For many months, people concerned about the anemic American economy have focused on the housing market, and the reality that many of the nation's homeowners remain underwater, owing banks more than their homes are worth. Eyes have turned to Fannie Mae and Freddie Mac, the two government-controlled mortgage behemoths that collectively back about half of the nation's $11 trillion worth of outstanding home loans: If they would forgive a significant slice of this debt for homeowners facing difficulty, that would give borrowers a greater stake in their properties, diminishing the foreclosure crisis. The move would put more money in people's pockets via lowered mortgage payments -- money that borrowers would in turn spend, generating jobs for other people.
But the government body that now supervises Fannie and Freddie, the Federal Housing Finance Agency, has refused to go along, asserting that this kind of help for homeowners would be unfair to taxpayers, who ultimately own the mortgages. Better to hold firm and extract what they can from distressed borrowers, returning something to the taxpayers who ponied up north of $140 billion to rescue Fannie and Freddie three years ago.
In a trenchant piece in the Wall Street Journal late last month, the agency's acting director, Edward J. DeMarco, dismissed as irresponsible suggestions that he should be thinking about the broader housing market and the health of the economy, calling campaigns launched in that spirit "a very slippery slope." In DeMarco's world, his responsibilities begin and end with the taxpayer, on whose behalf he has been laboring to collect as much as he can from a teeming storehouse of delinquent mortgages.
This rationale for continued lack of action has always been hard to swallow, because it involves defining taxpayer interest in an absurdly narrow way. Do taxpayers love picking up the tab for governments mowing scraggly lawns in front of empires worth of homes relinquished to foreclosure? Are taxpayers pleased to be paying for police forces chasing vagrants, partying teenagers and prostitutes out of abandoned buildings? Where do these costs get factored in? Who pays for the domestic violence, child neglect and basic psychological damage that flows from having so many communities ripped apart by the foreclosure epidemic, with families camped out in grungy motels, sleeping in cars and piling into homes of friends and neighbors on an itinerant basis? If holding firm in the face of such strife amounts to good value for taxpayers, the FHFA needs a new form of accounting.
And now we know that this supposed tough treatment of homeowners in pursuit of taxpayer value is is not only wrongheaded, it's also fiction. In the reality version of American life, what Fannie and Freddie care most about is the enduring affection of people running major banks -- the same banks that helped trash the economy and screw taxpayers.
As Gretchen Morgenson reports today in The New York Times, Freddie significantly undercounted the extent of the bad loans it accepted from Countrywide -- the notorious subprime lender -- during the housing boom as part of the calculation that led to a $1.35 billion settlement with that institution's current owner, Bank of America. In other words, Freddie should have pressed for a lot more than $1.35 billion in its settlement with BofA, but it didn't, clinging to a bogus accounting methodology that undervalued the sum total of the bad loans that Countrywide pawned off on Freddie and -- in the end -- the taxpayer. These details come via a damning report by the FHFA's inspector general.
Why didn't Freddie push harder for more money in its settlement with Bank of America? Some people inside Freddie advocated that the methodology used to calculate the bad loans be tweaked while pressing for more money, but they were overruled. The most glaring quote in the inspector general's report -- and highlighted by the Times -- explains why: "Freddie Mac officials also disagreed with the concerns expressed by the senior examiner at the agency, the report said, 'partly because they believed a change to a more aggressive approach to repurchase claims would adversely affect Freddie Mac's business relationships with Bank of America and other large loan sellers.' "
In the burgeoning chronicles of what is wrong today in the United States, here is a sentence that should properly provoke widespread disgust. Faced with a choice between collecting on behalf of the taxpayer or keeping relations cordial with the pyromaniacal banks that burned down much of the real economy for private gain, Freddie went with the banks.
What is most disconcerting about this not terribly surprising revelation is that it was precisely this variety of cozy dealing between Fannie, Freddie and the big banks that did so much to put us here in the first place, staring at a depressed housing market, a continuing wave of foreclosures and elevated unemployment.
Fannie, Freddie and the Great Big Banks: It sounds almost like a lovely children's story. In reality it was a story of insider corruption masquerading as a fairytale of expansive home ownership and ceaseless debt that need never be paid back.
All through the housing bubble, Fannie and Freddie did not allow worries about the taxpayer -- whose dollars where ultimately pledged behind its lending operations -- as it bought up whatever pile of toxic mortgages the big lenders brought in the door.
Countrywide, Washington Mutual, and a dozens of other lenders signed off on loans to anyone with a beating heart, knowing that they could sell much of the paper they issued to Fannie and Freddie.
Major constituencies cheered this dynamic: politicians in both parties, hailing gobs of business delivered to Wall Street and expanding ranks of homeowners; home builders and realtors who enjoyed a bonanza; a new generation of homeowners, who saw their addresses climb in value, enabling them to tap the winnings to finance life's needs and luxuries.
In the end, taxpayers paid dearly for this insanity in every conceivable fashion. As real estate values eventually plunged, and as millions of borrowers landed in delinquency, Fannie and Freddie required public bailouts to avoid the prospect of their collapse, eliminating the linchpin of mortgage lending. Taxpayers paid for emergency unemployment benefits, food stamps, relief programs for homeowners, and all the less direct costs associated with having tens of millions of previously employed, home-owners turned into jobless people lacking reliable shelter.
And now that Fannie and Freddie are wards of the state, couldn't they at least help to clean up the mess they did so much to create by writing down outstanding loan balances for people trying to hang on to their homes? This might not be good for their balance sheets in the immediate term, yes, but those balance sheets are now public, and it would be good for the country.
Alas, that's not how things work in America. Not unless you are Bank of America or some other huge lender. Another sorry milestone reached on the road to crony capitalism.