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Fanniegate Just Got Worse

Horrible news for the Dems: Fanniegate is turning uglier still.

Along with its evil twin Freddie Mac, Fannie Mae is one of the key institutions of the blue social model that provide government subsidies to the middle class.  Already implicated in the housing bubble and the proliferation of liar loans and bogus mortgage backed securities, Fannie and Freddie may also have been up to their government-subsidized eyeballs in foreclosure abuse. Gretchen Morgenson—whose work Via Meadia has blogged on before—has a new piece in the NYT suggesting that the management knew years in advance that Fannie and Freddie’s foreclosure practices — contracted out to law firms — were seriously flawed but they did very little to correct them:

Fannie Mae, the mortgage finance giant, learned as early as 2003 of extensive foreclosure abuses among the law firms it had hired to remove troubled borrowers from their homes. But the company did little to correct the firms’ practices, according to a report issued Tuesday.

Only after news reports in mid-2010 began to describe the dubious practices, like the routine filing of false pleadings in bankruptcy courts, did Fannie Mae’s overseer start to scrutinize the conduct. The report was critical of that overseer, the Federal Housing Finance Agency, and was prepared by the agency’s inspector general.

Disturbingly, Fannie and Freddie gave their law firms an economic incentive to file false foreclosure documents:

The law firms in the network agreed to a flat-rate fee structure and pricing model based on the volume of foreclosures they completed.

The entire story is worth reading.  Not only did Fannie hire for its legal work law firms which forged bankruptcy documents, but it also gave them more power over its foreclosure operations after it was taken over by the government.  In one case, a contracted law firm for Fannie and Freddie “was handling more than 75,000 foreclosure actions a year before Fannie Mae terminated it because of vast problems with its legal work.”

A scandal like this is likely to do much more damage to Fannie and Freddie’s public image than their seriously flawed lending practices.  Corrupt lending agencies forging documents which cause homeowners to lose their homes is the kind of scandal which the public can understand.

The story is toxic to Dems for several reasons.  First, while the Bush administration did its share of Fannie-enabling, many of the key players are prominent Democratic activists and donors.  The Clinton administration stuffed the upper reaches of the federal agencies with good friends and many of the names and faces involved will look good in GOP attack ads come 2012.

Second, the Fannie/Freddie mess and the Dems’ involvement in it, makes it much harder for the Democrats to run as a credible anti-Wall Street, economically populist party.  Eager Democratic populists like James Carville think or at least say that running to the left can help Democrats win in 2012; the Fanniegate story is a way the GOP can undercut that Democratic narrative.

Third and perhaps most damaging, the Fanniegate mess illustrates the potential for even the best government programs with the best of intentions to backfire expensively and disastrously.  Lobbying by advocacy groups like ACORN allied to banking interests helped warp Fannie Mae’s programs from sound housing finance for the middle class into a toxic disaster that helped bring about the Great Recession.  This is the Tea Party case for small, limited government wrapped up into a comprehensible package and blames Democratic special interests for much of the country’s economic woes.

Anything that makes Fanniegate look uglier puts weapons into GOP hands for 2012; in many cases, the impact could be even more significant in close congressional and senate races where incumbents have voting records that leave them vulnerable.  Strategists for both parties should take note.

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  • WigWag

    This post perfectly illustrates Professor Mead’s modus operandi. As usual, he provides only half the story; that would be the part of the story that supports his thesis.

    What Professor Mead forgets to mention is that this type of abuse was just as common and perhaps more common in the private sector’s mortgage lending operations as in the public sector’s.

    It’s not just Fannie or Freddie that engaged in this type of abuse, it was Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. In fact, these banks are expecting to pay at least $20 billion in order to “make nice” on allegations of their foreclosure abuse.

    The story, which as far as I recall Professor Mead never bothered to blog about, has been all over the newspapers. More information can be found here,

    My question to Professor Mead is this; if the abuses of Fannie and Freddie are just more evidence of what a failure the blue state model is, are the abuses of the private banking sector evidence of the failure of the red state model? That would be an economic model which believes citizens, taxpayers, consumers and regulators should genuflect before the deity called “the market?”

