It looks as if Fannie Mae and Freddie Mac have not learned from their previous enabling of banks leading to the financial crisis. In fact, it looks as if the two are still using the same business model; they are lowering even further their underwriting standards to allow loans to be underwritten, ignoring student, credit card and auto loans supposedly “paid by others.” Didn’t this kind of tactic fail before?
Their creativity now extends to former college students who are so heavily burdened with student and other debt, so why not excuse the debt? Why not change the rules and allow mortgage lenders to ignore the debt that would prevent many students out of school to not be able to buy homes, cars, etc? Why not put them into more debt, not less and oh, by the way, maybe cripple the economy as they helped do before?!
Fannie Mae has just released new rules allowing millennial borrowers to exclude student loans, credit cards and auto loans that are “paid by someone else” when they are applying for a new mortgage. To further incent, taxpayer subsidized mortgage loans can also now be used to repay student debt.
According to Jonathan Lawless, Vice President of Customer Solutions, Fannie Mae, ”We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution, …. These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”
And, ironically, the person in charge of cleaning up these Wall Street rules is Craig S. Phillips, a former top executive on Morgan Stanley’s trading desk, who is now in charge to head up the effort to reform the Government-Sponsored Entities, Fannie Mae and Freddie Mac. At Morgan Stanley, Mr. Phillips headed a division that sold billions of dollars of toxic mortgages and mortgage-backed securities to Fannie, Freddie, and others.
Just this last April, Gretchen Morgenson of the New York Times wrote in an article that Mr. Phillips, then leader of Morgan Stanley’s mortgage desk during the peak mortgage-mania years of 2004 and 2005, ran the operation that bundled loans and sold them to the two government-sponsored enterprises and many others. The loans blew up, the government sued Morgan Stanley and Mr. Phillips was a named defendant in the initial case — a case that resulted in the firm paying a $1.25 billion settlement.
Discussing the financial crisis in December 2008 at the National Press Club, Phillips said he felt terrible about the level of government support of the financial system at that time, but government actions such as injecting capital were “critical because we can’t have systematic failure and a breakdown in all markets.”
As I commented in a recent article, before the 2008 debacle the push was on to make housing affordable for everyone, and Congress gave directives to loosen the underwriting standards. And, although this was certainly one of the reasons Fannie and Freddie had such catastrophic losses, I strongly believe that the primary reason Fannie and Freddie had the huge losses was that they purchased many, many mortgages which did not even meet that lowered bar of creditworthiness. That is, they did not review the individual mortgages purchased but relied almost solely upon false certifications by the large bank sellers that the mortgages sold met the published standards.
It was a perfect storm: a lack of controls, the implicit guarantee the government would stand by the loan, and the assumption that the institutions doing the lending wouldn’t go under and were providing true certifications. No one was checking. It was a circus! And still continues to be one!
The more mortgages were purchased, the more incentives went straight to Fannie and Freddie and their executives, until their collapse, when they were bailed out and placed into conservatorship. Then, in a move some have described as nationalizing the entities, the US Treasury started taking all of their profits, thus ensuring they would never be able to rebuild a capital base.
Our country is now faced with the dilemma of what to do with Fannie and Freddie. Should they be recapitalized and returned to private ownership, or should another path more favorable to the large banks be followed?
What to do with Fannie and Freddie is a huge decision now facing President Trump’s administration. Bad enough we’re encouraging – read enabling, those who may not be able to afford more debt to do so. Yet to appoint someone with Mr. Phillips’ less than clean hands to make this decision is a travesty.
Jonathan Lawless- you can’t make this stuff up. So Craig S. Phillips, a failed trader/banker whose actions helped cause Morgan Stanley to require the “Welfare Queen” suckling at the taxpayer teat treatment is, not only not in jail, and not shunned by polite society, but is now charged with fixing some of the wreckage he helped cause? And not as part of a prison work release program but as a well paid non-reformed criminal? Words fail me.
Peter Chao says
It really is a strange world, where professional con-artists like Frank Abagnale end up advising and lecturing on fraud cases for the FBI. Perhaps Craig Phillips is acting in the same capacity here: as a professional mortgage fraudster, who else is better able to detect and oust other con-artists than him? Either that or Mnuchin has truly lost his mind. I think it probably isn’t the latter – I’d rather give him the benefit of the doubt for now. Perhaps Mnuchin has substantial leverage on him: either do a good job or go to jail.
Paul Cheung says
Richard Bowen repeatedly warned Citi executive
management and the board about fraudulent behavior within the
organization. The company certified poor mortgages as quality mortgages
and sold them to Fannie Mae, Freddie Mac and other investors.
So, Mr. Bowen was part of the storm ?
At some points before 2008, Fannie and Freddie were forced to include a certain percentage of sub-prime mortgages in their MBS. So, it was government policy. If you worked in Fannie & Freddie at that time, what would you do ? Quit the job ?
Fannie and Freddie were not the root cause. The model was extremely proven to ensure liquidity to the mortgage market at extremely low cost. Millions of US households enjoyed low mortgage repayments for many decades. They did not require any bailout. They were never in negative cash flow during the crisis.
Fannie & Freddie were put under Conservator-ship to buy time to contain the situation and to bailout the TBTF banks. In George Bush’s own words in 2008, there was no bailout. The measure was just to calm some nerves. Fannie and Freddie were private companies and would be returned to their share-holders.
No, clearly Mr. Bowen was attempting to prevent a “storm”. You can have a discussion with those who hold the TBTF blameless and reassure yourselves that Occupy Wall Street was the root cause.
They claim that Goldman Sachs needed no bailout either and just took the money to help calm the Public. How noble. Who is claiming that Frannie are the root cause? strawman.
The words of George Bush hold little weight.
OBAMA PRIVATE PROPERTY FRAUD!
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