Archive for 'Freddie Mac'

FHFA Streamlines Short Sale Standards for Fannie Mae and Freddie Mac

The program attempts to remove barriers created by some subordinate lien holders by limiting subordinate-lien payments to $6,000. This maneuver essentially cuts off any attempts by second-lien holders to negotiate for larger payoff amounts.

New short sale requirements for servicers proposed by the Federal Housing Finance Agency are giving financial firms a battle strategy for dealing with reluctant subordinate-lien holders who attempt to delay short sales on points of negotiation.

Some parties in short sales are able to delay the process by Click Here for Full Video/Article (Members Only)

Freddie Mac has invested billions of dollars betting that U.S. homeowners won’t be able to refinance their mortgages at today’s lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom.

January 30, 2012

Freddie Mac, a taxpayer-owned mortgage company, is supposed to make homeownership easier. One thing that makes owning a home more affordable is getting a cheaper mortgage.

These investments, while legal, raise concerns about a conflict of interest within Freddie Mac.

“We were actually shocked they did this,” says Scott Simon, who heads the mortgage-backed securities team at the giant bond trading and investment firm called PIMCO. “It seemed so out of line with their mission, out of line with what Congress wanted them to do.”

Freddie Mac, formally called the Federal Home Loan Mortgage Corp., was chartered by Congress in 1970. On its website, it says it has “a public mission to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership.” The company is owned by U.S. taxpayers and overseen by a regulator, the Federal Housing Finance Agency (FHFA).

In December, Freddie’s chief executive, Charles Haldeman, assured Congress his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”

But public documents show that in 2010 and 2011, Freddie Mac set out to make gains for its own investment portfolio by using complex mortgage securities that brought in more money for Freddie Mac when homeowners in higher interest-rate loans were unable to qualify for a refinancing.

Those trades “put them squarely against the homeowner,” PIMCO’s Simon says.

Freddie Mac’s trades came at a time when mortgage rates were falling to record lows. Millions of homeowners wish they could refinance, but their lenders tell them they can’t qualify for today’s low rates because of tight rules. Freddie Mac is one of the gatekeepers with the power to set those rules, and lately, it has been saying no more often to homeowners.

That raises concerns among some industry insiders who see a conflict: Freddie Mac’s own financial health improves when homeowners can’t refinance.

Simply put, “Freddie Mac prevented households from being able to take advantage of today’s mortgage rates — and then bet on it,” says Alan Boyce, a former bond trader who has been involved in efforts to push for more refinancing of home loans.

In the summer of 2010, long lines of hopeful homeowners waited for help from the Neighborhood Assistance Corporation of America’s “Save the Dream” tour. The tour made stops around the U.S., offering assistance from hundreds of mortgage counselors from various mortgage companies.

Freddie and FHFA repeatedly declined to comment on the specific transactions, but Freddie did say that its employees who make investment decisions are “walled off” from those who decide the rules for homeowners.

When Homeowners Lose, Freddie Mac Wins

Freddie Mac, based in Northern Virginia, says its job is to purchase “loans from lenders to replenish their supply of funds so that they [the lenders] can make more mortgage loans to other borrowers.” That’s one reason why Freddie has a gigantic portfolio containing loans that generate income from mortgage payments. Critics say this investment portfolio has been allowed to grow far larger than necessary to further Freddie’s policy mission.

Plus, in 2010 and 2011, Freddie didn’t just hold a simple pile of loans. Instead, for hundreds of thousands of home loans, it used Wall Street alchemy to chop these loans up into complicated securities — slices of which were sold in financial markets.

    This hypothetical example may help explain what happens:

    1) Freddie Mac takes, say, $1 billion worth of home loans and packages them. With the help of a Wall Street banker, it can then slice off parts of the bundle to create different investment securities, some riskier than others. The slices could be set up so that, say, $900 million worth are relatively safe investments, based upon homeowners paying the principal on their mortgages.

    2) But the one remaining slice, worth $100 million, is the riskiest part. Freddie retains that slice, known as an “inverse floater,” which receives all of the interest payments from the entire $1 billion worth of mortgages.

