Banking Crisis: Money-Spinning Scam for the Financial Giants

Democrat Frank Says Abolish Freddie and Fannie: Report

Aug 18, 2010

Reuters - Fannie Mae and Freddie Mac should be abolished rather than reformed as part of the Obama administration's planned overhaul of the government's role in housing finance, Rep. Barney Frank, chairman of the House Financial Services committee, said on Tuesday.

"They should be abolished," Frank said in an interview on Fox Business, when asked whether the mortgage giants should be elements in housing market reform. "They only question is what do you put in their place," Frank said.

The Federal Housing Administration should be fully self-financing and Freddie and Fannie should be replaced with a new mechanism to help subsidize housing, Frank said in the interview.

"There is no more hybrid private-public," the Massachusetts Democrat suggested. "If we want to subsidize housing then we could do it upfront and let the budget be clear about that."

Fannie Mae and Freddie Mac were government-sponsored enterprises, privately owned companies supported by the government, until the Bush administration took control of the companies in 2008 to save them from collapse.

Frank said that he does believe the federal government should have a role in building affordable rental housing but thinks money should go toward projects by private developers.

On the question of whether the government should still provide some guarantees in the mortgage market, Frank said:

"If we have it (guarantees), it has to be self-financed by the people who are benefiting."

Frank commented after Treasury Secretary Timothy Geithner convened a Washington conference of housing industry leaders to hear ideas about reforms for the $10.7 trillion mortgage market.

The firms' pursuit of growth and profits helped precipitate the financial crisis of 2007-2009, but their vast resources also helped minimize its impact.

Together, Fannie and Freddie and the Federal Housing Administration now back 90 percent of new U.S. home mortgages.

Fannie and Freddie have received $150 billion in taxpayer bailout money.

In the Fox Business interview, Frank also was critical of public policy that promoted homeownership at any cost. He also said the federal government should not be a "backstop" in guaranteeing mortgages.

"There were people in this society who for economic and, frankly, social reasons can't and shouldn't be homeowners," Frank said. "I think we should, particularly, stop this assumption that you put everybody into homeownership."

"Public policy has been too much to try to push people into homeownership."

Fannie Mae and Freddie Mac Bailouts Could Cost $1 Trillion

June 14, 2010

247WallSt - The cost of the bailouts of Freddie Mac (NYSE: FRE) and Fannie Mae (FNM) could rise as high as $1 trillion, according to Bloomberg. Even the most modest projections call for the price tag to be close to $200 billion.

The government owns 80% of the two financial firms and has extended them nearly $150 billion in lines of credit. The reason for the tremendous sum is that the two control the US mortgage market, owning or backing more than half of the nation’s home loans. Congress and economists have come up with no other facility to take and hold those loans because they lost so much of their value during the collapse of the housing market.

The analysis is troubling, particularly because the high-end of the estimate is not accounted for in the federal budget and could add to the deficit.The figure has to be balanced against the $75 billion Obama homeowner aid package, which has largely been a failure. It operates on the theory that if people owning houses can secure lower monthly payment that they will not default on their obligations and leave their homes driving down home prices even further. Homes in some regions have lost more than half of their value.

The $75 billion program has modified only a few hundred thousand mortgages permanently with more than one million home loans in the “trial”" phase. The trouble with the system is that many of those who get lower monthly packages end up defaulting anyway, either because they lose their jobs or their hope that the homes they live in will ever have positive equity value.

The interlocking problems of high unemployment and housing prices are seen more clearly in the Freddie and Fannie problems than anywhere else. Moreever, the amount it will cost to bail them out begs the question of what else the federal government can do to support homeowners.

The most effective but least attractive of the potential solutions — at least to banks – is to modify the principle amounts of millions of mortgages. That would not only lower monthly payments; it would give homeowners real hope that their homes will be worth more than their home loans–a significant reason to keep paying their mortgages. The arguments against this is that banks will have to take write-downs on modified loans and handle complex paperwork to make the new system work.

That leaves the federal government two choices. The first is to cover hundreds of billions of dollars in Freddie and Fannie financial bleeding. The second is to make banks whole on mortgage principle revaluations. No one can predict which option will cost more.

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

August 11, 2010

The New York Times — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar.

“People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since.

“The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next.

“I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable.

“It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”