January 8, 2010

Latest Pajamas Media Column (‘Fan and Fred: Frauds by Design?’) Is Up (Plus ‘Upon Further Review’)

Filed under: Economy,Scams,Taxes & Government — Tom @ 6:05 am

FredAndFanLogos1209It’s here.

It will go up here at BizzyBlog on Sunday morning (link won’t work until then) after the blackout expires.


Upon further review

The column addresses the significance of this revelation carried in the Wall Street Journal last week:

New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.

As I showed in September 2008, Fan and Fred motivated mortgage lenders to make exponentially riskier conventional and subprime loans by lowering the credit score approval thresholds for each. To be clear, those relaxation probably date back “only” to the late 1990s. Pinto’s research further asserts that the two entities went even further than anyone up to this point has thought by fibbing about the quality of loans it purchased — for 15 years.

To the extent they securitized these loans, Fan and Fred deceived bond investors, arguably contributing to the demise of many entities previously thought to have done themselves in on their own. To the extent these loans were kept on Fan’s and Fred’s books, they deceived shareholders, regulators, and Congress. Ultimately, Fan and Fred ripped off the American public for what is estimated so far to be something north of $400 billion. I’m guessing it will be far north of that.

The big “upon further review” question that occurred to me after I submitted the column is this: Why would all of this have started in 1993 as Ed Pinto indicated? Anyone? A likely answer is below the fold if you’re on the home page.

1993 was the year the Democratic Party took over the White House and the executive branch of government for the first time in 12 years, while also controlling the House and the Senate.

It doesn’t seem like a mere coincidence.

First, consider this from an article recounting the sordid history of “affordable housing” efforts compiled in Spring 2009 by Steven Malanga at City Journal (HT Jim Lindgren at Volokh; internal link added by me; bolds are mine):

In 1992, Congress passed legislation requiring Fannie Mae and the similar Freddie Mac to devote 30 percent of their loan purchases to mortgages for low- and moderate-income borrowers.

The campaign gained further traction with the election of Bill Clinton, whose housing secretary, Henry Cisneros, declared that he would expand homeownership among lower- and lower-middle-income renters. His strategy: pushing for no-down-payment loans; expanding the size of mortgages that the government would insure against losses; and using the CRA and other lending laws to direct more private money into low-income programs. Shortly after Cisneros announced his plan, Fannie Mae and Freddie Mac agreed to begin buying loans under new, looser guidelines. Freddie Mac, for instance, started approving low-income buyers with bad credit histories or none at all, so long as they were current on rent and utilities payments. Freddie Mac also said that it would begin counting income from seasonal jobs and public assistance toward its income minimum, despite the FHA disaster of the sixties.

To meet their goals, the two mortgage giants enlisted large lenders—including nonbanks, which weren’t covered by the CRA—into the effort. Freddie Mac began an “alternative qualifying” program with the Sears Mortgage Corporation that let a borrower qualify for a loan with a monthly payment as high as 50 percent of his income, at a time when most private mortgage companies wouldn’t exceed 33 percent. The program also allowed borrowers with bad credit to get mortgages if they took credit-counseling classes administered by Acorn and other nonprofits. Subsequent research would show that such classes have little impact on default rates.

Pressuring nonbank lenders to make more loans to poor minorities didn’t stop with Sears. If it didn’t happen, Clinton officials warned, they’d seek to extend CRA regulations to all mortgage makers. In Congress, Representative Maxine Waters called financial firms not covered by the CRA “among the most egregious redliners.” To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown.

A later post from Lindgren, quoting an archived Washington Times story, describes why the MBA caved. Especially note the tone of the rhetoric coming from a certain Chris Lewis:

Part of the rush to embrace minorities and low-income people “is directly a result of that (30% low- and moderate income requiring) legislation,” observed Chris Lewis, director of bank and housing policy at the Consumer Federation of America (CFA).

Congress acted last year to codify federal obligations to Fannie Mae and the Federal Home Mortgage Corp. (Freddie Mac), both of which were chartered by Congress but now operate independently. In so doing, he said, “The legislation forced the secondary market to either help minorities or lose its federal backing.”

CFA, an advocacy umbrella group of 240 organizations representing nearly 50 million persons, closely monitors the housing market, Mr. Lewis said. . . .

CFA strongly supported Congressional mandates requiring that by 1994 mortgage lenders target at least 30 percent of their business to minorities and poorer home buyers.

The legislation “could work a revolution of sorts” in the way poorer people and minorities are treated by the real estate world, he said.

Lenders now must track mortgage business by a borrower’s race, ethnicity, geographic location and other variables. By August, the Department of Housing and Urban Development will report to the nation on the performance of all mortgage lenders.

“That’s when the mortgage community will have to face a new reality,” he said. Banks not reaching the 30 percent requirement could find themselves losing federal backing in the secondary market in 1994, “a possibility that has the mortgage-financing world on the brink of something we’ve really not seen before in this country.” . . .

