Trouble for Barney and Friends

I’ve got many criticisms from Leftblogosphere because I continue to criticize the lending and borrowing practices that have left Fannie and Freddie at the mercy of the taxpayer.  I believe they also contributed mightily to the problems we face now in the mortgage and financial markets.  Again, I would like to emphasis here that I a NOT against affordable housing and that I worked against redlining when I worked in the mortgage/thrift industry in the 1980s.  I do think it is completely bad banking as well as unfair to everyone involved to place people in mortgages that they cannot possibly pay.  I’ve always supported special bond financing dedicated to helping folks with either less than stellar credit ratings, first time home buyers with little to put down, or revitalizing neighborhoods where increased home ownership would help the community.  Lending to folks without income and placing anyone but the most sophisticated investor in an exotic mortgage are both completely unethical in my opinion.

Anyway, with that said, here’s some interesting news coming from the Fannie and Freddie rescue process from the AP wire.

December 9, 2008

Fannie, Freddie execs turned aside warnings

By ALAN ZIBEL   AP Real Estate Writer

Top executives at mortgage finance companies Fannie Mae and Freddie Mac ignored warnings that they were taking on too many risky loans long before the housing market plunged, according to documents released by a House committee.

E-mails released by the House Oversight and Government Reform Committee on Tuesday show that former Fannie CEO Daniel Mudd and former Freddie Mac CEO Richard Syron disregarded recommendations that they stay away from riskier types of loans.

“Their own risk managers raised warning after warning about the dangers of investing heavily in the subprime and alternative mortgage market. But these warnings were ignored” by the two chief executives, said Rep. Henry Waxman, D-Calif., the committee’s chairman. “Their irresponsible decisions are now costing the taxpayers billions of dollars.”

Four former top executives of the two companies were poised to defend their stewardship in a hearing held by the House committee.

Fannie and Freddie own or guarantee around half the $11.5 trillion in U.S. outstanding home loan debt. The two companies are the engines behind a complex process of buying, bundling and selling mortgages as investments.

They traditionally backed the safest loans, 30-year fixed rate mortgages that required a down payment of at least 20 percent. But in recent years, they lowered their standards, matching a decline fueled by Wall Street banks that backed the now-defunct subprime lending industry.

Republicans blame Fannie and Freddie, and homeownership policies of the Clinton administration for sowing the seeds of the financial meltdown. Democrats defend the companies’ role in encouraging homeownership and stress that Wall Street banks ” not Fannie and Freddie ” led the dramatic decline in lending standards.

Freddie Mac last month asked for an initial injection of $13.8 billion in government aid after posting a massive quarterly loss. Fannie Mae has yet to request any government aid but has warned it may need to soon.

For years the two companies flexed their lobbying muscle in Washington to thwart efforts to impose tighter regulation.

Internal Freddie Mac budget records obtained by The Associated Press show $11.7 million was paid to 52 outside lobbyists and consultants in 2006. Power brokers such as former House Speaker Newt Gingrich and former Sen. Alfonse D’Amato of New York were recruited with six-figure contracts.

The more difficult questions will come next year, when lawmakers weigh what role, if any, the two companies play should play in the mortgage market.

Options include taking the companies private, morphing them into a public utility or a federal agency, or leaving them as government-sponsored entities that have private shareholders and profits, with tougher regulations.

Given this information looks truthful, my guess is that there may be some actionable lawsuits at the very least against management.  It is also possible that the overseers (read Barney and friends) could become entangled in the web of culpability.  Look for this to continue make headlines as we determine what to do with the mess these two quasi-agencies made with the mortgage market.  What role did the the folks responsible for oversight play in this mess and how will they be held to account?