    3) That riskiest investment pays out a lucrative stream of interest payments. But Freddie’s slice also has all the so-called “pre-payment risk” associated with that $1 billion worth of loans. So if lots of people “pre-pay” their old loans and refinance into new, cheaper ones, then Freddie Mac starts to lose money. If people can’t refinance, then Freddie wins because it continues to receive that flow of older, higher interest payments.

If the homeowner is unable to refinance, the Freddie Mac portfolio managers win, Simon says. “And if the homeowner can refinance, they lose.”

Refinancing A Path To Recovery…

“I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates,” Obama said during his State of the Union speech last week. “No more red tape. No more runaround from the banks.”

In his State of the Union address, President Obama pushed for legislation to allow “every responsible homeowner the chance to save about $3,000 a year on their mortgage” by refinancing without what he called “red tape” or a “runaround from the banks.”

Columbia University economist Chris Mayer supports such an approach. “A widespread refinancing program would have many benefits — not only helping the economy and putting tens of billions of dollars back in consumers’ pockets, the equivalent of a very long-term tax cut,” he says.

“It also is likely to reduce foreclosures and benefit the U.S. government by having fewer losses that they have to pay,” Mayer adds.

In the long term, he says, allowing more Americans to refinance would help taxpayers as well as mortgage giants Freddie Mac and Fannie Mae, because they would suffer fewer losses related to foreclosures. These inverse floater trades, however, give Freddie Mac a short-term incentive to resist such so-called “mass re-fi” programs.

“If there was a mass re-fi program, the bets they made would get absolutely wiped out,” PIMCO’s Simon says. “The way these bets do the best is if the homeowner is barred from refinancing.”

In a written statement, Freddie said it “is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates.” It also says it refinanced loans for hundreds of thousands of borrowers just last year.

Fannie and Freddie have taken part in an existing federal program known as “HARP” to help Americans refinance, but many economists say far more homeowners would benefit if Fannie and Freddie were to implement the program more aggressively.
The Silversteins had trouble selling this house after they moved out, forcing them to carry two mortgages for more than two years. “It just drained us,” says Jay Silverstein.
Enlarge Chris Arnold/NPR

The Silversteins had trouble selling their house after they moved out, forcing them to carry two mortgages for more than two years. “It just drained us,” says Jay Silverstein.

Stuck In ‘Financial Jail’

Some homeowners believe the current re-fi game is stacked against them.
If Jay and Bonnie Silverstein were able to refinance their mortgage, they could save nearly $500 a month.

Jay and Bonnie Silverstein describe themselves as truly stuck in a bad mortgage. They live in an unfinished development of yellow stucco houses north of Philadelphia. The developer went bankrupt.

The Silversteins bought this home before the housing market crashed, and then couldn’t sell their old house. They now say that buying a new home before selling the old one was a mistake — a painful one. Stuck with two mortgages, they started to get behind on their payments on the old house.

“It wound up taking us years to sell that house, so we had two homes and two mortgages for two-and-a-half years,” Jay Silverstein says. “It burned up my 401(k) and drained us.”

Jay Silverstein has a modest pension, and they haven’t missed a mortgage payment on their current home. Still, they are struggling. They could make the monthly payment on their new home if they could just refinance — down from their current interest rate of near 7 percent to today’s rates below 4 percent. That could save them roughly $500 a month.

“You know, we’re living paycheck to paycheck,” he says. A lower rate “might go a long way toward helping us.”

But that’s the problem — getting approved for a refinancing. Here’s why: After the housing market crashed, the Silversteins’ old house had to be sold for less than the mortgage was worth. That’s known as a short sale.

Freddie Mac has been tightening lending restrictions, and one of its restrictions blocks people with a short sale in their past from refinancing for up to four years following that short sale. So the Silversteins are stranded by the rule.

“We’re in financial jail,” Jay says. “We’ve never been there before.”
One of Freddie Mac’s restrictions blocks people who have a short sale in their past from refinancing for two to four years following the short sale.

Tight For Homeowners, But Elsewhere, Money Still Flows

Economists say that during the housing bubble, lending standards got too loose. Now many believe the pendulum has swung too far, making rules too tight.

