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The United States of Real Estate
April 1, 2004: QT recently covered Marcy and her family in Wisconsin, who lost their home in a refinance deal arranged by a mortgage broker and serviced by a string of mainstream subprime lenders. All of whom seemed strangely connected. Over the Winter, Marcy researched the subject of equity stripping (a form of mortgage fraud which targets homeowners who refinance, particularly for debt ) while fielding phone calls from re-fi hustlers who don't seem to know the bird had flown. Marcy's also been trying to get help from public officials. Lucky she's not holding her breath. Marcy's only Chinatown, Jake. A sub division of The United States of Real Estate.

On the other hand, Fannie Mae and Freddie Mac are housing finance giants. Government Supported Entities. Aka GSE's. Their stated mission is to provide liquidity to mortgage lending institutions. Fannie and Freddie buy bundles of mortgages from lenders, which are sold to investors as mortgage backed securities. Lenders get money up front more quickly and can pump that money back into more loans. And bundling mortgages minimizes individual mortgage risk. Lending risk has also been reduced by the numerous tax payer backed home ownership programs administered by the federal government. Hence subprime lending, including subprime re- financing, has become much more attractive to lenders. Wildly attractive in fact. And wildly profitable. Despite all that reduced risk, subprime lending often means higher interest rates and/or extra fees for borrowers. It has also been posited that insulating lenders from risk has made some sloppy about, and even complicit in, mortgage fraud. The white collar crime du jour.

Fannie Mae and Freddie Mae exist in the ever widening area between private enterprise and government agency. Being a GSE means major advantages. Such as tax breaks and freedom from certain Security and Exchange (SEC) regulations. For example, Fan and Fred are not required to keep as much capital on hand as non GSE institutions that provide similar services. Plus investors tend to assume the GSE designation means tax payers will pick up the bill should things go awry. Which Fannie and Freddie say will never happen. A growing chorus say the two lack sufficient supervision. Oversight currently rests with a sub agency of the U.S. Department of Housing and Urban Development (HUD). But HUD doesn't follow its own money trails very well and despite some policy disputes, HUD's interests are essentially interwoven with those of the GSE's.

Last year Freddie Mac was caught mis-stating profits and doing what's called "cookie jar accounting": carrying profits over from one period to the next in order to smooth the overall financial picture. As result, its senior management tier was reshuffled. Freddie Mac is now 6 months behind in releasing financial results for 2003. In March of this year, the California Public Employees' Retirement Sytem, which owns 5.1 million Freddie Mac shares, announced it opposed Freddie's reappointment of it's post shuffle auditor Price Waterhouse Coopers due to conflict of interest concerns and Freddie Mac's chief lobbyist R. Mitchell Delk left the company due to alleged improprieties in his fundraising activities for members of Congress. Also in March, the U.S. Treasury Department announced it was scrutinizing "unusual" multimillion-dollar derivative losses disclosed recently by Fannie Mae. And Freddie Mac, Fannie Mae and the Republican National Committee were fined by the Federal Election Commission (FEC) for past soft money violations, some involving the Republican Governor's Association. Overall, Fannie and Freddie's political generosity and clout are legendary. Plus completely bi partisan. Democratic presidential candidate John Kerry has tapped Jim Johnson, ex CEO of Fannie Mae, to help choose his vice presidential running mate.

As said, some propose more oversight for Fannie and Freddie. One suggestion is to further empower the watchdog within HUD. Another is to move GSE oversight to a new agency within the Department of Treasury. The latter plan is reportedly favored by the Bush administration. Fannie Mae claims to favor it as well. Yet two of the GSE's most fervent supporters, the National Association of Home Builders (NAHB) and National Association of Realtors (NAR) do not. Jerry Howard, chief executive of NAHB warns that "tinkering with what remains the only strong segment of the economy at this time is a dangerous course". Federal Reserve Chairman Allen Greenspan doesn't support Treasury oversight either. He also has concerns about the economy. Though from a different perspective. Greenspan fears oversight by an agency like the U.S. Treasury will only strengthen investor trust that a taxpayer safety net exists for Fannie and Freddie, encouraging investors to throw caution even further to the winds. Instead Greenspan recommends limiting Fannie and Freddie's ability to issue debt. As reported by Reuters in March: "Last month, Federal Reserve Chairman Alan Greenspan recommended limits on Fannie and Freddie's debt issuance, warning that unchecked growth of the housing finance giants will likely threaten the U.S. financial system."

Fannie Mae and Freddie Mac hold or guarantee close to half of the nation's mortgages. Their overall share of the U.S. economy has become so large that Jerry Howard may soon be able to defend Fan and Fred by warning that tinkering with our entire economy is a dangerous course. Yet the GSE housing mission as originally conceived was limited. For instance, Fannie and Freddie weren't supposed to originate loan activity, only market results. But increasingly, their involvements segue into origination. And as Bill Mann, in the 11/23/03 issue of the investor newsletter Motley Fool wrote: "Critics have charged in recent years that the two companies have taken on substantially more risk in order to continue their rates of growth as the housing market has matured."

Industry interests and political pull are not the only things protecting Fan & Fred. They have an image of social virtue. Which they market heavily. Of late it seems TV spots have ramped up, with folksy types on front porches extolling GSE goodness. True, the claims that GSE profits get passed along to below median income and/or minority housing consumers, via reduced mortgage and refinancing costs have taken some hits lately. Alan Greenspan for instance, cited a Fed study which found most of those profits get passed along to shareholders. But David Seiders, chief economist for the National Association of Home Builders disagreed. Whatever the case, an image of social virtue is a powerful weapon when it comes to masking unforeseen negative social consequences, management problems and corporate deception. Plus those who sound alarms re Fannie and Freddie can be accused of being "anti-housing". Though you'd think this charge would only stick to tent-makers. And it certainly can't be flung at Alan "low interest rates" Greenspan.

Speaking of social virtue, something else which works in favor of leaving Fan and Fred be, or of reforming them in name only, is the willfully short sighted and unethical mentality that has come to characterize housing discourse in the United States of Real Estate. Where when truth conflicts with desire, it's as if it were spoken in a dead language.

Carola Von Hoffmannstahl-Solomonoff

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Copyright (c) 2004 by Carola Von Hoffmannstahl-Solomonoff. This material may be freely distributed subject to the terms and conditions set forth in the Open Publication License. This license relieves the author of any liability or implication of warranty, grants others permission to use the Content in whole or in part, and insures that the original author will be properly credited when Content is used. It also grants others permission to modify and redistribute the Content if they clearly mark what changes have been made, when they were made, and who made them. Finally, the license insures that if someone else bases a work on this Content, that the resultant work will be made available under the Open Publication License as well.

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