Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare PDF
Preview Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare
Fannie Mae and Freddie Mac Turning the American Dream into a Nightmare This page intentionally left blank Fannie Mae and Freddie Mac Turning the American Dream into a Nightmare Oonagh McDonald B L O O M S B U R Y A C A D E M I C First published in 2012 by Bloomsbury Academic an imprint of Bloomsbury Publishing Plc 50 Bedford Square, London WC1B 3DP, UK and 175 Fifth Avenue, New York, NY 10010, USA Copyright © Oonagh McDonald 2012 This work is published subject to a Creative Commons Attribution Non-Commercial Licence. You may share this work for non-commercial purposes only, provided you give attribution to the copyright holder and the publisher. For permission to publish commercial versions please contact Bloomsbury Academic. CIP records for this book are available from the British Library and the Library of Congress ISBN 978-1-78093-002-2 (hardback) ISBN 978-1-78093-004-6 (ebook) ISBN 978-1-78093-005-3 (ebook PDF) This book is produced using paper that is made from wood grown in managed, sustainable forests. It is natural, renewable and recyclable. The logging and manufacturing processes conform to the environmental regulations of the country of origin. Printed and bound in Great Britain by MPG Books Group, Bodmin, Cornwall. Cover image: © Beth Brawn/Shutterstock www.bloomsburyacademic.com Contents Acknowledgements vii List of Abbreviations viii Introduction xi Timeline xv 1 The Seeds are Sown 1 2 Two More Tools in the Tool-Kit 25 3 The Role of the Housing and Urban Development Department (HUD) 54 4 Mortgage Data 69 5 The “Mission Regulator” for Fannie Mae and Freddie Mac 90 6 The GSEs and the Developing Crisis 115 7 The Dominance of the GSEs 142 8 The Beginning of the End for Freddie Mac 164 9 The Beginning of the End for Fannie Mae 189 10 The Years 2005 to 2007: Drinking in the last chance saloon 216 11 The Subprime Market Grew and Grew and No One Knew 243 12 Why Did Fannie Mae and Freddie Mac Get Away with It for So Long? 266 13 The End Cometh 283 14 What Next? 316 Appendix Membership of the House Committee on Financial Services 336 Membership of Senate Banking, Housing and Urban Affairs Committee 344 Fannie and Freddie’s contributions to members of the House Committee on Financial Services 346 Fannie and Freddie’s contributions to members of the Senate Banking, Housing and Urban Affairs Committee 356 Years in which Fannie Mae was a top 100 contributor to the campaign fund of a member of the House Financial Services Committee 360 Years in which Fannie Mae was a top 100 contributor to the campaign fund of a member of the Senate Banking Committee 368 Contributions from Fannie Mae to Senate Banking Committee 368 v vi CONTENTS Contributions to presidential candidates 370 Fannie’s annual lobbying expenditure 370 Real estate lobbying expenditure 370 Lobbying reports for 2004, 2005, 2006 and 2007 374 Notes 411 Bibliography 441 Index 462 Acknowledgements I have benefi tted from discussions with Mark Calabria, Director of Financial Regulation, Cato Institute and Ed Pinto, Resident Fellow at the American Enterprise Institute. I would especially like to thank Lord Desai, Professor Robert Hudson, Professor of Finance, Newcastle University Business School and Professor Kevin Keasey, Director of the International Institute of Banking and Financial Services, University of Leeds, all of whom were kind enough to read the manuscript in draft and for their constructive comments and criticisms. I would also like to thank John Fawthrop for the provision of the list of Fannie Mae and Freddie Mac’s campaign contributions, and Matthew Kamisher-Koch, Cicero Consulting, for assisting with some source material. Any errors or misconceptions are mine. Oonagh McDonald List of Abbreviations ABS: Asset-backed securities ACORN: Association of Community Organizations for Reform Now AHAR: Annual Homeless Assessment Report APR: Annual percentage rate ARMs: Adjustable rate mortgages BIF: Bank Insurance Fund CalPERS: Californian Public Employees Retirement System CBO: Congressional Budget Offi ce CDO: Collateralized Debt Obligation, an investment-grade security, backed by a pool of bonds, loans, and other assets. CDOs represent different kinds of credit risk, usually described as “tranches” or “slices,” each of which has a different materiality or risk associated with it CFCB: Consumer Financial Protection Bureau CLO: Collateralized Loan Obligation, a special-purpose vehicle with securitization payments in the form of different tranches. CLOs allow banks to reduce their regulatory capital requirements by selling large portions of their loan portfolios to international markets, reducing the risks associated with lending CRA: Community Reinvestment Act DU: Desktop Underwriter (Fannie Mae’s automated underwriting system) ECOA: Equal Credit Opportunity Act, 1974 Fannie Mae: Federal National Mortgage Association FASB: Financial Accounting Standards Board FAS: Financial accounting standard FCRA: Federal Credit Reform Act FDIC: Federal Deposit Insurance Corporation FHA: Federal Housing Administration FHFA: Federal Housing Finance Agency FHFB: Federal Housing Finance Board FHLB: Federal Home Loans Banks System FHESSA: Federal Housing Enterprises Safety and Soundness Act, 1992 FICO: Fair Isaacs Corporation, most widely used credit scoring model in the USA FFIEC: Federal Financial Institutions Examinations Council viii LIST OF ABBREVIATIONS ix FIRREA: F ederal Institutions Reform, Recovery and Enforcement Act, 1989 FOIA: Freedom of Information Act FRB: Federal Reserve Board Freddie Mac: F ederal Home Loan Mortgage Corporation GAAP: Generally accepted accounting principles GAO: Government Accountability Offi ce GEMICO: GE Capital Mortgage Insurance Corporation Ginnie Mae: Government National Mortgage Association GLBA: G ramm-Leach-Bliley Act, 1999 GMS: Guaranteed Mortgage Securities GSE: Government Sponsored Enterprise HECM: H ome Equity Conversion Mortgage HERA: Housing and Economic Recovery Act, 2008 HMDA: Home Mortgage Disclosure Act, 1975 HOPA: Home Owners Protection Act, 1998 HOEPA: Home Ownership and Equity Protection Act, 1994 HUD: Housing and Urban Development Department LIBOR: London Inter-bank Offer Rate LMI: Low-to-Moderate Income LP: Loan Prospector (Freddie Mac’s automated underwriting system) LP: First American Loan Performance LPS: Lender processing services LTV: Loan-to-Value MBA: Mortgage Bankers Association MBSs: Mortgage-backed securities MMI: Mutual Mortgage Insurance MSA: Metropolitan statistical area NACA: Neighborhood Assistance Corporation of America NAR: National Association of Realtors NASDQ: National Association of Securities Dealers Automated Quotations NCRC: National Community Reinvestment Coalition OBRA: Omnibus Budget Reconciliation Act, 1990 OCC: Offi ce of the Comptroller of the Currency OFHEO: Offi ce of Federal Housing Enterprise Oversight OIG: Offi ce of the Inspector General OMB: Offi ce of Management and Budget OTS: Offi ce of Thrift Supervision PDAMS: Purchase discount amortization system PCS: Participation certifi cates in a pool of mortgages
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