Fannie, Freddie, Hud and the Housing Crisis

Decisions made by Secretary of HUD, Andrew Cuomo, from 1997-2001 laid the foundation for the current housing crisis. HUD is the government agency with the authority to set housing goals for Fannie Mae and Freddie Mac (Government Sponsored Enterprises). In 2000 HUD Secretary Cuomo established quantum leap numbers for low-to-moderate income loans for affordable housing mortgages to be purchased by Fannie and Freddie.

Mortgages are commodities sold in the financial market from mortgage brokers to banks to investment firms. Thus, mortgages can be sold again and again. At the bottom of this mortgage commodity pyramid is the borrower. Meanwhile, the houses can be repackaged and re-sold to a new homeowner as often as necessary.

From 1997-2000, HUD strategies generated a feeding frenzy in the subprime market. By 2006, Fannie and Freddie had purchased over $434 billion in subprime loans. During this period, Fannie and Freddie hired 88 lobbying firms, based on Cuomo’s suggestion, to represent their interests before Congress and in the financial markets. The unrestrained and unchecked investments by Fannie and Freddie are indicative of the greed and corruption that was pervasive in the housing market. The Secretary of HUD from 1997-2001 decided that reporting requirements on Fannie and Freddie were to be suspended and risky loans were to be pursued. Pointing the finger solely at Fannie, Freddie, HUD, and Congress is not completely fair, but individuals who took out these give-a-way loans must be held accountable because they overlooked the basic economic premise that nothing in life is free. Everything has a cost, and unfortunately the cost of this housing crisis falls on the taxpayer. Consequences of personal greed, a reckless housing policy of investing in unsecured risky mortgages, and the failure of Congressional oversight committees to carry out their legislative responsibilities will be felt for a long time.

Fannie and Freddie purchased unsecured mortgages for the specific purpose of providing affordable housing to low-income families to expand housing for minorities. Unfortunately, these loans were extremely risky investments because they required zero percent down payment, no credit background checks, and included YSPs (yield spread premiums=fees to mortgage brokers from lenders for the brokers services, which were included in the borrower’s monthly premiums). Also, the bulk of these risky subprime mortgages were set at flexible rates.

The Office of Federal Housing Enterprise Oversight’s report in 2005 says that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac. Franklin Raines, a former Clinton Cabinet member ended up with a $90 million salary, and currently serves as a Senior economic advisor to Barack H. Obama. Freddie Mac’s former chief, Jim Johnson, received a $1.7 million low cost loan from CountryWide. Johnson also serves as a Senior economic advisor to Barack. H. Obama.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
Where was the Federal Reserve Board during this time? Well, the Fed was under the leadership of Alan Greenspan who must be held accountable for keeping interest rates far too low for far too long which pumped too much money into the market and making borrowing money extremely easy. Greenspan should also be held accountable for not seeing the threat of the subprime loan industry to the nation’s economy.

November 12, 1999 William J. Clinton signed a law repealing the Glass-Steagall Act of 1933. By lifting this New Deal legislation, Clinton and Congress opened the financial supermarket by allowing banks to own full-service brokerage firm and opened the way for investment banks to engage in underwriting corporate and municipal securities. Glass-Steagall had served as the guard keeping financial powers banks and brokerages separate. This all unraveled with Clinton signing the repeal into law. The repeal had been promoted by Clinton’s Secretary of Treasury, Robert Rubin, a long time Wall Street CEO. The repeal of the Glass Steagall Act has produced our current investment dilemma of the breakdown of the residential mortgage investment sector and created financialization -- a relatively new term used to discuss the emergence of a new form of capitalism in which financial markets dominate over the traditional industrial economy.

Where was the SEC during this time? The job of the SEC is to rate investments. However, the SEC was spending its time advising investment firms on how to structure their vehicles of investment as opposed to accurately rating investments.

We also have to examine the impact of the Sarbannes-Oxley Law imposed in 2003-2004 calling for transparent accounting practices. What Congress failed to envision when they wrote and passed SOX was how companies would relocate off-shore and in London to avoid the stringent accounting practices. Again, Congressional action resulted in corporations seeking ways to skirt federal law, and Congress either couldn’t or chose not to pursue the application of the law.

Congress had been warned for years that Fannie Mae and Freddie Mac, GSEs, were on shaky ground. Public documents have long been available for examination showing that Congressional lawmakers, however, had long been coddled by Fannie and Freddie, yet these same lawmakers refused to tighten oversight of Fannie and Freddie. If lawmakers had fulfilled their oversight responsibilities, a tough regulator might have alerted Congress to the inherent risks in the subprime market. Congress could have called for a halt to such a practice or at least required them to take the appropriate actions to increase a cash cushion to counter losses. Congress could also have insisted that HUD reinstitute detailed and transparent reports on risky investments. Lastly, if Congress had taken action, such a move would have sent a signal to Wall Street to take greater care and clean up their act. Congress has the constitutional responsibility to approve all actions and financial transactions of ALL government departments and agencies. Congress’ oversight powers are extensive, and Congress failed in its duties of overseeing HUD, Fannie Mae, and Freddie Mac.