it may well hurt, but it won’t heal without the cleansing.
I agree with Capn Rusty. I read the book. The authors do a good job of detailing how the people within Fannie Mae cooked the books and used various means to ensure folks who normally wouldn’t qualify for loans got them. It also details those within government, both Republicans and Democrats, who defended Fannie Mae.
They also report how Barney Frank and Chris Dodd vigorously defended Fannie/Freddie against various people who questioned the economic wisdom of what was happening.
It’s not a perfect book but it details the greed that drove the key participants within these organizations. It’s ironic because the only time I recall the media or liberals use the word greed was to chastise Wall Street’s role, not those within government and the GSEs.
The ultimate too-big-to-fail entity is the Federal Government, which has in its Progressive wisdom perpetrated enormous frauds and hurt every one of us. It ain’t done yet; it’s long from over.
And we just sit there, quibbling over ID vs. evolution.
Neo, will you puhleeze stop linking to the NYT? Next time, try the WSJ or IBD. Anything but the wretched NYT.
“They also report how Barney Frank and Chris Dodd vigorously defended Fannie/Freddie against various people who questioned the economic wisdom of what was happening.”
The real estate bubble came about directly because of politicians becoming involved in the market place. A guaranteed recipe for disaster every time they cook the books.
Canada did not have the housing bubble and crash we did because they stayed with traditional underwriting standards.
Loans sold to Freddie Mac HAD to meet their standards even to to size of the print on the forms. I was not involved with mortgage loans but I can remember shaking my head at the requirements for a government guaranteed loan being so much more lax, of course the value of the house never goes down.
My mother ,90 at the time, got a 30 year fixed rate loan in 2006, wonder how that will play out.
Is there really enough interest rate premium at today’s 4% to pay any investor to hold mtgs for 30 years. Used to say that there was a 7 year turnover in mtgs wonder what that figure is now.
I find it absurd that Fannie Mae and Freddie Mac are suing the banks, as it was the go-go standards of Fannie Mae and Freddie Mac that the banks were responding to.
It is very interesting that at least 3 people on this thread, myself included, have read Reckless Endangerment. On page 40 the book discusses the research in the mid 1990s of Walter Todd, who was
Good old Chris Dodd, who surpassed his father Senator Tom in both length of service in the Senate and also in corruption. His father was censured for corruption, which resulted in his running as an Independent the next election- and losing. Chris learned from his father, and did not run for reelection last year. Corrupt father the Senator and corrupt Son the Senator- is that why Connecticut bills itself as the “land of steady habits?” I say this not to excorciate Connecticut, but in shame, as father and son both served as my Congressman, and Chris Dodd’s cousin was in my gym class one year.
Because the investment banks and insurance banks knew they would get bailed out, many abandoned prudent economic behavior. If they knew they would not get bailed out, they would not have engaged in such risky economic behavior, for which we have paid a great price. Thanks a lot , Chris Dodd.
On page 276, we learn that interest-only mortgages comprised 29% of the mortgage market. One does not have to be a Ph.D. economist with a law degree from Harvard to realize that is madness.
Any country that lets such madness reign deserves the crash that comes.
Unfortunately, Dodd, Frank and others will never pay the consequences of their gross misgovernment.
It worked in oral book reports in elementary school, so I will try it here. If you want to find out what happened, read the book.
Reckless Endangerment also details the tools that Fannie used to pressure Congress and, through it, the regulators. It’s a textbook on the combination of money and influence. I was concerned that a NYT writer would give us a hit piece on the private sector. The concern was misplaced; the blame is placed where it belongs at each stage of the disaster-in-making.
It’s an excellent book.
Back in 2008, everything went by so fast, I can’t remember it anymore.
But I sort of have this recollection that the Federal Government encouraged certain institutions to buy others to create stability.
JP Morgan ended up with WAMU I think. And Band of America ended up with Countrywide. The thing I can’t remember is: Did the federal government use its leverage to get BAC to buy Countrywide. If so, that is pretty rude, if the Feds are now suing BAC for the things done by Countrywide.
So Fannie and Freddie are suing the banks. Who’s going to sue Freddie and Fannie?
On the other hand I think they could end up regretting their decision because of the aforementioned sunlight that will end up being shed on their fraudulent operations.
I want to see Franklin Raines, Jamie Gorelick and a couple of perviously named gongress weasels frog marched to jail…
Couple of points: In the late Eighties, early Nineties, I worked with a faith-based peace&wonderfulness group. One of the pieces of taurine scat they were pushing was racial discrimination in mortgage lending. All lies, of course, as was demonstrated by the default rate–equal from one race to another.
But they kept on. They were preparing the battlespace, as the military puts it, for the CRA and attendant abuses.
I have a relation who was in the mortgage biz when this was happening and he said the pressure to ignore sound underwriting standards was increasing steadily. It’s one thing to be graded by the number of good loans. It’s another to be told that you need more and more loans and screw the standards we’ve spent decades trying to impose on you guys. In fact, standards don’t count. He saw the handwriting, and was saved from bailing to another line of work by retiring. Watched in a combination of amusement and chagrin.
I believe this is a larger example of Baltimore which tried to sue banks for restricting loans and then tried to sue banks for making bad loans.
Bank of America may be laying off 10,000 to 30,000 in the next couple of years. One report says they need the money for legal fees and settlements.
Yeah. Gorelick has been seen in a number of dicey places, leaving ruin in her wake. Somebody ought to look.
This head-popping Con, coupled with this week’s news that Comrade Holder’s commissars are bring massive pressure to bear on banks AGAIN to give out loans to the unqualified.
Horriffic.
The Democrats are master cons of the art of playing both sides at once; at the same time they’re keeping the lawyers out of the unemployment lines…
One presumes Fannie and Freddie Mac’s legal claim against the banks is based on the famous Animal House precedent?
“You F****d Up. You Trusted Us.”
Barney Frank! Call for Barney Frank!
Chris Dodd! Call for Chris Dodd!