Opinion

The Great Debate

Surprise — we might actually begin meaningful housing reform this year

Last week, I spotlighted three ominous trends in consumer banking. The last one spotlighted a brewing war “between the private bank sector and the government over who exactly controls the allocation of consumer credit in this country.”

By far, the most important front in this battle is over the future of housing finance. Today, the government is underwriting or assuming 100 percent of the credit risk on practically every new mortgage that’s originated. With regard to outstanding mortgages, the government is responsible for 100 percent of the default risk on about $6 trillion of the roughly $10 trillion market.

Thankfully, there is some real hope that a somewhat clandestine reform effort is about to commence that would start to shift a portion of this credit risk back to the private sector. The leader of this effort is the much-maligned regulator of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. After Fannie and Freddie were bailed out and then taken over by the government in 2008, Edward DeMarco was named acting head of the Federal Housing Finance Agency (FHFA) and conservator of the GSEs. He was tasked with a nearly impossible balancing act or mission:

mitigating Enterprise losses, which ultimately accrue to taxpayers; ensuring families have access to mortgages to buy a home or refinance an existing mortgage; and offering borrowers in trouble on their mortgage an opportunity to modify their loan or otherwise avoid foreclosure.

Most of the criticism that DeMarco has received to date has come from those who wish he would prioritize making mortgage refinancing or modifications easier, even if there are questions about whether some of these actions may lead to more taxpayer losses. Taxpayers have already bailed out the GSEs with more than $150 billion.

Everyone’s housing market profits were fictitious

By Maureen Tkacik
The opinions expressed are her own.

Also read part one of this series, How Ed DeMarco finally cried fraud.

A big clue something had become dysfunctional at Fannie Mae and Freddie Mac came in the first week of 2011, when the government mortgage market makers announced the terms of a settlement agreement they’d reached with Bank of America, and were immediately pilloried for extending the bank another “backdoor bailout” by the likes of Maxine Waters and the American Enterprise Institute.

By the end of January an internal investigation had convened, all other settlement negotiations had been suspended, and Edward J. DeMarco, the acting Fannie/Freddie overseer pending the confirmation of his replacement, found himself suddenly faced with the challenge of replacing himself as congressional Republicans vowed to stonewall Obama’s pick. Part one of this series traced DeMarco’s unlikely conversion in 2011 from coddler of banks to unyielding litigator of bank fraud. It’s a rare shift in Washington, where “corruption” is a process that’s practically synonymous with “aging.” What’s often forgotten when bureaucrats fail as spectacularly as they have at Fannie and Freddie is the critical roles played by cluelessness, incuriosity, faulty reasoning and fraudulent economic logic as well.

Consider what the inspector general learned about the corporate procedures for pursuing “putback” claims in place at Freddie Mac. While purchase contracts entitle the GSEs to force banks to buy back any delinquent loan in which it finds evidence of fraud, Freddie restricted examiners to screening only mortgages which had defaulted within two years of origination, a tiny sliver of total foreclosures comprising less than one-tenth of defaults from the years 2004 to 2007—the vintage of the Countrywide loans. When one of DeMarco’s deputies noticed this apparent oversight and began warning executives that “Freddie could passively be absorbing billions of dollars of losses” merely by refusing to glance at 90% of their files, the enterprise … chose to absorb the losses, repeatedly resorting to a boilerplate argument justifying the two-year policy holding that:

How Ed DeMarco finally cried fraud

By Maureen Tkacik
The opinions expressed are her own.

Read part two of this series: Everyone’s housing market profits were fictitious.

It took three years, but Fannie/Freddie Conservator Ed DeMarco is starting to channel his inner Irving Picard by acknowledging that among root causes of the financial crisis is fraud, and lots of it.

Trying to parse the madness of Fannie Mae and Freddie Mac over the past few years has given me a new appreciation for Bernie Madoff. Bernie might not have left much for his victims, but at least they finally got a straight answer about what he’d been doing with their money all those years, and a sensible legal framework for recovering and winding down all that might be left.

  •