Enough With the Fannie/Freddie Scapegoating
One thing I am sick and tired of in the GOP debates is hearing how Fannie and Freddie were responsible for the housing bubble. The fact of the matter is they weren’t and as someone who worked in the mortgage industry from 2000 to 2006 let me explain why.
First you have to understand the limits placed on Fannie and Freddie. They were and remain limited in how much they are allowed to lend and would be insured for. Those limits were, at least when I was in the business, around $417k. That meant they could not do loans for more than that amount.
Second, you have to understand that at the end of the 90’s and beginning of the 00’s there were several pieces of legislation passed by congress and signed into law by presidents Clinton and Bush that opened up this can of worms. Most notably, repeals of provisions of Glass Steagall which removed barriers to trading these loan packages. I remember being at a company luncheon with the CFO of the mortgage company I worked for and hearing him talk about how the MBAA (Mortgage Bankers association of America) had met with incoming president Bush and him (the CFO) telling us how Bush promised to do all he could to make this type of trading easier for companies like mine.
As the housing bubble took off property values soared. Here in southern california it was even more ridiculous. I can remember a new set of homes going in that included no property and were basically right on top of one another that had prices starting at $700k, within a month of completion those prices went to starting in the $900k range. These were homes that Fannie and Freddie would not be able to lend on due to their limits.
Enter the subprime and exotic loan makers: Washington Mutual, Countrywide, and a miriad number of other “mortgage banks”. These were not banks making loans, they were businesses that would spring up over night in many cases and start making loans with lax underwriting standards and using “exotic” loan programs such as jumbo loans, Interest Only loans, and Alt-A loans.
These companies, in many cases, weren’t banks. They made their money by making the loans then turning around and selling the loans on Wall st. through the secondary market. At the time, by law, they only had to hold a loan for 90 days and would then be able to sell it on the open market. More often than not a bundle of loans would be sold and “seasoned” sure there were good loans but there were also loans made to people who, had underwriting standards been tighter, would never have received them. These people could not get financed through any of the actual “banks” but could through these “Mortgage companies”.
Another thing to take into account is the fact that these companies, many times, would lie to the customer. The customer would get the loan and see that their payment would explode after a given period, they in turn would ask the company about this and the company would say “don’t worry you can re-finance”. What they didn’t tell them was that after 90 days the company would sell the loans as investment vehicles and more often than not the company/Investors who bought and serviced the loans after that would not re-fi the person since they didn’t qualify under the loan buyer’s underwriting standards.
As the bubble started to pop the cancer had spread. Now those “investment vehicles” aka junk loans were starting to be adjusted people couldn’t pay and couldn’t refi. As a result they were losing their loans. Those who had homes and had received Home Equity Lines of Credit (HELOC’s) saw that credit collapse as the value of homes collapsed and many were left upside down owing more in debt than they had in credit. With the collapse of so many companies and the toxicity of these assets the government, under Bush at the time, ordered Fannie and Freddie to buy up the junk loans to keep other companies from collapsing.