  • Tim B

    Having read more than my fair share of reporting, books and studies regarding the housing industry and the sub-prime crisis as it bubbled up over the past 15 years, I am disappointed that otherwise intelligent and balanced authors (such as Dr. Mead) get worked up into such a partisan blather over Fannie and Freddie. While part of the network that contributed to the crisis, they were largely playing “catch-up” during most of the 2000’s to the private placement brokers who were bundling, selling and insuring the increasingly risky mortgages as the hottest new income stream since LBO’s in the 80’s. The idea that Fannie, Freddie and the Dem’s somehow led all the players down this path is a partisan myth which makes developing real safeguards agains this happening again more difficult . . . although it is great red meat for the more partisan inclined.

  • Anthony

    “Before the 1930s, little more than two fifths of American households were owner-occupiers. Unless you were a farmer, mortgages were the exception, not the rule…Mortgages were short-term, usually for three to five years, and they were not amortized. In other words, people paid interest, but did not repay the sum they had borrowed (the principal) until the end of the loan’s term, so that they ended up facing a balloon-sized final payment. The average difference (spread) between mortgage rates and high grade corporate bond yields was about two percentage points during the 1920s, compared with almost half a per cent (50 basis points) in the past twenty years…When the economy nosedived, nervous lenders simply refused to renew. By mid thirties home prices plummeted and the construction industry collapsed, revealing (as in all future recessions of the twentieth century) the extent to which the wider US economy relied on residential investment as an engine of growth.” Therein lies catalyst for government policy (FHA) vis-a-vis housing. The FHA provides the foundation for a national secondary market (Fannie Mae) pioneering the idea of a property-owning democracy (the virtue of home ownership) spurring the economy.

    Now, here we are; and whether or not this housing policy (Fannie Mae)) is a partisan issue, market issue, human fallibility issue, our challenge as citizens (and taxpayers) remains to examine a business model (and its proponents) that led to such financial restructuring as visits our markets and lives today. For me, its not a binary choice (GOP or DEM); I think American taxpayers should take note and carefully examine public policy – and your representatives.

  • Perry

    I’m not sure where the red state model ends and the Tea Party model begins, but crony capitalism’s great strength is that it has the money to transcend political parties by implicating both. Maybe my take home lesson is that vast amounts of money aims for what it wants regardless of who holds the nominal reins.

    The left is clearly hostile to big corporatism, and has been. The Tea Party could, I think, handle big business, but can’t stand the crony part.

    It is a development of the last fifty years that the core values of business and Main Street have separated. It is almost as though there are three parties now: left, right and big money, where BM (Phew!) doesn’t care who signs what in the East Room as long as its interests hold sway.

    As for the law firms that allegedly falsified documents, and the Fannie and Freddie execs who turned a blind eye to that, people need to go to jail.

    It has been a running joke forever that if business handled its affairs like the gov’t runs its, people would be in the slammer for dereliction, malfeasance, fraud and etc.

    Apparently when they are not using the printing presses to flood the world with fiat cash, they moonlight cranking out get-out-of-jail-free cards.

    Until a swath of law breakers is cooling their ollective heels behind bars, to include bankers, lawyers and government functionaries, there is no incentive for any of it to stop.

    Those people must get together in Washington and New York and laugh their asses off.

  • Toni

    The Gretchen Morgenson link doesn’t work. But she cowrote a book on this topic, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.

  • Perry

    Edit correction: on comment #4, line #4, the sentence should end with, “both red and blue models.” The way it reads now indicts the Tea Party, which was not my aim. I regret not catching that .

