Sunday, October 05, 2008

Fannie: Suicide? Murder? or Both?

Good article in the NYTimes.

...Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.

Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations.

But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans

Also note that Raines was the CEO until 2004, when the fraud problems emerged.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

Note well how this happened: Fannie specified the terms and conditions of the loans AND the 'acceptable' levels of credit for buyers. Banks (and brokers) made the loans on Fannie's terms, OR on terms and conditions ginned up by Lehman, Bear, and Goldman.

Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.

“We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department

Well, now. What to do? What to do?

Essentially, they adopted the AlGore approach: modeling with computers. Remember that you can make a computer give you any result you want...

Fannie constructed a vast network of computer programs and mathematical formulas that analyzed its millions of daily transactions and ranked borrowers according to their risk.

Those computer programs seemingly turned Fannie into a divining rod, capable of separating pools of similar-seeming borrowers into safe and risky bets. The riskier the loan, the more Fannie charged to handle it. In theory, those high fees would offset any losses.

With that self-assurance, the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010

Mozilo of Countrywide threatened to dump Fannie and go directly to Bear, Lehman, and Goldman--all of whom were buying nuclear-waste loans at a rapid clip (and selling them to school districts and other rubes for quite a profit.)

Congress was also heating Mudd's chair:

Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers

“Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little,” said a former senior Fannie executive. “But our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”

Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled.

Mudd allowed the chief-risk-officer slot to be vacant for TWO YEARS, and when he finally hired a guy, he was told that things were really, really, really bad.

Mr. Dallavecchia was among those whom Mr. Mudd forced out of the company during a reorganization in August.

The messenger was executed.

The rest of the article describes the inevitable downcycle.

1 comment:

Anonymous said...

Makes it hard for the Dems to wiggle out of this one.