Investors in Fannie, Freddie Should Consider Depth of Deception

[Mejappz]

*** FOR IMMEDIATE RELEASE ***​

INVESTORS IN FANNIE, FREDDIE SHOULD CONSIDER DEPTH OF DECEPTION

VENTURA, Calif. (January 17, 2024) – The mummified shares of mortgage giants Fannie Mae and Freddie Mac have been stirring in their crypt on speculation that the incoming administration will boot the twins from government conservatorship, where they’ve been since 2008. Investor Bill Ackman is believed to have made close to $1 billion from speculating on the stocks’ recent ups and downs. (Think the GameStop mania of 2021.)

While Ackman is free to dabble, it should be caveat emptor – buyer beware – for any pension-fund manager, insurance executive, endowment investment officer, widow or orphan. The twin pachyderms are filled with more incompetence, fraud and corruption than ever before. Their proximity to the halls of power while in federal conservatorship has only proliferated the mischief and deceit.

The twins together guarantee around 70% of U.S. mortgages. They control the U.S. mortgage market while ostensibly relying on its independence. During the Biden administration, the waste and corruption has been pumped in at fire-hose pressures.

Destruction of Underwriting Safeguards
The mortgage giants have eliminated critical checks and balances in a radical experiment with U.S. taxpayers’ money and the U.S. economy. A stage-managed campaign to subvert federally guaranteed mortgages for political purposes began early in the Biden administration with a phased attack on time-tested underwriting norms. The twins began scrapping or weakening safeguards like standard FICO scoring, title insurance, mortgage insurance, downpayments and appraisals.

The Federal Housing Finance Agency is the twins’ federal regulator and conservator. The then-head of the agency, a political partisan named Sandra L. Thompson, oversaw efforts to coerce the publicly traded Fair Isaac company to dilute its FICO score with new variants that promised “inclusivity” and untold risk to U.S. taxpayers and now investors. She also led efforts to replace title reports and title insurance with what are being called “lawyer letters.”

At the glitzy Mortgage Bankers Association’s Annual Convention and Expo in Denver last year, Thompson and acting Secretary of Housing and Urban Development Adrianne Todman laid one final sop at the feet of the special interests and politicians who’ve captured her agency. The giveaway effectively banned the requirement for anything recognizable as a valuation of the homes securing almost all mortgages guaranteed by the twins going forward. The decree creates what amounts to a new federal entitlement program.

One of the most disturbing recent developments at Freddie and Fannie has been the censorship of appraisers. Freddie, in particular, is actively censoring appraisers for the use of words like “crime,” “graffiti,” “student,” “preferred,” “school district,” “well-kept,” “desirable,” “undesirable,” “good” and “bad” in appraisal reports. Also being censored are words any economist, financial analyst or market observer would use like “high,” “low,” “strong,” “weak,” “slow,” and “rapid.” Many puzzlingly innocuous phrases like “convenient to” are also being censored. The new policy aims is to silence appraisers and cow them into rubber-stamping values to make deals work.

Affinity Schemes
Fannie and Freddie are again embracing affinity schemes. Addie Polk was a 91-year-old African-American widow who shot herself in 2008 during a Fannie Mae-initiated eviction in Akron, Ohio. A fraudulent mortgage was taken out in the widow’s name through a so-called affinity scam in which commissioned salespeople for the now-defunct Countrywide Home Loans infiltrated her African-American Baptist church. It is believed bad actors, after taking volunteer positions at the church, copied the elderly woman’s signature from donation checks. The subsequent cash-out mortgages and lines of credit taken out in her name devoured the equity in the nonagenarian’s home, which she had owned free and clear prior to the episode. Had she not shot herself and gained a national spotlight, her story would have slipped under the radar.

The Equal Credit Opportunity Act prohibits discrimination against any credit applicant on the basis of characteristics like race, color, religion, national origin, sex, marital status or receipt of public assistance. But the statute has an unusual feature: It permits creditors to favor people with those characteristics in a dangerous exclusion called a “Special Purpose Credit Program.” Banks wisely steered clear of this exception in recent years, since it can be construed as racial targeting. But partnering with nonbank lenders, Fannie and Freddie resurrected the Special Purpose Credit Program to appease their political overlords in the Biden administration. In the process, the move provided a fig leaf for affinity-scam fraudsters, targeting minority homebuyers in poor neighborhoods who tend to go immediately underwater.

 

[Mejappz]

Making Bad Loans and Selling Them to Venture Capital Firms
Fannie and Freddie have been making bad loans and then dumping the notes for pennies on the dollar to companies that are not putting foreclosed homes back on the market. Instead of being allowed to reprice, the homes are being rented out. Also, the restrictions in fine print placed on the purchasers of Freddie and Fannie’s nonperforming loans offer a big clue as to what the twins are up to in staving off foreclosures of botched mortgages. Since Covid, Fannie alone has auctioned off pools of nonperforming and so-called delinquent “reperforming” loans. The twins have been quietly purging them from their books or holding the loans under misleading labels, such as “reperforming.” In the past, both entities have been caught using accounting strategies that underreported expenses and inflated income.

