Fannie And Freddie Are America's Underdogs And They Have The History To Prove It
Apr. 21, 2025 - Christopher DeMaria
look at Fund ownership !
Summary
-- The Fannie Mae court cases have greater implications than ultimately deciding whether the GSE's (Fannie Mae and Freddie Mac) should be released from government conservatorship.
-- A partial Timeline of events leading up to and following the financial meltdown.
-- Shareholders, Citizens, Taxpayers need to hold our government accountable.
The Fannie Mae (OTCQB:FNMA) court cases have greater implications than ultimately deciding whether the GSE's (Fannie Mae and Freddie Mac (OTCQB:FMCC)) should be released from government conservatorship. They represent more than just shareholder’s rights and their ability to participate in the success of the companies they have invested in. These cases are about our rights and liberties and the great responsibility to hold our government accountable as free citizens. They are also about keeping the American Dream alive and providing housing market liquidity to our nation’s neediest. Consequently, a failure to release these entities suggests that, as a nation, we are lowering our standards of responsibility and accountability to one another.
A great quote from Jeff Atwater, Florida's former Chief Financial Officer, crystallizes my point that accountability is a systemic problem which is not just isolated to the GSE's:
"Our Constitution, and the subsequent Bill of Rights, enshrines the specific liberties that Americans recognize as coming from our creator. It also defines a clear system of limits and accountability for government. But somewhere along the way, the roles of accountability are being reversed.
The absolute truth that a free people must hold their government accountable is being rejected by some and replaced by a failed idea that citizens ultimately answer to government." Time-line of events
1977: President Jimmy Carter signed the Community Reinvestment Act which was designed to eliminate discriminatory lending in banks. (ref 1)
1980: the Depository Institution's Deregulation and Monetary Control Act increased the availability of alternative mortgages. These alternative mortgages are backed by government sponsored enterprises Fannie Mae which was established in 1938 as the Federal National Mortgage Association, and Freddie Mac, established in 1970 as the Federal Home Mortgage Loan Corporation. (ref 2)
1992: The Federal Housing Enterprise's Financial Safety and Soundness Act of 1992 provided HUD with the oversight of Fannie Mae and Freddie Mac, allowing the expansion of these 'alternative mortgages' using implicit and explicit pressures (Miller,Benjamin, North, 2010 pg. 122) on lending. (ref 3)
1994: The National Home-ownership Strategy began and this effort was coordinated with the Department of Housing and Urban Development to increase home-ownership among all Americans. On paper these incentives sounded pretty good and seemingly with good intentions. The reality is, almost anybody could get a mortgage as a result of the changes that were occurring. Many fell prey to their own desires and the temptation to use higher risk adjustable rate mortgages, interest-only loans, and no-documentation or stated income loans that were readily available until the financial meltdown. (ref 4)
1995: "Blueprint for Reinvention of HUD" and "The New HUD" was released promoting the value of home-ownership and many changes to lending standards. This, in conjunction with The National Home-ownership Strategy, loosened lending standards while seeking more creative lending practices to increase home-ownership. Policies to increase home-ownership were written with the intent the GSE's purchasing $2.4 trillion of mortgages over the next ten years.
1996: The national home-ownership rate hit 66.3 million or 65%, the highest it had ever been. HUD set standards for banking institutions which technically, did not force the banks to make sub-prime loans. However, if the lending institutions did not comply with minimum goals, Fannie Mae and Freddie Mac would have to refuse to back the mortgages (this is called moral suasion). In 1996, 42% of the mortgages in the portfolios had to be derived from borrowers who's incomes were below the median income of the area. Subsequently, this target was raised to 50% in 2000 and 52% in 2004. These where portfolios of mortgages that Fannie Mae and Freddie Mac were required to guarantee. Isn't it odd that many politicians today are now blaming the "greedy banks" and the GSE's for these failed government policies. (ref 6)
1997: Home-ownership had increased by 2.3 million additional home-owners. One of the largest increases in history.
