Fannie
and Freddie Pay a Price for the Meltdown While the Banks Skate
By
Phil Mattera in the Dirt Diggers Digest
Five
years ago at this time, the federal government seized control of Fannie Mae and
Freddie Mac as the financial meltdown began to unfold. The two mortgage giants
have remained in conservatorship ever since and are now the subject of a policy
debate over whether they should be radically transformed or obliterated
entirely.
Meanwhile,
the primary culprits for the housing bubble and collapse – the big Wall Street
banks, that is – remain intact. They face some legal entanglements, but they
will be able to buy their way out of those cases and continue with business as
usual, which for them means profiting from reckless transactions and expecting
that taxpayers will eventually pay to clean up the mess.
A
major reason for the disparity between the fates of Fannie and Freddie and that
of the banks was the success of the right-wing disinformation campaign blaming
the financial crisis entirely on the mortgage agencies.
Fannie
and Freddie certainly made their share of mistakes. Let’s recall, as
conservatives typically fail to do, that while these agencies were created by
Congress and ultimately had taxpayer backing, they had been functioning as
for-profit entities. Their executives benefited handsomely from the housing
bubble.
Yet
much more damage was done by purely private-sector players such as Countrywide
Financial, which steered low-income families into predatory sub-prime
mortgages, as well as the big investment banks, which packaged those doomed
mortgages into securities whose risks were not adequately disclosed to
investors. In this they were aided by the unscrupulous credit-rating agencies.
Those
risks were also not sufficiently disclosed to Fannie Mae and Freddie Mac, which
purchased many of the toxic securities. A few years ago, the Federal Housing
Finance Agency, which currently oversees Fannie and Freddie, began to bring
legal actions against the banks.
In
January 2011 Bank of America, which had purchased Countrywide, consented to
pay $2.8 billion to settle one such suit brought by FHFA. The amount was
considered a bargain for BofA, with one financial analyst calling it
a “gift” from the government.
In
July 2011 FHFA brought a
similar action against a U.S. subsidiary of the Swiss bank UBS, which had been
an aggressive marketer of mortgage-backed securities in the years following its
acquisition of U.S. investment banks PaineWebber and Kidder Peabody. The case
is pending.
And
in September 2011 FHFA brought suits against
17 financial institutions, among them Citigroup, Goldman Sachs, JPMorgan Chase
and Morgan Stanley. In the Citi complaint, for example, FHFA alleged that the
bank “falsely represented that the underlying mortgage loans complied with
certain underwriting guidelines and standards, including representations that
significantly overstated the ability of the borrowers’ to repay their mortgage
loans.” Those cases are pending as well.
At
the beginning of this year, Bank of America agreed to
pay another $10.3 billion ($3.6 billion in cash and $6.75 billion in mortgage
repurchases) to Fannie Mae to settle a new lawsuit concerning the bank’s sale
of faulty mortgages to the agency. As part of the deal, BofA also agreed to
sell off about 20 percent of its loan servicing business.
Those
who depict Fannie and Freddie as the root of all housing evil should explain
how it is that they ended up among the main victims of Wall Street’s huge
mortgage-backed securities scam and are receiving billions to resolve their
legal claims over the matter.
In
August President Obama came out in favor of winding down Fannie and Freddie and
sharply restricting the role of the federal government in mortgage markets.
When will the Administration propose something similarly radical about the big
banks?