Twins Sell to Artificial Market: Federal Reserve
We know that since 2010, the Federal Reserve has been purchasing mortgage-backed securities from Fannie, Freddie and the Federal Home Loan Bank. This was unheard of prior to 2009, when the Federal Reserve’s assets were almost entirely Treasury securities. Earlier in the month, the Federal Reserve reported it held $2.3 trillion in mortgage-backed securities. (That’s the face value of the remaining principal balance.) The Fed’s holdings of these ever-more-dubious securities began to decline but then shot way up during the early days of the pandemic.

“When I was at Fannie Mae in the aftermath of the financial crisis,” said Brian Jarrard, now a real property appraiser in Georgia, “the estimated cost to remove a single nonperforming loan from the portfolio of a mortgage-backed security was between $50,000 and $100,000. That could easily be double today.”

Once each nonperforming loan is excised from the twins’ mortgage-backed securities at great cost, they are pooled and sold to the above-mentioned venture capital firms.

Data Cancer
The twins use of “black box” home appraisals has caused what Ohio podcaster and real property appraiser Phil Crawford calls “data cancer.” The practice, which often violates state law in the states the appraised properties are located, has inflated home values nationally. Crawford has found and studied a “cancerous” home sale in a Cincinnati housing tract. He believes this inflated sale, based on an automated valuation by mortgage giant Fannie Mae or Freddie Mac, has subverted other sales in the tract and is a microcosm of what is causing housing inflation coast to coast.

Based on Crawford’s analysis, the data cancer began with a so-called appraisal waiver by Fannie or Freddie – “appraisal waiver” is code for the twins’ nearly complete use of artificial intelligence and Big Data to assign synthetic values to properties across the country. They have created a self-reinforcing distortion cycle, says Crawford. “You couldn’t design a more efficient system for corrupting a market. It bases lending on the sale price of the collateral, not on its actual value,” said Crawford.

Twins Violate Federal Law, Too
Fannie and Freddie are violating federal consumer-protection law. The Equal Credit Opportunity Act mandates that creditors provide consumers with a copy of any appraisal or written valuation report used in connection with a credit application for a loan secured by a first lien on a dwelling, meaning if Fannie and Freddie are creating automated “appraisals” to make credit decisions, they must provide mortgage applicants copies of the reports. Freddie and Fannie are gaslighting the public, using the term “appraisal waiver.” In reality, they are generating appraisals to make credit decisions. Fannie recently stonewalled a Maryland state task force after inquiries regarding its “black box” valuations.

Barry Colen, appointed by Maryland’s then-Gov. Larry Hogan to a panel called the Taskforce on Property Appraisal and Valuation Equity, also believes Fannie and Freddie have been approving mortgages based on these unreliable automated appraisals, which are not being shared with borrowers or state officials.

Credit Default Swaps
While no one was looking, the twins – who effectively wield the full faith and credit of the U.S. government – began quietly offloading surplus risk in the form of so-called “credit-risk transfers.” The U.S. taxpayer should be worried. As the public learned in 2008 with AIG’s credit-default swaps, hidden risk injected into the financial system doesn’t stay hidden for long. To offset the new risks within their residential mortgage pools, the twins are offloading the froth in the form of the junk-rated credit-risk transfers. The product line was quietly created during the first term of the Obama administration.

The new junk product comes as no surprise. The twin gorgons have been a constant source of such mischief. The systemic risk the twins represent will never go away so long as there are politicians who believe they can exploit the duo to coddle constituents and special interests. The credit-risk transfers – known to investors as “CRTs” – create a Dr. Jekyll-Mr. Hyde approach at the twins as they compartmentalize their dark side. The junk investments smack of the synthetic instruments that were all the rage in the lead-up to the financial crisis.

Under the banner of reducing taxpayer risk, Fannie and Freddie now partner with private capital to peddle the swaps and help keep the niche market liquid. If it ever goes illiquid, watch out. It could set off a new contagion, the only serum for which will be new taxpayer bailouts.

Past Offenses
Both Freddie and Fannie have a history of lying to Congress, investors and the public, from hiding the trillions they held in toxic Alt-A loans, stated-income loans and negatively amortizing loans, and publishing misleading studies. The twins concealed the number of these toxic products they had on their books until the 2008 collapse. Freddie and Fannie required a combined federal bailout of nearly $200 billion that year.

In 2011, the Securities and Exchange Commission filed civil fraud charges against former Fannie Mae CEO Daniel Mudd, former Freddie Mac CEO Richard Syron and four other former executives. In 2015, the case against Freddie Mac execs settled with Syron paying $250,000, former chief business officer Patricia Cook paying $50,000, and former vice president of credit policy Donald Bisenius paying just $10,000. The settlement was unusual as it allowed the three executives to continue to deny wrongdoing. Mudd settled his case a year later for $100,000, a sum paid for by Fannie Mae. It was sofa change compared with the $24 million he earned from Fannie Mae from 2006 to 2008.

When it comes to the stocks of unaccountable organizations, it should be strictly “buyer beware.”

# # #​

Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.