The short-sale restriction may be a good example. For a home purchase, such a rule may be prudent, but allowing people with existing loans to refinance actually lowers the risk that they may default by giving them more affordable mortgage payments.

In a recent analysis of remedies for the stalled housing market, the Federal Reserve criticized Fannie and Freddie for the fees they have charged for refinancing. Such fees are “another possible reason for low rates of refinancing,” the Fed wrote, adding that the charges are “difficult to justify.”

Meanwhile, even though Freddie is a ward of the federal government, its top executives are highly compensated. The Freddie Mac official then in charge of its investment portfolio, Peter Federico, made $2.5 million in 2010, and had target compensation of $2.6 million for last year — the time period during which most of these inverse floater investments were made. ProPublica and NPR made numerous attempts to reach Federico. A woman who answered his home phone said he declined to comment.

NPR’s Uri Berliner and Marilyn Geewax also contributed to this report.

How Homeowner Assistance Fell Short

Freddie Mac: Mortgage giants Freddie Mac and Fannie Mae were government-sponsored enterprises that nearly failed during the 2008 financial crisis that brought down the U.S. housing market. The government took over the companies that year; it has sunk more than $169 billion into keeping them afloat. Freddie Mac was chartered by Congress in 1970.

“Our statutory mission is to provide liquidity, stability and affordability to the U.S. housing market,” Freddie Mac says on its website. Fannie and Freddie own or guarantee trillions of dollars worth of mortgages and mortgage-backed securities. The Securities and Exchange Commission has charged that six former top executives of Frannie and Freddie misled investors about the firms’ exposure to high-risk mortgages.

FHFA: The Federal Housing Finance Agency has regulated Freddie Mac and Fannie Mae since the government took them over in 2008. The FHFA was created as part of the Housing and Economic Recovery Act of 2008, which was designed in part to allow borrowers to refinance with lower-cost, government-backed mortgages.

The Obama administration has been pressing the FHFA to allow more homeowners to refinance their government-backed loans at lower rates. But so far, programs to help millions of homeowners lower their costs have fallen short of expectations.

Refinancing: With mortgage rates at historic lows, millions of homeowners could save hundreds of dollars a month by refinancing their mortgages. Rates for 30-year fixed-rate mortgages have remained below 4 percent for several weeks in a row. But many homeowners can’t qualify for refinancing because their homes are “underwater” — the value has dropped far below the amount that they owe on their mortgages. In many cases, they can’t get a “re-fi” because they have been tripped up by a tangle of complicated eligibility requirements and paperwork.

— Avie Schneider from NPR

The Senate on Thursday backed a measure to help bolster the housing market by making it easier for people to afford a home in wealthier neighborhoods.

The Senate voted 60-38 to attach the proposal to a spending bill that the chamber will consider later this year. It would restore the size of the loans the government buys or insures to a maximum of $729,500 from the previous cap of $625,500.

The cap, known as the “conforming loan limit,” determines the maximum size of loans the Federal Housing Administration and the government’s mortgage buyers, Fannie Mae and Freddie Mac, can buy or guarantee.

The higher loan limit expired at the end of Click Here for Full Video/Article (Members Only)

WOW! This could be huge. My experience has been borrowers can only get a 30 year loan when the lender has the opportunity to “sell the loan” to Fannie Mae or Freddie and get “reimbursed” the money loaned.

Many local banks have worked with investors by offering “in house” loan products with shorter terms and calls.

Mike Butler


How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.

Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.

Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.

The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans.

Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.

Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he said.

“The politicians would like something that provides a deep and wide subsidy for housing that doesn’t show up on the budget as costing anything. That’s what we had” with Fannie and Freddie, Mr. Elliott said. “But going forward there is going to be more honest accounting.”

Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.

“A purely private mortgage finance market is a very serious and very achievable goal,” Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. “No one serious in this debate believes our housing market will return to the 1930s.”

Still, powerful interests in both parties want the government instead to construct a system that would preserve many of the same benefits, with changes intended to minimize the risk of future bailouts. They say the recent crisis showed that the market could not stand on its own.

