Fannie and Freddie ignored the red flags
Clearly the decision to push on was not prudent. What I still do not understand is why they felt competitive pressure to buy bad loans. In a rational world you would want your competitors to make bad decisions that would give you a competitive advantage in the future, not join them in running off the cliff together. I hope someone at the hears raises the question of the irrational competitive pressure.Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry.
At Fannie Mae, top executives were told it was necessary to develop "underground" efforts to buy subprime mortgages because of competitive pressures, although there were growing risks and borrowers often didn't understand the terms of the loans, documents show.
The House Committee on Oversight and Government Reform, which has the documents, is holding a hearing today to discuss Fannie and Freddie's downfall. The companies were seized by the government three months ago after nearly collapsing in the wake of billions of dollars of losses on mortgages.
In a memo to former Freddie chief executive Richard F. Syron and other top executives, former Freddie chief enterprise risk officer David Andrukonis wrote that the company was buying mortgages that appear "to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed."
Andrukonis warned that these mortgages could be particularly harmful for Hispanic borrowers, and they could lead to loans being made to people who would be unlikely to pay them off. "The potential for the perception and the reality of predatory lending with this product is great," Andrukonis wrote.
The documents, which the committee has not yet released but were obtained by The Washington Post, show that Fannie and Freddie, two linchpins of the nation's mortgage market, continued to push into new, risky markets despite internal debate over whether the efforts were prudent.
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Clearly the decision to push on was not prudent. What I still do not understand is why they felt competitive pressure to buy bad loans.
ReplyDeleteThat’s easy..
The public didn’t know they were bad… and the choice was to either accept the loans and hope you can do something with them, or lose tons of market share to other banks, and look racist. So everyone participating had to compete at a lower fractional reserve (which the state dictated), because once the state says X amount, those with more prudence lose in the short term market, and so can’t refuse.
Once the state says you only need 1 dollar in fractional reserve for a million dollar loan, what is the response? I can do this because the state is now making bad judgment legal and good judgment harmful.
And since time is involved, the game is a game of hot potatoe...
Its going to come down, but at least we made money before it did, rather than made nothing, and then got to hold the potatoe anyway.
It’s a case of better to earn and lose, than never to have earned at all.
If the value the state sets is wrong, then the whole system goes wrong. one cant choose otherwise. If the state does not set it, then each bank can set a different number and the public sees that the reason has to do with their unique circumstances and needs… and of course, when disaster hits, it hits some, not all… the way the state did this, everyone gets hit when it fails.