$1.5 Trillion of Debt (the real danger posed by Fannie May and Freddie Mac)

Wall Street Journal via American Enterprise Institute (AEI) ^ | March 7, 2006 | Peter J. Wallison

[GodGunsGuts]

The Rudman Report on Fannie Mae recites facts eerily similar to what we now know about Enron. According to the report, the CFO of Fannie misled the board (and possibly the CEO) about the financial position of the company. The CEO, head of the corporate governance committee of the powerful Business Roundtable, regularly misled Wall Street and the board, but may not have understood the accounting. The auditors (this time not Arthur Andersen) failed to stand up to the management or didn't understand what was happening. The board, primarily made up of independent directors, and the audit committee, made up entirely of independent directors, were unable to penetrate the scam and remained clueless as earnings were manipulated. In Fannie's case there was also a regulator, but the regulator did not begin to look into any problems until it had been surprised by similar wrongdoing at Fannie's smaller sibling, Freddie Mac.

[GodGunsGuts]

Also see:

http://www.aei.org/publications/pubID.12235/pub_detail.asp

[A CA Guy]

Good for you, not recent, but the implications in today's economy with homes make them very timely to read.

Thanks.

[GodGunsGuts]

Thanks. It occured to me to check and see if the article was ever posted, and it wasn't. Actually, I should be thanking you. You're the one that put it into my head to go look it up!--GGG

[ikka]

Another difference: the guys at Enron went to jail. The politically connected honchos at Fannie/Freddie will not even have their insanely high pensions reduced.

[gusopol3]

with very marginal awareness of this, I question why the roles of Clintonoids Raines and Gorelick aren't mentioned.

[stainlessbanner]

bttt

[A CA Guy]

I think there have also been recent changes on how loans may be made again. I know for .25% more on a fixed with 5% down two summers ago, that someone buying could forgo a financial background check while getting the loan.

That didn't sound very responsible to me.

[Admin Moderator]

This article has now been excerpted and the source has been corrected. All material originating from the Wall Street Journal needs to be correctly attributed, excerpted and linked.

Updated FR Excerpt and Link Only or Deny Posting List due to Copyright Complaints

[GodGunsGuts]

Talk about irresponsible! Three or four years ago, me and a friend of mine were going to buy a house together as a rental property to be flipped some years later. Problem was, he didn't have good enough credit to make the interest rate worthwhile. I, on the other hand, had excellent credit, but I didn't make enough money to qualify for the interest rate we were hoping for. I was then offered a "stated" loan, in which they would offer the property on my own credit, but at far more than I could afford. So I signed the paperwork, and low and behold, the bank went for it. There is no way I could have kept up the payments on my own, but the bank was willing to cut me a loan anyways. In the end, I turned down the loan. Can you imagine how many people are out there who actually went through with it??!?! Believe me, there will be a HUGE price to pay for all these crazy loans (and many more I'm not even familiar with)--GGG

[GodGunsGuts]

Sorry about that. Didn't notice it was originally from the WSJ.

[A CA Guy]

The reason that went through was the banks need loans (numbers showing they are doing good business) and the people making the loans get salaries and commissions from your loan.

I remember a loan agent who gave an unsecured 10k loan to a friend of his and his friend the next week got busted with that money in a drug deal.
That loan agent got fired.

People like Appraisers have to pass and follow USPAP which has lots of legal and financial consequences.
I don't know that loan agents have equal consequences, though they may have to be real estate agents these days. That I don't know.

[Blue_Ridge_Mtn_Geek]

The report itself has plenty of details on Raines, Gorman, and other members of the management team. Copies of the report, and the earlier OFHEO report:

http://download.fanniemae.com/report.pdf
http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF

[RockinRight]

I know for .25% more on a fixed with 5% down two summers ago, that someone buying could forgo a financial background check while getting the loan.

As a mortgage loan officer I sure as hell never saw that happen. Where are you getting your facts?

[A CA Guy]

My sister's boyfriend bought a condo in the Las Vegas area.

He could get around 6% if he did the background check thing, but was offered 6.25% fixed without the check if he took the slightly higher rate.

I have also neighbors next door who's house is half my size and they paid $525,000, have all kinds of special loans and incomes combined that probably don't exceed 65k.
The property tax alone is about 7-8k a year. This seems nuts to me.

There is some real insanity happening out here on the loan side and I think California is going to get the body slam of it's life.

I also read there were some changes recently (within the last 4 months) regarding loans.
The way it's going now it reminds me of the Carter S&L debacle of the 80s and 90s.

I hope for the best, but the crazy loans are scary IMO.

[RockinRight]

OK I know what you refer to. A stated income or perhaps "no doc" loan. They have their purpose but have been overused.

I don't see how people making 65k afford homes of 525k. There are communities in CA where the average income is $68,000 but the average home price is over a million. IF you make $68,000 a year, you're taking home about $3500 a month or so after taxes. Let's be generous and say $4000. Even if you have 25% down on a million dollar house (but who does? almost nobody) you're paying $6000 a month in a mortgage once you figure taxes and insurance. Even in an exotic loan like a pay option ARM you're at 3 grand plus. I'm no math expert but how does that work?

[A CA Guy]

It gets worse for me when I use my HP12C to figure this stuff out that people signed up for.

Think about it, a new buyer before a payment easily starts out with nearly $700 a month in property taxes before anyone makes a payment.
That is a tough hit to take in the monthly wallet IMO.

A million dollar home will have someone paying at least $1200 a month in property taxes. OUCH!

[RockinRight]

Which is exactly why I will never move to CA. I can buy the same house in Ohio for $150,000.

[A CA Guy]

Here is another thought RR, the states like California have seen a huge revenue bump to the state in new higher property taxes (about 35%).

Remember the trouble with Gray Davis, we had in CA a couple of great years in taxes paid because people cashed in with capital gains before the stock market crashed.
Davis budgeted like this kind of income would be permanent.

The issue is, with the 35% increase, is the state budgeting like it is impossible to see a reversal?
If so, the slam to states like California will be THAT much harder.

[A CA Guy]

I've talked with quite a few world travelers and they all say the nicest spot in the whole world is California, that is why it is so expensive IMO (LOCATION LOCATION LOCATION).
We not only get all the illegals, we also get the richest legal immigrants as well.
As an example, Fullerton CA is almost completely Korean now, and the homes were way overbought by wealthy immigrants.

The prices in general make no sense though. Between the prior low cost of loans and all the wealthy legal immigrants, the prices went to the sky.