Regulation and govt sponsorship at heart of Fannie collapse

"Whenever competitors asked Congress to rein in the company, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: ?Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.?"

apitol 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.

"?When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie?s mission is of paramount importance,? Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. ?In fact, Fannie and Freddie can do more, a lot more.?"

"In the interview, Mr. Mudd said he did not recall that conversation and that he always stressed taking only prudent risks.

Employees, however, say they got a different message.

?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. As the market for risky loans soared to $1 trillion, Fannie expanded in white-hot real estate areas like California and Florida.

For two years, Mr. Mudd operated without a permanent chief risk officer to guard against unhealthy hazards. When Enrico Dallavecchia was hired for that position in 2006, he told Mr. Mudd that the company should be charging more to handle risky loans. "

"Had Fannie been a private entity, its comeuppance might have happened a year ago. But the White House, Wall Street and Capitol Hill were more concerned about the trillions of dollars in other loans that were poisoning financial institutions and banks.

Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and hold those troubled debts, hoping that removing them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply.

The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies? lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move.

?I?m not worried about Fannie and Freddie?s health, I?m worried that they won?t do enough to help out the economy,? the chairman of the House Financial Services Committee, Barney Frank, Democrat of Massachusetts, said at the time. ?That?s why I?ve supported them all these years ? so that they can help at a time like this.?"

Excellent article Iggy! And in the NYT, bless their hearts. I wonder if CHARLES DUHIGG will have a job on monday.

Wes

On Sat, 04 Oct 2008 16:11:18 -0500, the infamous Ignoramus25005 scrawled the following:

Democrats (mostly DBC) demanded this and now you want to put one of those Democrats in the Oval office next month? Time to step back, look around, and buy a clue, Ig.

-- Nothing is a waste of time if you use the experience wisely. -- Rodin

New York Times had a spate of seemingly well researched articles lately. It makes a part of my daily reading.

The clue store doesn't accept his Euros.