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Then Fannie and Freddie’s ability to pay back note holders becomes severely compromised.
FURTHER COMPLICATING the situation is that Fannie Mae and Freddie Mac have to answer to their shareholders. The looming likelihood of severe undercapitalization might trigger a sell-off.
But staying solvent runs counter to another cherished goal: fulfilling federally driven “affordable housing” goals. A risky portfolio, by definition, raises the likelihood of an equity shortfall. Simultaneously meeting these goals is kind of like hitting two targets with one arrow.
Fannie Mae and Freddie Mac bought large volumes of mortgages to “underserved” borrowers. Stripped of euphemism, these are the borrowers most likely to go into default or foreclosure. These households typically have low or unsteady incomes, few assets and limited credit histories.
Expanding loan volumes to these borrowers, heavily black and Hispanic, for years has been an obsession with GSE executives. Back in 1999, for example, then-Freddie Mac CEO David Glenn remarked, “We need to push into these underserved markets as much as we can.”
(As poetic justice, Glenn was terminated in 2003 in the wake of a federal probe into company accounting irregularities. He eventually settled out of court for $400,000.)
Doesn’t getting knee-deep in such mortgages violate market logic? Indeed, it does. The numbers certainly suggest severe miscalculation at work. Each company’s share price, at least until Congress saved their bacon, had been down more than 80 percent from a year ago. And their debt-to-income ratios equal or exceed 20-to-1.
But Fannie Mae and Freddie Mac operate in a political hothouse in which owning a home is an assumed right and being turned down for mortgage credit constitutes “discrimination.”
Market logic, in other words, does not apply.
Nonprofit groups such as ACORN, NACA and the National Low Income Housing Coalition, having been instrumental in creating this situation, are fully aware they have Fannie Mae and Freddie Mac over a barrel.
Executives of these companies, soft socialists that they are, rather than fight, have chosen to lower the bar for loan purchase standards. This in turn has given primary lenders every incentive to underwrite risky loans, especially with Fannie and Freddie’s current congressionally approved loan limit of $417,000.
NOW, HOPEFULLY, you are beginning to see why during second-quarter 2008, nearly 740,000 homes in the U.S. received at least one foreclosure notice. The pileup of troubled subprime and even prime loans gone sour is a legacy of the affirmative-action principle applied to mortgage lending.
The cost at the primary level is staggering. Five major commercial banks — SunTrust, Fifth Third, Regions Financial, Washington Mutual, and Wachovia — recently posted combined second-quarter 2008 losses of $11.6 billion.
The loss for the Charlotte, N.C.-based Wachovia alone was $8.86 billion, triggering a company announcement to slash its share dividend by 87 percent and eliminate through layoffs and attrition more than 10,000 jobs. The company’s current dilemma in large measure is a product of its acquisition in 2006 of the Oakland, Calif.-based Golden West Financial Corp. for $25.5 billion, an albatross around Wachovia’s neck from the get-go.
Let us not forget, of course, hedge funds that invested heavily in high-risk mortgages, often with adjustable interest rates resetting higher after a couple years. The collapse of Bear Stearns this year was preceded last year by the collapse of a pair of MBS-heavy hedge funds it operated.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?