The housing crisis has a million storylines and about as many players and culprits involved in the huge mess that ultimately resulted in billions of dollars worth of value lost and millions of homes sold at auction – not to mention the near collapse of the American economic system.
The Federal Housing Finance Agency today announced that Freddie Mac, the government-sponsored enterprise (GSE) that helps to promote liquidity in the mortgage market by purchasing and thereby owning millions of mortgages across the country, played a role in the crisis by backing banks and relaxing its oversight of the process.
Specifically, the inspector general of FHFA claimed that Freddie Mac did not do its due diligence to oversee underwriting requirements for loans that were at a higher risk to fail than other mortgage loans written at the time. Two months ago, the agency decided that the process Freddie Mac and its sister institution, Fannie Mae, used to supervise and audit these mortgage transactions was, in a word, “unsatisfactory.”
Other critics allege that Freddie Mac and Fannie Mae were too lenient with the banks in both tightening and enforcing lending standards and collecting on outstanding debt owed by the banks. Considering that American taxpayers shelled out $140 billion in 2008 to keep the two GSEs afloat, it is easy to see why some are frustrated with the agency’s actions.
What’s worse is that Freddie Mac settled for just $1.35 billion in a settlement reached with Bank of America over toxic loans Freddie Mac purchased from Countrywide (owned by Bank of America). The dollar amount of the settlement was grossly undervalued, according to some, and represents something akin to a sweetheart deal between the agency and big banks.
Further complications with Freddie Mac involve the increase in the limit of how big a “jumbo” mortgage can be. A jumbo mortgage is one that reaches the maximum amount that the government and its affiliates (like Freddie Mac and Fannie Mae) will back with taxpayer money. This Saturday, that number will to $625,500 from $729,750. Unfortunately for some critics, the limit could be raised again – which would represent Freddie Mac essentially subsidizing homes for affluent homeowners at taxpayer expense.
It is hard to say that Freddie Mac has been a good steward of taxpayer dollars since its conversion into a GSE in 2008. It is even more difficult to state that the housing market is in good hands with the GSE, considering the evidence on the table for its ineptitude in managing taxpayer money in its dealings with other industry actors, like big banks.
Unfortunately for critics of the agency, any government solution for rectifying the housing market will more than likely have to go through Freddie Mac, since private lenders are unwilling or unable to act.