“The kind of backstop that we have now, if it didn’t exist, we would have had a much more severe recession and a much sharper fall in home values,” said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry.
Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns.

The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.

A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the Click Here for Full Video/Article (Members Only)

U.S. Dept of Treasury Press Release

Written Testimony by Secretary Timothy F. Geithner before the House Committee on Financial Services


Chairman Bachus, Ranking Member Frank, and members of the committee, thank you for the opportunity to testify this morning.
Two weeks ago, we released a report outlining our vision of the next steps for reforming the housing finance market.  My testimony today summarizes the content of that report.
There is little dispute that the financial crisis was partly the result of fundamental flaws in the housing finance market.
The consequences of those flaws, and the losses Fannie Mae and Freddie Mac have inflicted on taxpayers, make clear that we must build a healthier, more stable market that will work better for American families and our nation’s economy.
For decades, the government supported incentives for housing that distorted the market, created significant moral hazard, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market.
In more recent years, we allowed an enormous amount of the mortgage market to shift to where there was little regulation and oversight.  We allowed underwriting standards to erode and left consumers vulnerable to predatory practices.
We allowed the market to increasingly rely on a securitization chain that lacked transparency and accountability.  And we allowed the financial system as a whole to take on too much risk and leverage.
These were avoidable mistakes.
Their convergence, as we all know, resulted in a financial system vulnerable to bubbles, panic, and failure.  Reforming our country’s housing finance market is an essential part of our broader efforts to help ensure Americans will never again suffer the consequences of a preventable economic crisis.
Our proposal for reform breaks sharply from the past to fundamentally transform the role of government in the housing market.
We believe the government’s primary role should be limited to several key responsibilities: consumer protection and robust oversight; targeted assistance for low- and moderate-income homeowners and renters; and a targeted capacity to support market stability and crisis response.
The Administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit.
We are committed to a system in which the private market – not American taxpayers – bears the burden for losses.
And while we believe that all Americans should have access to affordable, quality housing, our goal is not for every American to become a homeowner.
We should provide targeted and effective support to families who have the financial capacity to own a home but are underserved by the private market, as well as a range of options for Americans who rent.
As the housing market recovers and the economy heals, the Administration and Congress have a responsibility to look forward, reconsider the role government has played in the past, and work together to build a stronger and more balanced system of housing finance.
Reducing the Government’s Role in the Mortgage Market

In the wake of the financial crisis, private capital has not sufficiently returned to the mortgage market, leaving Fannie Mae, Freddie Mac, FHA, and Ginnie Mae to insure or guarantee more than nine out of every ten new mortgages.  Under normal market conditions, the essential components of housing finance – buying houses, lending money, determining how best to invest capital, and bearing credit risk – should be private sector activities.
We will work closely with the Federal Housing Finance Agency to determine the best way to responsibly reduce Fannie Mae and Freddie Mac’s role in the market and ultimately wind down both institutions.  This objective can be accomplished by gradually increasing guarantee pricing at Fannie Mae and Freddie Mac, as if they were held to the same capital standards as private institutions; reducing conforming loan limits by allowing the temporary increases enacted in 2008 to expire as scheduled on October 1, 2011; and gradually increasing the amount of private capital that risks loss ahead of taxpayers through credit loss protections from private entities and gradually increased down payment requirements.  We also support the continued wind down of Fannie Mae and Freddie Mac’s investment portfolios at a rate of no less than ten percent annually.
I want to emphasize that it is very important that we wind down Fannie Mae and Freddie Mac at a careful and deliberate pace.  Closing the doors at Fannie Mae and Freddie Mac without consideration for the pace of economic recovery could shock an already-fragile housing market, severely constrain mortgage credit for American families, and expose taxpayers to unnecessary losses on loans the institutions already guarantee.  It is ultimately in the best interest of the economy and the country to wind down Fannie Mae and Freddie Mac in a responsible and prudent manner.
The Administration is fully committed to ensuring Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future, as well as the ability to meet any of their debt obligations.  Ensuring these institutions have the financial capacity to meet their obligations is essential to maintaining stability in the housing finance market and the broader economy.  During the transition, it is also important that the operations of Fannie Mae and Freddie Mac continue to serve the market and the American people, including retaining the human capital necessary to effectively run both institutions.
As we decrease Fannie Mae and Freddie Mac’s presence in the market, we will also scale back FHA to its more traditionally targeted role.  We support decreasing the maximum loan size that qualifies for FHA insurance – first by allowing the present increase in those limits to expire as scheduled on October 1, 2011, and then by reviewing whether those limits should be further decreased going forward.
We will also increase the pricing of FHA mortgage insurance.  FHA has already raised premiums twice since the beginning of this Administration, and an additional 25 basis point increase in the annual mortgage insurance premium is included in the President’s 2012 Budget and will be levied on all new loans insured by FHA as of mid-April 2011.  This will continue ongoing efforts to strengthen the capital reserve account of FHA and align its pricing structure in a more appropriate relationship with the private sector, putting the program in a better position to gradually return to its traditional and more targeted role in the market.
The Administration also supports reforms at the Federal Home Loan Banks (FHLBs) to strengthen the FHLB system, which provides an important source of liquidity for small- and medium-sized financial institutions.  These reforms include instituting single district membership, capping the level of advances for any institution, and reducing the FHLBs’ investment portfolios.
We also believe it is appropriate to consider additional means of advance funding for mortgage credit as a part of the broader reform process, including potentially developing a legislative framework for a covered bond market.  We will work with Congress to explore opportunities in this area.
Addressing Fundamental Flaws in the Mortgage Market

