Fannie/Freddie – The Game Has Changed. ENRON on Steriods

Posted on September 7th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I don’t have time to write this up right now but I urge all of you to read this.  Every word.  Right now. This entire Fannie/Freddie story is not what it seems. It not a ‘bailout’ by the Gov’t trying to be proactive and get ahead of a failure. These are already the largest corporate failures in history due outright fraud.  These two companies and out of touch regulators have put every US tax payer and perhaps the US credit rating itelf in jeapordy. Deloitte and Morgan Stanley busted them. The criminality is something for a feature film.

I will entice you by leading in with ‘Fannie Mae did not count a loan ‘delinquent’ until the borrower was TWO YEARS LATE.’  Throughout time, most have had a 90-day policy that results in accounting action.  Well, that’s of course you talking talk about Second Mortgages, which some banks including Wells Fargo have now extended to 180-days.

We also learned that Fannie guarantees $400 billion and Freddie $800 billion in Alt-A and Subprime.  Everyone thought they had $700 billion in total. That’s almost 20% of all their holdings.  Given how poorly private labeled Alt-A and Subprime are performing and how the GSE’s hid defaults and foreclosures, the losses must be multi-hundred billion dollar, staggering arena.

This is the largest fraud story in the world’s history.  This makes ENRON look like a shoplifting.  When you are done reading, think again about the $5.2 trillion in retroactive MBS guarantees that they are thinking about putting on the tax payer and how much of that really may be bad paper. 

Fannie lied and cheated for years. Several years ago they kicked out the old CEO’s and the new ones appear to be even more crooked.  Hat-tip Gretchen Morganson.  -Best Mr Mortgage

http://www.nytimes.com/2008/09/07/business/07fannie.html?_r=1&hp&oref=slogin

16 Responses to “Fannie/Freddie – The Game Has Changed. ENRON on Steriods”

  1. This entire bailout of the GSEs and the associated meltdown in housing is why I’ve been telling my wife for the last two months that the winner of the presidential election will be a one-term president no matter who wins – we are looking at a economic meltdown and required tax increases that will alienate most of the US public and send us into a 1970’s era malaise. As a country we have deferred our financial problems for far too long and we will run out of options.

    That Fannie and Freddie were cooking the books is no secret – go back 5 to 7 years and you will see a similar series of articles about this and issues with their auditor on the accuracy of the books.

    Go look at the bankruptcy trustee’s report on the failure of New Century Financial – he concludes that KPMG aided and abetted the company in cooking the books. I worked for a Big Five firm for many years and while they have gotten more conservative since Enron, one only needs to look at the absurd quarterly earnings and 10-Qs that have been filed this year to understand that the accounting firms are bending over backwards to help their clients massage earnings, especially in the financial industry.

  2. Ok, so a contact of mine used to work at Countrywide. The original requirement between them and the GSE’s for loans ultimately landing at the GSE was that all the loan docs needed to be put together and sent over within 1 year of closing. My contact says an arrangement was made with both of the GSE’s to eliminate that requirement and instead agree that if docs were needed/requested, CW would provide them within 3 days.

    Once this arrangement was made, the underwriting became increasingly sloppy. Internal reviews of the underwriting found missing information and dubious claims by the borrower wrt their income, assets, etc. Those responsible were given slaps on the wrists, but otherwise the game continued.

    In the end, I believe we all know what this means. The GSE’s were buying garbage loans.

    This bailout of the GSE’s is just going to make the government act more crazy about trying to arrest the reduction in home prices. We don’t need the GSE’s for people to be able to get loans, just look at other countries. What we need is for housing to be allowed to fall as much as required in order to make it affordable. Sure, it may overshoot, but what can you expect? At that point it will make much more sense to loan money especially with 20% down. At the moment though, it’s crazy to loan money against a declining asset so if the home loan credit market seizes/drys up, so be it. Once reasonable housing prices return credit will be available whether the GSE’s are around or not.

  3. Talk about late to the party! You just figure out that there was fraud at Fan and Fred?!?!?

    The Feds are bailing this thing out because they created it, they regulated it, and they encouraged it to grow. Fraudulently.

  4. Dirty Harry once said “A man’s gotta know his limits”

    I find Mr Mortgage to be a useful source when it comes to issues involving the mortgage bankers, real estate, and what’s happening at the street level in Cali.

    But this guy is without a clue when it comes to assessing public companies, predicting public policy, understanding the debt and equity markets, etc.

    Sad thing is, he doesn’t even realize it and soldiers on with increasingly bizarre posts.

    IMHO, YMMV

  5. “This is the largest fraud story in the world’s history.”

    And Mr Mortgage has JUST figured this out!

    Hardly news.

    A very dim bulb indeed.

  6. For years now I’ve been asking why Jeff Skilling is in jail, and Franklin Raines is out playing golf every day (I said this as a way of saying that the fraud story at Fannie has been obvious but inconvenient… Was there fraud at Fannie? It seemed that everyone wanted to look the other way rather than find out).

    Remember, the NYSE permitted Fannie’s stock to continue to trade, even though, by the NYSE’s own rules, the shares should have been delisted since Fannie had not filed any accounting statements with the SEC for many many quarters.

  7. A principal reason why I have stated for the last several months that we may well stave off the meltdown until February of next year deals with this very issue.

    Recall the dramatic downdraft we had in January. This is coincident with a little known fact.

    Quarterly earnings reports are not audited. Annual statements, typically issued in January, are.

    AUDITED reports, especially after the Enron scandal, are far more probative of a company’s ACTUAL financial health. This story deals with the difference between an AUDITED and an UNAUDITED view of a company’s balance sheet.

