Almost five years after taxpayers bailed out mortgage giants Fannie Mae and Freddie Mac, President Obama said on Tuesday that it’s time for private investors to take a bigger role in the mortgage market.
Fannie and Freddie collapsed in 2008 before being bailed out with almost $200 billion in taxpayer funds.
But with the nation’s real estate market on the mend, Obama said in an address in Phoenix on home ownership that it is time to wind down the two companies and make clear that the days of a guaranteed government bailout are over.
“For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag,” Obama said. “It was heads we win, tails you lose. And it was wrong.”
For the better part of his time in the White House, Obama has faced calls to shake up Fannie Mae and Freddie Mac, but the administration has held back on taking action while the housing market was weak.
Freddie Mac (FMCC) sued Bank of America Corp., UBS AG (UBSN), JPMorgan Chase & Co. (JPM) and a dozen other banks over alleged manipulation of the London interbank offered rate, saying the mortgage financier suffered substantial losses as a result of the companies’ conduct.
Government-owned Freddie Mac accuses the banks of acting collectively to hold down the U.S. dollar Libor to “hide their institutions’ financial problems and boost their profits,” according to a complaint filed in federal court in Alexandria, Virginia.
“Defendants’ fraudulent and collusive conduct caused USD LIBOR to be published at rates that were false, dishonest, and artificially low,” Richard Leveridge, a lawyer for Freddie Mac, said in the complaint, which was made public yesterday.
Manipulation of interest rates by some of the world’s biggest banks has spawned probes by half a dozen agencies on three continents in what has become the industry’s largest and longest-running scandal. More than $300 trillion of loans, mortgages, financial products and contracts are linked to Libor.
Bank of America agreed on Monday to pay more than $10 billion to Fannie Mae to settle claims over troubled mortgages that soured during the housing crash, mostly loans issued by the bank’s Countrywide Financial subsidiary.
Separately, federal regulators reached an $8.5 billion settlement on Monday to resolve claims of foreclosure abuses that included flawed paperwork used in foreclosures and bungled loan modifications by 10 major lenders, including JPMorgan Chase, Bank of America and Citibank. About $3.3 billion of that settlement amount will go toward Americans who went through foreclosure in 2009 and 2010, while $5.2 billion will address other assistance to troubled borrowers, including loan modifications and reductions of principal balances. Eligible homeowners could get up to $125,000 in compensation.
The two agreements are not directly related, but they illustrate the extent of the banks’ role in the excesses of the credit boom, from the making of loans to the seizure of homes.
Under the terms of the Bank of America deal, the bank will pay Fannie Mae $3.6 billion and will also spend $6.75 billion to buy back mortgages from the housing finance giant.
The settlement will resolve all of the lender’s disputes with Fannie Mae, removing a major impediment to Bank of America’s rehabilitation. The bank had settled its fight with Freddie Mac, the other government-owned mortgage giant, in 2011.
Both Fannie and Freddie, which have posted billions of dollars in losses in recent years, have argued that Countrywide misrepresented the quality of home loans that it sold to the two entities at the height of the mortgage bubble. Bank of America assumed those troubles when it bought Countrywide in 2008.
Fannie Mae (FNMA) and Freddie Mac (FMCC) said Monday that they will suspend some foreclosures during the holidays.
From December 19 through Jan. 2, 2013, Fannie will halt evictions of homeowners in a single-family property and in apartments with up to four units that are financed by a mortgage from the government-sponsored enterprise. Freddie, the nation’s other main provider of government-backed housing loans, will stop foreclosures for the same the type of homes from December 17 through Jan. 2, 2013.
“We’re taking this step in support of families who have faced financial challenges and gone through a foreclosure,” said Terry Edwards, an executive vice president in Fannie Mae’s credit management division, in a statement. “The holidays are a chance to be with loved ones and we want to relieve some stress at this time of year.”