1999: The Gramm-Leach-Bliley law, passed in 1999 and signed by Clinton, repealed the Glass-Steagall Act. This law benefited the economy and had a negligible effect on the looming banking crisis. Some argue that this may have helped stabilize the economy by allowing for the purchase of Merrill Lynch by Bank of America or JP Morgan to purchase Bear Sterns. The purpose of mentioning the Gramm-Leach-Bliley law was this was a period of deregulation and lack of financial oversight which not only impacted America but, Europe as well. (ref 8)
2000: The national home-ownership rate reached 71.6 million or 67.5%. There was an increase in the home-ownership incentives that were in place and home-ownership increased from 67.5% in 2000 to 69.2% at the end of 2004. The tide was already beginning to turn as the home-ownership rate declined back to 67.5% by the end 2008. (ref 9)
2005 thru 2007: Roughly 200+ billion dollars of toxic mortgages were dumped on Fannie and Freddie. These were not known risks and according to Judge Jed. S. Rakoff this scheme was a "brazen fraud.", yet Fannie and Freddie were the scapegoats. (ref 10)
July 2008: Congress passes the Housing and Economic Recovery Act (HERA), creating the Federal Housing Finance Agency (FHFA), and providing the option to place Fannie and Freddie into conservatorship or receivership. (ref 11)
September 6, 2008: FHFA chose to place Fannie Mae and Freddie Mac into conservatorship. This left approximately $34 billion of privately held preferred shares outstanding. (ref 12)
September 26, 2008: Treasury enters into preferred stock purchase agreements (PSPAs) with FHFA to purchase senior preferred stock of both Fannie Mae and Freddie Mac and to receive warrants for 79.9 percent of the common stock of each company. (ref 13)
2008: Shortly after the GSE's were put into conservatorship they were ordered to buy additional toxic MBS from the banks. This was billions of dollars worth of toxic mortgages in addition to the 200 billion between 2005 and 2007. Some estimates suggest a total of $267 billion were dumped on the GSE's (ref 14) (ref 15)
May 6, 2009: The First Amendment raises the maximum aggregate amount of funds permitted to be invested by Treasury into Fannie Mae and Freddie Mac from $100 billion to $200 billion. (ref 16)
December 28, 2009: The Second Amendment removes the cap on funds available through 2012 to provide stability in the mortgage market. December 31, 2009: Treasury's statutory authority to set the "terms and conditions" of Fannie Mae and Freddie Mac security purchases expires. (ref 17)
November 2010: Two years after the rules of conservatorship are established and after Treasury's authority to set the "terms and conditions" of security purchases expires and Perry Capital begins to purchase Fannie Mae and Freddie Mac securities for its institutional clients.
August 2012: Treasury and FHFA revise PSPAs via Sweep Amendment from a 10 percent annual dividend to quarterly sweep of all profits. Furthermore, these payments will not redeem the senior preferred stock or otherwise reduce the balance owed by Fannie Mae and Freddie Mac, essentially wiping out private investors, and liquidating, rather than conserving, the companies
2012: Both GSE's become profitable despite absorbing billions of dollars of toxic debt. The GSE's did exactly what they were supposed to do during a financial crisis and I am thankful to those who diligently did their jobs at the GSE's despite the uncertainties and criticism in part from our own leaders. (ref 18)
June 29, 2013: Fannie Mae and Freddie Mac pay a combined $66.4 billion payment to Treasury. With these payments, Fannie Mae has now paid $95 billion of the roughly $116 billion it has received, while Freddie Mac has repaid roughly $37 billion of the $71.3 it received. (ref 19)
2014: Fannie Mae and Freddie Mac have fully paid back the taxpayers/US Treasury even though the terms of the conservatorship, technically don't consider this a repayment. By the end of September 2014, they will have paid a total of $218.7 billion. That is $31.2 billion more than the $187.5 billion they received after being placed under government conservatorship. (ref 20)
2015: The GSE's have paid a total of $241 billion to the treasury, earning taxpayers $53billion in excess of the $187.5billion borrowed by the GSE's
2015: Despite Government inaction, there have been many positive changes and reforms under Mel Watt and the GSE's. These include increasing private capital requirements needed by the private sector, through capital market structures and risk sharing models, which reduce potential taxpayer risks.
There is also a focus on private mortgage insurance conterparties to offset additionals risks during market stressors and the creation of a common securitization platform (NYSE:CSP). The creation of a single common security is intended to reduce costs and increase liquidity within the housing finance markets and it's starting to sound like Fannie and Freddie may merge some day. Maybe it's better for these reforms to occur from within afterall.
2016: Multiple lawsuits, attempting to free the GSE's, remain in place and one of interest is Jacobs & Hindes V. the FHFA. Glen Bradford describes this well in his article Fannie Mae Lawsuit Updates Bode Well For Shareholders
Our Communities
The GSE's obviously play a critical role in the US financial System. They are, not only a central component of the American housing market but, they also play a crucial role in the "American Dream", by making affordable housing available to our nations new homebuyers and to lower income families. While it is important to continue to provide housing finance availability to our nation’s most needy, it is equally important to prevent the abuses that occured in the past. The new efforts under Mel Watt and the GSE's appear to be addressing those abuses.
Cause and Effect
The continued need for creative lending practices and the easing of lending standards was a great burden that was placed on our nation's financial system. Although there is fault on many levels, including the less sophisticated home buyers who bought more house than they historically may have been able to afford, the lenders who recommended the newer lending products (ARM's and stated income loans), and the banks that gave in to moral suasion from the US Treasury, government policies were ultimately the driving force behind all the events that culminated into the perfect storm. Now the GSE's are being hung out to dry for adhering to such policies.
Justice and truth will ultimately prevail but we, as a nation need to address the issues of accountability and responsibility and how these have become a cultural problem. I often lament, how good, moral, and responsible leaders can rise out of a culture that doesn't value such things. Our leaders were brought up in a culture that is losing its sense of personal accountability and responsibility. This is a grass roots problem and we need to address it by looking at our own actions and families and how we interact with others. These are the same families that have hope in the American Dream and of someday owning their own home. Unfortunately, America's values are under attack and it's time for our taxpayers and citizens to demand truth.
The circumstances surrounding Fannie and Freddie symbolize the war on the American Dream and hence, Fannie and Freddie are Americas Underdogs.
AI