    Under current case law, accounting firms are FULLY LIABLE for ALL of the losses not properly represented on AUDITED statements. This means that just one poorly performed audit of a corporate behemoth can wipe out any of the large accounting firms. Again, recall Enron and Arthur Andersen. This case law has not changed.

    As yet another sign of their central role in intensifying this crisis, the SEC (NOT the FED) is likely to argue in court against this case law. However, it is by no means clear they will prevail.

    Think of Arthur Andersen’s extinction at the hands of Paul Volcker and the courts. They were thought to be “too big to fail”. Their very public dismemberment chastened EVERYONE working for a large accountng firm.

    Because ONLY annual reports are audited, this accounts for why there were so many huge earnings “surprises” in January. Last January, corporate Treasurers were shocked by the intensity and pugnaciousness of the auditing firms, said firms determined not to go the way of their dear friends at Arthur Andersen by failing to include enormous risks posed by asinine derivatives accounting practices in their comprehensive audits.

    The story above is but one example why in this current environment quarterly earnings reports are virtually worthless and the ONLY rational accounting treatment occurs from the AUDITED reports, issued every January.

    Matt Dubuque

  8. Hey Mister Mortgage, spin this! I can’t emphasize enough just how wrong you were.

    From Treasury Secretary Paulson:

    “These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.”

    Translation:

    The Feds have BOTH a moral and practical obligation to make the holders of current MBS and debt whole.

    Can’t state it any simpler than that.

  9. You Haters Suck – start your own Blog.

  10. “…send us into a 1970’s malaise.”

    If only what’s coming would be so forgiving as the 1970’s…

    What’s coming directly ahead is so ‘out there’ that to discuss it would immediately relegate one to the tin-foil hat crowd.

    Most of us either believe (or have believed) that because we live here, that nothing bad could ever happen. ‘Bad’ in the context of what routinely happens or has happened in countries outside our boundaries in terms of economic, political and social strife.

    I can only state that it’s probably a good thing we don’t know precisely what is right around the corner, because at least not grasping the full extent of what lies ahead, allows for some preparation and reflection. As this slow-motion (but rapidly accelerating into fast-motion) Smack-down plays out, you will at least have an ‘ignorant’ chance at survival.

    If you had full knowledge of just how bad things are going to get – from all angles, it would likely be too depressing to confront.

    Peace –

    CC

  11. I will entice you by leading in with ‘Fannie Mae did not count a loan ‘delinquent’ until the borrower was TWO YEARS LATE.’

    You’ve misread this. Of course they file a NOD and count a loan delinquent after 90 days. The change is that they allow for longer workouts/short sales and do not write down values of loans (for balance sheet purposes) while they are being worked out. (Which may in principle take up to 2 years, but never really does)

    http://www.fanniemae.com/markets/debt/pdf/fundingnotes_05_08.pdf

    Many investors and analysts view the serious delinquency rate as an indicator of potential foreclosures in the future. However, most loans that become seriously delinquent do not result in foreclosure.
    Fannie Mae classifies a single-family loan as seriously delinquent when it meets one of the following three criteria:
    (1) When a borrower has missed three or more consecutive monthly payments,
    and the loan has not been brought current or extinguished through foreclosure, payoff or other resolution;

  12. The Asians own way too much of the debt for the govt to not make them whole. Gotta keep em happy, or they’ll turn off the juice. The US$ holding up ok in FOREX right now. Funny.
    I dont see how this will change the default that are headed down the pipe, though. Maybe I’m missing something, besides the usual brain cells slipping away everday.

  13. Scientist – William Poole is on my side. This is becomming more realistic. Now double it because he is paid to be conservative and you come very close to my figures.

    U.S. Losses on Fannie, Freddie May Be $300 Billion, Poole Says
    By Christopher Swann and Pimm Fox
    Sept. 7 (Bloomberg) — William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae and Freddie Mac, the mortgage giants being taken over by the Federal government.

    “I would not be surprised if their total losses aggregate about 5 percent of their obligations” of about $6 trillion, Poole said today in an interview on Bloomberg Radio. “Five percent does not seem to me to be an outrageous guess.”

    Poole welcomed the decision to put the companies into conservatorship by the Federal Housing Finance Agency, calling it preferable to action by the Federal Reserve. He said financial fallout from Fannie and Freddie was likely to be a long-term drain on the Treasury.

    “It’s extremely healthy that it’s now the Congress and the Treasury and not the Federal Reserve putting funds in,” he said. “It’s not the purpose of a central bank to put funds in to save or bail out failing companies.”

    Treasury Secretary Henry Paulson said today he would replace the chief executives of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac and eliminate their dividends. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth.

    The Treasury said it would reduce the portfolios of both companies by 10 percent a year starting in 2010. “I think that’s a good way to go, and I just hope that the government can complete that course,” Poole said.

    To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net; Pimm Fox in New York at pfox11@bloomberg.net;

    Last Updated: September 7, 2008 16:39 EDT

  14. All I know is that I want the current and former executive officers of FNM & FRE in prison (that includes Franklin Raines); and, I want the boards and their chairmen of both GSE’s over this time period in prison as well. It is time!

  15. […] Phonie/Fraudie Thoughts Before Market Decides FateFannie/Freddie – Massive Fraud BreakdownFannie/Freddie – The Game Has Changed. ENRON on SteriodsFannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.Fannie/Freddie…Now We Wait […]

  16. […] NewsFinal Phonie/Fraudie Thoughts Before Market Decides FateFannie/Freddie – Massive Fraud BreakdownFannie/Freddie – The Game Has Changed. ENRON on SteriodsFannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.Fannie/Freddie…Now We Wait […]

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