Winding down Fannie Mae and Freddie Mac and implementing reforms at FHA and the FHLBs, however, is only one side of the coin.  These steps alone will not give rise to a housing finance market that meets the needs of families and communities, nor will it guarantee that private markets can effectively play a predominant role.  We must also pursue reforms that restore confidence in the mortgage market among borrowers, lenders, and investors.
The Administration supports the strong implementation of reforms to help address pre-crisis flaws and rebuild trust and integrity in the mortgage market.  Taken together, these reforms will improve consumer protection, support the creation of safe, high-quality mortgage products with strong underwriting standards, restore the integrity of the securitization market, restructure the servicing industry, and establish clear and consolidated regulatory oversight.
The Dodd-Frank Act laid the groundwork for many of these reforms.  We will implement its provisions in a thoughtful manner to protect borrowers and promote stability across the housing finance markets.
Treasury is currently coordinating critical reforms to the securitization market that will require originators and securitizers to retain risk, including coordinating an interagency process to determine the parameters for Qualified Residential Mortgages (QRM) under the Dodd-Frank Act.  This summer, the Consumer Financial Protection Bureau will assume authority to set new rules to curb abusive practices, promote choice and clarity for consumers, and set stronger underwriting standards.
Federal regulators will require banks to increase capital standards, including maintaining larger capital buffers against higher-risk mortgages that have a greater risk of default.
Treasury is also actively participating in interagency efforts to design and implement near-term reforms that will help correct chronic problems in the servicing industry, which has proven especially ill-equipped to deal fairly and efficiently with the sharp increase in the number of families facing foreclosure.  Right now, we are working together to design national servicing standards that better align incentives and provide clarity and consistency to borrowers and investors regarding their treatment by servicers, especially in the event of delinquency.  Our work includes identifying ways to reduce conflicts of interest between holders of first and second mortgages and improving incentives for servicers to work with troubled borrowers to avoid foreclosure.
Alongside these efforts, Treasury, the Department of Housing and Urban Development, and the Department of Justice are coordinating the Administration’s interagency foreclosure task force, which is comprised of eleven federal agencies and also works closely with the state Attorneys General.  In light of reports of misconduct in the servicing industry, the task force is currently reviewing foreclosure processing, loss mitigation, and disclosure requirements at the country’s largest mortgage servicers.  Those that have acted improperly will be held accountable.
Providing Targeted and Transparent Support for Access and Affordability