Where did this Chris Lewis learn to talk like that? It may be because “this Chris Lewis” is also THIS Chris Lewis, cited in an October 1991 New York Times piece (bold is mine) that served as a stage-setter for the big housing lie of the 1990s, which was that qualified minority mortgage loan applicants weren’t getting approved:

Chris Lewis, the legislative director of Acorn, said such revisions of the standard income rules were important in poor neighborhoods, “where people are accustomed to spending more of their income for shelter.” He noted a recent study by the Center on Budget and Policy Priorities, a Washington research organization, showing that two of three poor renter households spend at least 50 percent of their incomes on shelter.

Lewis was arguing that the poor can afford higher house payments and wouldn’t be worse credit risks because they were used to them (but notice the clever use of “shelter” instead of “house payment”). So “obviously” it would be grrrrreat public policy to encourage them to make a commitment to keep doing that for the next 30 years. Yikes.

It seems pretty likely that ACORN’s Chris Lewis is also the Chris Lewis of “advocacy umbrella group” CFA. If so, it shouldn’t be surprising, as the two organizations still seem pretty darn cozy with each other.

Getting back on point, the evidence points to a 15-year campaign of intimidation designed to force the lending industry to do what it knew it really shouldn’t do, and in essence saying, “Don’t worry, Fan and Fred will take your problems off your hands.”

This brings us back to Pinto’s finding above.

Fan and Fred “agreed” to “begin buying loans under new, looser guidelines” because that was the only way they were going to meet the legally required 30% quota in such a short time.

Sane people at Fan and Fred surely recognized the toxicity of the loans they were in essence being legally forced to buy. They also knew that they had to unload a substantial portion of this rubbish onto the secondary markets; if they didn’t, they would violate capitalization requirements.

They could have blown the whistle and said, “Hey, we can’t do this; the markets won’t buy this garbage.” But they didn’t.

Why? I surely can’t prove anything, but here at least four possible reasons why:

  • James A. Johnson, who was Fan’s Chairman and CEO from 1991 to 1998.
  • Frank Raines, who was Fan’s Vice Chairman from 1991 to 1996 and its Chairman from 1998 until 2004.
  • Leland Brendsel, acting President of Fred since 1985. He officially became the company’s president and CEO in 1987, was its Chairman and CEO by 1990, and stayed until 2003.
  • David Glenn, who became Fred’s President and COO in 1990 and also left in 2003.

Johnson and Raines were and still are influential in the Democratic Party. Brendsel and Glenn seem to have been equal-opportunity political contributors.

There is no way Johnson and Raines could speak out against the brewing storm in 1993 without being seen as “fair housing” turncoats. Shoot, if they share the radical left’s ultimate goals (see below), they may not even have wanted to. Meanwhile, Brendsel and Glenn at weak stepchild Fred, even if they might not have been as dedicated to the cause, may have felt they had to follow Fan’s lead or risk the wrath of ACORN, CFA, other leftists and Fan itself. Regardless, Pinto is indicating they played along too.

So both firms orchestrated the pervasive misrepresentations Ed Pinto points to. I don’t think it’s out of bounds to speculate that at the time the 1992 law was under consideration, Raines and Johnson might have told key members of  Congress that “If you force them to make the loans, we will buy them, and we will in turn do whatever it takes to make the securities markets accept them.”

It seems almost inconceivable that underlings at Fan and Fred would have orchestrated a decade and a half of pervasive misrepresentation on their own without the knowledge of the four gentlemen just named.

ACORN’s top guns have always believed in taking down the system in the interest of advancing state control by overwhelming it. At least at the time, it seems clear that CFA was also down with that. If that was indeed their goal in housing and mortgage lending, they’ve largely succeeded. In a way it doesn’t matter whether that’s what they intended, because it is what they’ve done. In the process, by setting in motion the mechanisms that ultimately took down Fan and Fred, they have also contributed mightily to the ongoing misery known as the POR (Pelosi-Obama-Reid) Economy since the summer of last year, and to the atmosphere of panic and blackmail that led to the fall 2008 creation of TARP.

The only other questions are whether taking down housing and mortgage lending was the real goal of the Democrat-controlled Congress when it passed 1992′s 30%-requirement law, and whether this was what Henry Cisneros and his boss Bill Clinton ultimately had in mind when they aggressively implemented that law. Pinto’s work makes those charges much more plausible.



  1. At the very least, they were frauds by the time they were done with them:




    Comment by dscott — January 8, 2010 @ 8:57 pm

  2. [...] I got to Mickey Kaus’s point in my BizzyBlog tease for my Friday Pajamas Media column on Fan and Fred, but he wouldn’t know [...]

    Pingback by BizzyBlog — January 11, 2010 @ 10:57 am

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.