Fannie and Freddie at Fault?

Kevin G. Hall, McClatchy Newspapers’ national economics reporter, was interviewed recently on The Real news Network about a possible future for Fannie Mae and Freddie Mac as utilities. His perspective on the companies’ role in the financial crisis is particularly interesting to me because of McClatchy’s stand-out reporting on the financial crisis and their refusal to pull punches or accept “common wisdom” in their coverage.

Fannie and Freddie Charges Hurting Recovery, Consumers?

Brian Chappelle is a respected expert on FHA and the mortgage business. He wrote a Viewpoint in the May 4, 2010 American Banker that calls out two ways in which he believes Fannie and Freddie’s current policies are hurting consumers and weakening a possible housing recovery.

Both GSEs are charging up-front fees at closing for borrowers with lower credit scores. Chappelle makes the point that these fees raise the cost of conventional mortgage financing for borrowers. It is one of the drivers that has helped the government’s mortgage insurer, the Federal Housing Administration (FHA), swell from less than 3 percent of the market a few years ago to more than one-quarter today.

Chappelle also criticizes the GSEs for what he characterizes as aggressive buy-back poilcies through which the companies are requiring primary market lenders who provided original loans that are now failing to reimburse them. While supporting this practice where underwriting guidelines were not followed, leading to defaults, Chappelle argues that the buy-back policies have extended to less clear cut issues. They are being used in some cases, he argues, as a loss mitigation tool for the companies by trying to force lenders to buy back the loans.

American Banker "Viewpoint"

The American Banker published a commentary by me in the March 2, 2010 "Viewpoint" section entitled "Sustain the GSEs' Legacy."

Admin Quiet on GSE Future in 2011 Budget

In spite of widely held expectations that the Administration's FY2011 budget would lay out some significant outline of its plans for housing GSEs Fannie Mae and Freddie Mac in the future, the actual budget documents contain only one short paragraph about this topic. In the "Special Topics" subsection of its "Analytical Perspectives" addendum to the budget, the Administration devotes a number of pages to the companies' history and current status under the conservatorship imposed on them in September, 2008. But as to their future, the report offers only the following on page 352:

"Future of the GSEs

"The Administration continues to monitor the situationof the GSEs closely and will continue to provide updates on considerations for longer term reform of Fannie Maeand Freddie Mac as appropriate."

Reuters reported earlier today that HUD Secretary Shaun S. Donovan told reporters on a conference call about the budget that more details would be forthcoming soon.

Pitchforks, Anyone

The blog "Econompicdata" has some graphics showing growth in Wall St. compensation that should rouse the populist spirit in just about anyone.

The blog cites other sources to note that while the level of compensation remains exorbitantly high across all of financial services, the lack of competition among the largest banks has caused compensation within the industry to become even more concentrated. Before specifically detailing those firms, lets go to Wall Street Pit:

The Journal reported that based on its analysis — which includes banking giants J.P. Morgan, Bank of America and Citigroup, securities firms such as Goldman Sachs and Morgan Stanley, and exchange operators CME Group Inc. and NYSE Euronext Inc. — executives, traders and money managers at 38 top financial firms can expect to earn nearly 18% more than they did last year, and slightly more than they did in the record year of 2007.

While 18% seems like a massive jump (it is) from a level that was already too high (in my opinion), it ignores the broader issue of what has resulted from a government (i.e. taxpayer) guarantee on the downside risks of those banks deemed too big to fail... a MASSIVE increase in compensation (the joys of a "too big to fail" title for the select few).

As if that weren't enough, the post goes on to note that "the increase in compensation (and risk) is now concentrated among only these top banks. Bonuses at these "big four" banks are up a whopping 25% since 2007 (all other firms are down 18% since that time) and 40% since 2006 (whereas all other firms are down 2%)."