I wrote here about a very important story, which originated with Edward Pinto, a former chief credit officer for Fannie Mae, and was broken by Peter Wallison in the Wall Street Journal, that deserves much wider coverage. Everyone knows that Fannie Mae and Freddie Mac, the government-sponsored entities that helped create a market for mortgage-backed securities, played a key role in last year’s financial crisis. But the truth is, apparently, worse than that. It seems that Fannie Mae and Freddie Mac–the U.S. government, in effect–”routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A….” The much-reviled Wall Street bankers relied on those representations by agents of the federal government when they bought and sold securities backed by those misrepresented mortgages.
Qualitatively, this is not quite as bad as Bernie Madoff’s Ponzi scheme, but it is worse than anything Enron did. Quantitatively, it caused financial devastation compared to which Enron and Madoff are barely grains of sand in the ocean. So, wouldn’t one expect our reporters to show a little curiosity? Silly question, perhaps: mainstream reporters don’t like where that trail leads. Also, to be fair, most of them are not smart enough to understand it.
But Pajamas Media is on the case; Tom Blumer elaborates:
Before Pinto’s bombshell, we knew that Fan and Fred were used as instruments to “encourage” loans to undeserving borrowers. We knew that this “encouragement” was enforced through the Community Reinvestment Act (CRA), a law originally passed in the 1970s that was “progressively” given threatening teeth in ensuing years.
We have known for some time, as described in my September 2008 column, that Fan and Fred lowered the qualifying standards for conventional and subprime loans they would buy from participating lenders roughly as follows (quoting from that column):
The credit score threshold for conventional mortgages, which had generally been 670 or more, dropped to about 630. In the real world, a score of 630 indicates that you’re having trouble with your debt load, paying your bills on time, or a little of both.
More ominously, the credit score threshold for subprime mortgages, which had generally been 630 or more, fell to about 590. A score of 590 is the credit scoring equivalent of barely having a pulse.
We know that in doing this, Fan and Fred, as well as those who underwrote or bought securities backed by these conventional and subprime mortgages, were taking a huge risk by hoping that borrowers with mediocre or poor credit histories would somehow keep up with their mortgage payments. …
Incredibly, the Pinto paragraph above takes things one step further. It’s bad enough that Fan and Fred lowered the loan approval thresholds. Pinto’s point is that for 15 years, they doubled down by “routinely” misclassifying approved loans, effectively telling the capital markets and the public that these loans weren’t as risky as they really were. Because of this, securities backed by these mortgages carried lower interest rates than they would have if the risks had been properly disclosed. Some of the offerings should probably never have been issued or should have been given junk bond pricing. Further, misrepresented loans Fan and Fred kept on their books enabled the two entities to continually make false claims of financial health.
In the real world–i.e., the world not run by Barack Obama, Harry Reid and Nancy Pelosi–this is known as “fraud.”
And Mickey Kaus picks up on a key date in Wallison’s WSJ piece:
“[A]s early as 1993.” Hmm. Doesn’t that put this alleged routine misrepresentation well before Designated Fall Guy Franklin Raines’ tenure as head of Fannie Mae–and back into the watch of Getting-Away-With-It-Because-I’m-Well-Connected-and-Spread-It-Around Mondale campaign manager and initial Obama veep-vetter Jim Johnson? I think it does! (Johnson was CEO of Fannie Mae from 1991-1998.) … P.S.: ‘Misrepresented the mortgages ….” Isn’t misrepresenation some kind of, I dunno … fraud or … crime? Even if it was done in an arrogant, misguided attempt to extend the American dream of home ownership down the income scale (which maybe had a side effect of justifyiing the high pay of Fannie Mae executives)? … Just asking!
Last year’s financial crisis, from which we are still suffering, had its roots in the Clinton administration. To get the whole story, read Peter Schweizer’s Architects of Ruin.
It’s remarkable, really, how little interest our liberal reporters and editors have in the biggest economic story, and one of the biggest political stories, of the last 50 years.