My Initial Two Cents on Fannie Mae and Freddie Mac and the Spreading Financial Crisis on Wall Street
[Posted by WLS]
Several weeks ago I had the itch to post on this subject after reading this article at SFGate — the San Fran. Chronicle website. It’s the final installment in a series on families that had gotten themselves caught up in the subprime mortgage meltdown.
There are certainly many facets to the causes of the subprime disaster that is currently infecting all sectors of the financial services industry. IMO the main culprit is Fannie Mae/Freddie Mac and the removal by Congress of any restrictions on its growth. The movers behind that effort, and the stalward defenders of Fannie Mae and Freddie Mac were Barney Frank and Chris Dodd, though they certainly needed GOP support to make it happen. But Dems far and away dominate the receipt of campaign contributions from Fannie Mae and Freddie Mac, and the millions of dollars Fannie and Freddie spent on lobbying and campaign contributions wasn’t for nothing. They bought off any interest in Congress for tighter regulation of their growth in purchasing securities in the secondary market. This willingness created a “black hole” of secondary market purchasing, where Fannie and Freddie sucked up every kind of mortgage debt instrument the financial services industry could create. No paper was too risky for Fannie and Freddie to buy, and when they resold those instruments to investors, no instrument was too risky for Fannie and Freddie to insure with a repurchase guarantee.
But, lets get back to the underreported aspect of the meltdown — the complicity of unqualified borrowers.
It just so happens that the subjects of this particular story are an AA family living in a lower socio-economic neighborhood in Oakland. But it doesn’t matter what their ethnicity is — they were not creditworthy borrowers, and they acted irresponsibly with the money they received.
Yes, THE MONEY THEY RECEIVED.
Sometimes overlooked in all the subprime mortgage reporting is that the homeowner who refinanced — and now finds themselves dispossessed of their property due to their inability to make the payments — received a large amount of money from the company that took back the mortgage.
In all the handwringing over the plight of the Gardner family’s saga in the article, very little time is spent on this subject:
Joann’s parents, Johnnie Gardner, 87, and Estelle, 88, bought the two-bedroom in the Sobrante Park neighborhood in 1954 for $11,500. His salary as an electrician at the Oakland naval shipyard allowed them to make the payments.
But in recent years, Joann and her brother refinanced it several times for increasingly larger amounts.
The final refinance at the end of 2006 left the family owing $454,000. The monthly payments of $3,362 exceeded the household income of $3,144.
What happened to the money from all the refinances?
Gardner can’t quite say. Some went to paying off credit cards; some was eaten up in huge loan fees. What is clear is that the family has not made a mortgage payment since December 2006.
Only in America.