Low-and moderate-income families and communities account for a large proportion of all home purchase mortgages, and 100 million Americans are renters.  The Administration stands strongly behind our obligation to support an adequate range of affordable housing options and access to fairly priced, sustainable mortgage credit for all communities and families – including those in rural and economically-distressed areas, and those with low- or moderate-incomes.
Although homeownership is not the best option for everyone, affordable opportunities should be available to Americans with the financial capacity to own a home.  Part of our efforts to reform the housing finance system will focus on helping ensure FHA is a sustainable, efficient resource for creditworthy first-time homebuyers and families of modest incomes.  We are working expeditiously with the FHA to plan and carry out reforms so its programs are more efficient and responsive to changing market conditions.  To improve and streamline other government initiatives, the Departments of Housing and Urban Development, Agriculture, and Veterans Affairs – which all operate targeted housing finance programs – will establish a task force to explore ways to better coordinate or consolidate their efforts.
We will also consider measures to help ensure secondary market participants – securitizers and mortgage guarantors – provide capital to all communities in ways that reflect activity in the primary market consistent with safety and soundness.  In addition, we will focus on making sure all mortgage market participants comply with antidiscrimination laws, and work with Congress to require greater transparency for data that tracks where and to whom mortgage credit is flowing.
Our approach should also encourage greater balance between homeownership and rental opportunities.  That means improving support to the one-third of Americans who rent their homes, and especially to low- and moderate-income families.  In the near term, the Administration will begin work to strengthen and expand FHA’s capacity to support both lending to the multifamily market and adequate financing for affordable properties that private credit markets generally underserve.  As part of our efforts, we will explore innovative ways to finance smaller multifamily properties, which contain a third of all multifamily rental units but the housing finance system has not adequately served.
Addressing long-standing problems in housing finance, like rental supply shortages for the lowest income families, will require a dedicated commitment, but it is one that can be made in a budget neutral way.  We look forward to working with Congress and other stakeholders to discuss this and other avenues for improving access and affordability in a targeted, transparent way.
Options for the Long-Term Structure of Housing Finance

In the paper the Administration released last month, we laid out three potential ways to structure government support in a housing finance market where the private sector is the predominant provider of mortgage credit.
In each option, government support would be transparent, explicit, and limited.  Each would make private markets the primary source of mortgage credit and the primary bearer of mortgage losses.  Each would preserve FHA assistance and similar government initiatives that assist targeted groups, such as low- and moderate-income families, farmers, and veterans.
The first option would limit the government’s role almost exclusively to these targeted assistance initiatives.  The overwhelming majority of mortgages would be financed by lenders and investors and would not benefit from a government guarantee.
In the second option, targeted assistance through FHA and other initiatives would be complemented by a government backstop designed only to promote stability and access to mortgage credit in times of market stress.  The government backstop would have a minimal presence in the market under normal economic conditions, but would scale up to help fund mortgages if private capital became unavailable in times of crisis.
The third option broadens access for creditworthy Americans and helps ensure stability in times of market stress.  Alongside the FHA and targeted assistance initiatives, the government would provide reinsurance for certain securities that would be backed by high-quality mortgages.  These securities would be guaranteed by closely regulated private companies under stringent capital standards and strict oversight, and reinsured by the government.  The government would charge a premium to cover future claims and would not pay claims until private guarantors are wiped out.
The report we released last month discusses the advantages and disadvantages of each approach in additional detail, and also encourages Congress and the public to evaluate each option in light of four common criteria: access to mortgage credit, including the future role of the 30-year fixed-rate mortgage; incentives for private investment in the housing sector; taxpayer protection; and financial and economic stability.
Part of our intention in providing this narrow set of options and key criteria by which they should be judged is to encourage an honest conversation about the merits and drawbacks of each approach among the Administration, Congress, and stakeholders.  We are faced with difficult choices that will involve real trade-offs.  The challenge before us is to strike the right balance between providing access to mortgages for American families and communities, managing the risk to taxpayers, and maintaining a stable and healthy mortgage market.
In choosing among these options, care must be given to designing a system that maximizes the benefits we are seeking from government involvement in the mortgage market, while minimizing the costs.  We should also be sure to consider how to utilize the existing systems and assets in our housing finance system, including those at Fannie Mae and Freddie Mac, as best as possible for the benefit of the taxpayer and the American people.
Each of the longer-term reform options we have outlined will require legislation from Congress, and we hope to work together with you and your colleagues to pass comprehensive legislation within the next two years.  Failing to act would exacerbate market uncertainty and risk leaving many of the flaws in the market that brought us to this point in the first place unaddressed.  We look forward to continuing the dialogue with consumer and community organizations, market participants, and academic experts as we work together to build a housing finance market that is stronger and more stable than it was in the past.
I want to conclude with one important point.  Housing is a critical part of our economy and we will proceed with our plan for reform with great care.  Our objective, after all, is a healthier, more stable housing finance system.  While we are confident that the steps we have laid out follow the right path, haste would be counterproductive – possibly destabilizing the housing finance market or even disrupting the broader recovery.
I’d be happy to take your questions now and, again, thank you for the opportunity to be here today.

