Table Of ContentFannie Mae and Freddie Mac
Turning the American Dream into a Nightmare
This page intentionally left blank
Fannie Mae and Freddie Mac
Turning the American Dream into a Nightmare
Oonagh McDonald
B L O O M S B U R Y A C A D E M I C
First published in 2012 by
Bloomsbury Academic
an imprint of Bloomsbury Publishing Plc
50 Bedford Square, London WC1B 3DP, UK
and
175 Fifth Avenue, New York, NY 10010, USA
Copyright © Oonagh McDonald 2012
This work is published subject to a Creative Commons Attribution Non-Commercial Licence.
You may share this work for non-commercial purposes only, provided you give attribution
to the copyright holder and the publisher. For permission to publish commercial versions
please contact Bloomsbury Academic.
CIP records for this book are available from the British Library and the
Library of Congress
ISBN 978-1-78093-002-2 (hardback)
ISBN 978-1-78093-004-6 (ebook)
ISBN 978-1-78093-005-3 (ebook PDF)
This book is produced using paper that is made from wood grown in managed,
sustainable forests. It is natural, renewable and recyclable. The logging and
manufacturing processes conform to the environmental regulations of
the country of origin.
Printed and bound in Great Britain by MPG Books Group, Bodmin, Cornwall.
Cover image: © Beth Brawn/Shutterstock
www.bloomsburyacademic.com
Contents
Acknowledgements vii
List of Abbreviations viii
Introduction xi
Timeline xv
1 The Seeds are Sown 1
2 Two More Tools in the Tool-Kit 25
3 The Role of the Housing and Urban Development
Department (HUD) 54
4 Mortgage Data 69
5 The “Mission Regulator” for Fannie Mae and Freddie Mac 90
6 The GSEs and the Developing Crisis 115
7 The Dominance of the GSEs 142
8 The Beginning of the End for Freddie Mac 164
9 The Beginning of the End for Fannie Mae 189
10 The Years 2005 to 2007: Drinking in the last chance saloon 216
11 The Subprime Market Grew and Grew and No One Knew 243
12 Why Did Fannie Mae and Freddie Mac Get Away with
It for So Long? 266
13 The End Cometh 283
14 What Next? 316
Appendix
Membership of the House Committee on Financial Services 336
Membership of Senate Banking, Housing and Urban Affairs
Committee 344
Fannie and Freddie’s contributions to members of the House
Committee on Financial Services 346
Fannie and Freddie’s contributions to members of the Senate
Banking, Housing and Urban Affairs Committee 356
Years in which Fannie Mae was a top 100 contributor
to the campaign fund of a member of the House Financial
Services Committee 360
Years in which Fannie Mae was a top 100 contributor to
the campaign fund of a member of the Senate Banking
Committee 368
Contributions from Fannie Mae to Senate Banking
Committee 368
v
vi CONTENTS
Contributions to presidential candidates 370
Fannie’s annual lobbying expenditure 370
Real estate lobbying expenditure 370
Lobbying reports for 2004, 2005, 2006 and 2007 374
Notes 411
Bibliography 441
Index 462
Acknowledgements
I
have benefi tted from discussions with Mark Calabria, Director of Financial
Regulation, Cato Institute and Ed Pinto, Resident Fellow at the American
Enterprise Institute. I would especially like to thank Lord Desai, Professor
Robert Hudson, Professor of Finance, Newcastle University Business School
and Professor Kevin Keasey, Director of the International Institute of Banking
and Financial Services, University of Leeds, all of whom were kind enough
to read the manuscript in draft and for their constructive comments and
criticisms. I would also like to thank John Fawthrop for the provision of the
list of Fannie Mae and Freddie Mac’s campaign contributions, and Matthew
Kamisher-Koch, Cicero Consulting, for assisting with some source material.
Any errors or misconceptions are mine.
Oonagh McDonald
List of Abbreviations
ABS: Asset-backed securities
ACORN: Association of Community Organizations for Reform Now
AHAR: Annual Homeless Assessment Report
APR: Annual percentage rate
ARMs: Adjustable rate mortgages
BIF: Bank Insurance Fund
CalPERS: Californian Public Employees Retirement System
CBO: Congressional Budget Offi ce
CDO: Collateralized Debt Obligation, an investment-grade
security, backed by a pool of bonds, loans, and other
assets. CDOs represent different kinds of credit risk,
usually described as “tranches” or “slices,” each of which
has a different materiality or risk associated with it
CFCB: Consumer Financial Protection Bureau
CLO: Collateralized Loan Obligation, a special-purpose vehicle
with securitization payments in the form of different
tranches. CLOs allow banks to reduce their regulatory
capital requirements by selling large portions of their
loan portfolios to international markets, reducing the
risks associated with lending
CRA: Community Reinvestment Act
DU: Desktop Underwriter (Fannie Mae’s automated
underwriting system)
ECOA: Equal Credit Opportunity Act, 1974
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FAS: Financial accounting standard
FCRA: Federal Credit Reform Act
FDIC: Federal Deposit Insurance Corporation
FHA: Federal Housing Administration
FHFA: Federal Housing Finance Agency
FHFB: Federal Housing Finance Board
FHLB: Federal Home Loans Banks System
FHESSA: Federal Housing Enterprises Safety and Soundness Act,
1992
FICO: Fair Isaacs Corporation, most widely used credit scoring
model in the USA
FFIEC: Federal Financial Institutions Examinations Council
viii
LIST OF ABBREVIATIONS ix
FIRREA: F ederal Institutions Reform, Recovery and Enforcement
Act, 1989
FOIA: Freedom of Information Act
FRB: Federal Reserve Board
Freddie Mac: F ederal Home Loan Mortgage Corporation
GAAP: Generally accepted accounting principles
GAO: Government Accountability Offi ce
GEMICO: GE Capital Mortgage Insurance Corporation
Ginnie Mae: Government National Mortgage Association
GLBA: G ramm-Leach-Bliley Act, 1999
GMS: Guaranteed Mortgage Securities
GSE: Government Sponsored Enterprise
HECM: H ome Equity Conversion Mortgage
HERA: Housing and Economic Recovery Act, 2008
HMDA: Home Mortgage Disclosure Act, 1975
HOPA: Home Owners Protection Act, 1998
HOEPA: Home Ownership and Equity Protection Act, 1994
HUD: Housing and Urban Development Department
LIBOR: London Inter-bank Offer Rate
LMI: Low-to-Moderate Income
LP: Loan Prospector (Freddie Mac’s automated underwriting
system)
LP: First American Loan Performance
LPS: Lender processing services
LTV: Loan-to-Value
MBA: Mortgage Bankers Association
MBSs: Mortgage-backed securities
MMI: Mutual Mortgage Insurance
MSA: Metropolitan statistical area
NACA: Neighborhood Assistance Corporation of America
NAR: National Association of Realtors
NASDQ: National Association of Securities Dealers Automated
Quotations
NCRC: National Community Reinvestment Coalition
OBRA: Omnibus Budget Reconciliation Act, 1990
OCC: Offi ce of the Comptroller of the Currency
OFHEO: Offi ce of Federal Housing Enterprise Oversight
OIG: Offi ce of the Inspector General
OMB: Offi ce of Management and Budget
OTS: Offi ce of Thrift Supervision
PDAMS: Purchase discount amortization system
PCS: Participation certifi cates in a pool of mortgages