Edwards said borrowers who are struggling with their house payments should contact Fannie as soon as possible.
If you’re still a bit fuzzy about what caused the 2008 financial meltdown, here’s a bit of insight, courtesy of the Justice Dept.
In 2007, mortgage lender Countrywide Financial was trying to figure out how to meet its loan production targets as the housing market—especially the sub-prime segment—began to cool down. So it revamped its lending procedures to eliminate many of the “toll gates” that tend to hold up loans, such as verifying a borrower’s income and eliminating checklists that underwriters must complete before approving a loan. Countrywide met its production targets, but severely degraded the quality of the loans in its portfolio. At one point, the percentage of loans with “material defects” was close to 40 percent—about 10 times the normal rate.
To maximize profits, Countrywide, like many other lenders, packaged its loans into mortgage-backed securities that investors would purchase, a standard practice for more than 20 years. Securities that met certain standards were guaranteed by the federal housing agencies Fannie Mae and Freddie Mac, whose imprimatur acted like insurance if some of the loans defaulted and the securities lost value. But Fannie and Freddie relied on the lenders to validate the quality of their own loans, without doing their own vigorous checking.
As the housing market began to tank, borrowers began to default in record numbers, and many of the loans packaged into mortgage-backed securities turned out to be far riskier than the lenders had acknowledged. That’s the basis for the Justice Dept.’s latest lawsuit against Bank of America, which bought Countrywide in 2008 for $2.5 billion, hoping that its huge mortgage portfolio would make B of A the nation’s premiere housing lender. Instead, the Countrywide deal became one of the worst corporate acquisitions in history, saddling a once-healthy bank with billions in losses and another $40 billion in fees for litigation and restitution, according to estimates by Credit Suisse.
U.S. Attorney Preet Bharara said Wednesday his office will sue the big bank for crisis-era procedures that allegedly allowed it to process thousands of fraudulent loans.
Fannie and Freddie were essentially destroyed by the financial crises, and the subsequent freak out that resulted. As it turns out, the dysphoria began much deeper
(AP) - The top federal prosecutor in Manhattan says he’s suing Bank of America for $1 billion for mortgage fraud against Fannie Mae and Freddie Mac.
U.S. Attorney Preet Bharara says Countrywide, which was later bought by Bank of America, had procedures designed to process loans at high speed and generated thousands of fraudulent loans.
Mr. Bharara says it’s the first civil fraud suit brought by the Justice Department concerning loans that were later sold to Fannie and Freddie.
The suit against Bank of America is the first brought by the Justice Department concerning loans that were later sold to Fannie and Freddie.
Goldman Sachs has disclosed that it was cleared of wrongdoing after an investigation into a $1.3 billion subprime mortgage deal, a surprising victory for the bank.
The Securities and Exchange Commission’s decision to forgo action is an about-face for the federal regulator. In February, the SEC notified Goldman that it planned to pursue a civil enforcement action over the deal, a package of subprime mortgages in Fremont, Calif., that the bank sold to investors in 2006.
The SEC was examining whether Goldman misled investors into thinking the mortgage securities were a safe bet. At the time, Goldman said it would fight to convince regulators that they were mistaken.
On Monday, the bank learned that it was successful. Goldman was ”notified by the SEC staff that the investigation into this offering has been completed,” the bank said in a quarterly filing released Thursday, ”and that the staff does not intend to recommend any enforcement action.”
The announcement is the latest indication that federal investigations into the financial crisis are petering out as the deadline to file cases approaches. While the SEC has brought more than 100 financial crisis-related cases, including a major action against Goldman in 2010, the agency was aiming to take a final crack at punishing Wall Street for its role in the crisis.
After President Obama announced the creation of a special task force in January to investigate the residential mortgage mess, the SEC and other authorities vowed to hold the banks accountable. Wall Street packaged and sold subprime mortgages to investors, as well as the government-owned mortgage finance giants Fannie Mae and Freddie Mac, which suffered billions of dollars in losses.