The Fed Bought Fraud and Plans To Buy More

By Greg Hunter

In the wake of the financial meltdown of 2008, the Federal Reserve announced it would buy mortgage-backed securities, or MBS.  The January announcement by the Fed said it would buy MBS from failed mortgage giants Fannie Mae and Freddie Mac in the amount of $1.25 trillion.  
At the time, the Fed said in a press release, “The goal of the program was to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.”  (Click here for the full Fed statement.) It did provide “support” to the mortgage market, but did it also buy fraud and cover the banks that sold it?  The evidence shows, at the very least, it bought massive amounts of fraud.
We now know the Fed definitely bought valueless MBS because it has joined other ripped-off investors to demand Bank of America buy back billions in sour home debt.  A Bloomberg story from just last week, featuring Philadelphia Fed President Charles Plosser,  reports, “The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., has joined a bondholder group that aims to force Bank of America buy back some bad home loans packaged into $47 billion of securities.  On the one hand, the Fed has “a duty to the taxpayer to try to collect on behalf of the taxpayer on these mortgages,” Plosser said today at an event in Philadelphia.”
Mr. Plosser lamented the “difficult spot” the central bank is in because it is both bank regulator and plaintiff.  He said, “Should we be in the business of suing the financial institutions that we are in fact responsible for supervising?” (Click here to read the complete Bloomberg story.) To that question, I ask shouldn’t the Fed have done a much better job of supervising the big banks in the first place?
The whole financial and mortgage crisis from sour securities to foreclosure fraud is in the process of blowing sky high.  The entire mess is clearly the biggest financial fraud in history!  It looks to me like the regulators were just supervising their pay checks being deposited into the bank.
And remember, the $1.25 trillion of mortgage-backed securities the Fed bought from Fannie and Freddie?  How much of that is fraud?  William Black, the outspoken Professor of Economics from the University of Missouri KC, says all the big banks were committing “major frauds”in the mortgage-backed security market.  Black says, at Citicorp, for example, “. . . 80% of the mortgage loans it sold to Fannie and Freddie were sold under false representations and warranties.” (Click here for the complete Black interview.) Black claims the frauds increased at some banks, and it is sill going on today!   (I admit I used this same video in a recent post.  I use it again, because it is the single most important and damning indictment of the big banks out there.  Professor Black defines the size of the entire fraudulent mortgage mess.)
If he’s right, and I think he is, that means the Fed just spent the last 20 months (the  program ended in August 2010) buying a trillion dollars in mortgage fraud!  
That is a staggering amount even for the most powerful central bank in the world.  
Could the Federal Reserve have bought that amount of fraudulent MBS and not have known it?  
Could the Fed have been buying that amount of rotten worthless debt to cover the banksters in the syndicate?  

Who knows if we will ever find that out because the Federal Reserve cannot be independently audited.
And who knows what else it bought in sour debt to bail out their banking syndicate buddies because the Federal Reserve cannot be independently audited!
It has never been audited in its 97 year history.
I know one thing, if the Fed is going to keep its banking cartel alive, it is going to be forced to print massive amounts of money out of thin air to buy a heck of a lot more fraudulent mortgage-backed securities.  
That’s what worries and scares me the most.
Greg Hunter
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