  • Jacksonian Libertarian

    The Government Monopoly sucks, it can’t be fixed no matter what the big government politicians tell us, it can only be limited in the damage it does as our founding fathers taught us. It simply lacks the feedback that competition provides to the free enterprise system that makes it continuously improve quality, service, and price. There doesn’t seem to be any way to provide this competition derived feedback into the Government Monopoly, beyond what our founding fathers created with the checks and balances of divided government and periodic changes in personnel with democratic elections.
    Fannie has already cost us $300+ Billion, and nothing has been done to fix the stupid thing, or kill it. I hope the focus can now be placed on killing Fannie, Freddie, and the Community Reinvestment Act which enabled the corruption by requiring Banks to loan in all the zip codes in their area. It made simple banking sense to lower their risk by buying securities bundled by Fannie for those questionable zip codes.

  • Patriot

    The above comments mentioning the complicity of private mortgage lenders forget to mention that Freddie and Fannie set the baseline for most mortgages. Without the backing of Freddy and Fannie, the questionable lending and bundling would have occurred.

  • Scott

    Having spent twenty years as an investor in Real Estate, I can tell you that 90% of all residential loans written must conform with Fannie Mae rules…When Fannie Mae certified no-doc loans the industry responded…One need look no further than Fannie Mae policies and the directors who wrote them to find the cause of the sub-prime catastrophe.

  • Joe Ynot

    So WigWag and Tim B are establishing the Dem defense on F&F: I never borrowed your pot,I gave it back to you 2 weeks ago, and it was broken anyway.

    The banks would never have been able to make these loans if Congress and the Executive, using F&F as their instrument hadn’t first forced, then, when the vast amount of short-term profit available became apparent, enabled them to.

    These loans would never have cleared without first the government forcing a lowering of traditional, i.e. mathematically possible, loan standards, followed up by making it financially feasible through the use of F&F’s vast resources. If you look closely at what W and Tim B wrote, they can’t directly contradict this.

  • styrgwillidar

    Although both the private industry and Freddie/Fannie did many of the same things, the issue with Freddie/Fannie is the tie to government (i.e. taxpayer money). What should have happened to the private organization that did this was bankruptcy, not bailouts. The market should have been allowed to work with the idiots doing this suffering the consequences vice being rewarded. So, I agree with those who lump it all together because that’s effectively what the US government did. Turned all the large banks into Freddie/Fannie with the taxpayer footing the bill for bad, bad, bad, decisions. If the lenders who’d made stupid decisions had failed, there assets would have been sold piecemail to the financial organizations who hadn’t taken those risks. They would have bought the assets (bad loans) for pennies on the dollar. That would have allowed them to enter into negotiations with the lendees; discount the loans, lower principle etc. because they would still have been able to make a profit.

  • Everyman

    And the over/under on lawyer disbarments and law firm liquidations is . . .

  • ThomasD

    So, based on WigWag’s comparison, the next time someone says ‘we cannot trust big corporations to do ‘X’, we can safely conclude that we cannot trust the government to do it either.

    On this we agree.

  • Jim.


    I’m afraid I didn’t take the time to run through all the comments on that article you cited. Do those comments include any criticism from you that article only reported half of the story, and unfairly targeted corporations while ignoring the culpability of government agencies?

    Also, I can’t help but notice that that article you cited is one that reports how banks are paying $100 billion dollars (or more) to make good on their crimes. Is there any sign that the folks at Fannie / Freddie are going to be brought to justice in any way, shape, or form? Are the “key players [who] are prominent Democratic activists and donors” going to face anything like $100 billion in fines? If that is not a feasible resolution, they should probably face jail time.

    Unless they’re going to be doing perp walks, I think that WRM’s underlying point that they should *at least* be voted out of office is sound. This current crop of Democrats is in no way any kind of improvement over the Bush types they claim to exceed in virtue and capability. Nor is the public approach superior to the private approach, which is the core of Obama’s claim that he needs economic power to influence these events.

    WigWag, you point out that some degree of justice has been done to the private-sector perpetrators of this disaster. What do you propose should be done about the public-sector perpetrators?

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