A federal regulator is standing by its decision to bar Fannie Mae and Freddie Mac from reducing principal for borrowers at risk of foreclosure, resisting pressure from the Obama administration.
The Federal Housing Finance Agency announced the decision Tuesday after months of considering the option.
The timing the report lays out would mean both the iPhone and iOS 6 would arrive a bit earlier than expected.
The agency’s acting director, Edward DeMarco, has long opposed allowing Fannie and Freddie to offer principal reduction.
DeMarco said an extensive analysis by the FHFA found the potential benefit was too small compared with the costs and risks. The risks include as many as 19,000 borrowers strategically defaulting on their loans, according to the analysis.
About 1.4 million homeowners would be eligible for principal reductions from Fannie and Freddie.
The Obama administration immediately voiced its disappointment with the decision.
“I do not believe it is the best decision for the country,” Treasury Secretary Timothy Geithner said in a letter to DeMarco.
Geithner said allowing Fannie and Freddie to do “targeted” reductions of principal for troubled borrowers would provide much-needed help to a significant number of troubled homeowners. He said that would help repair the nation’s housing market and result in a net benefit to taxpayers.
Lenders like Bank of America Corp and Wells Fargo & Co say they are facing mounting pressure to buy back bad mortgages they sold to investors, signaling that banks’ home-loan headaches could continue for years.
Investors like Fannie Mae and Freddie Mac have been pressing banks to buy back bad mortgages for years, but in recent months those requests have intensified, the banks have said in recent second-quarter earnings reports.
These comments from banks provide a fresh reminder of the loose ends that remain from the housing bust that started five years ago. The threat of new expenses and litigation is dampening bank share prices, and the problem could linger for some time, analysts and experts said.
“This is not done yet,” said Paul Miller, analyst with FBR Capital Markets. “There will be continued surprises in the industry.”
The most pain will likely be felt by Bank of America, which said on Wednesday its total outstanding claims from investors surged more than 40 percent to about $22 billion in the second quarter. The bank’s shares fell nearly 5 percent as investors worried about future losses and dropped again on Thursday.
At a time of low interest rates, U.S. banks are making many new loans to borrowers buying homes and refinancing, but anxiety about the costs of old loans is overshadowing some of this success.
Everyone agrees uncertainty is bad for the economy. But doing something with this observation is seriously hampered by the fact that uncertainty is almost impossible to define and measure.
Many academics count things that proxy for uncertainty, such as mentions of the word in news articles. That’s one of the components in the uncertainty index developed by Scott R. Baker, Nicholas Bloom, and Steven J. Davis whose work we wrote about it here; it links heightened policy uncertainty to weaker growth. It’s also used by Jonathan Brogaard and Andrew Detzel here; they find increased policy uncertainty leads to lower stock prices and private investment.
Establishing causality is tricky. A weak economy or a traumatic event like a financial crisis or terrorist attacks will both raise uncertainty and provoke a policy response, but it’s the economic event, not the policy, that raises uncertainty and hurts growth.
I have my own back-of-the-envelope exercise. I count mentions of the word “uncertainty” in the Federal Reserve’s “beige book.” As my nearby chart shows, uncertainty has shot up in the last month. (Some months are blank because no beige book was released then.)
The beige book is a narrative based on conversations between analysts at the Fed and business contacts throughout the country. While this means it’s not well suited to quantitative analysis such as mine, it does allow you to isolate the source of the uncertainty.
Usually, it’s the economic or sales outlook. Often, it’s an event beyond America’s control: the European crisis, higher petrol prices, Japan’s tsunami, and so on. Some months, though, the source is clearly exogenous policy decisions. In April of 2011, the federal budget was cited in three of that month’s 15 references to uncertainty. Recall that that month the government was on the verge of shutting down over Republican pressure for cuts to discretionary spending. One reference was to the future of Fannie Mae and Freddie Mac.