www.lasvegasmtg.com Report: Fannie Mae and Freddie Mac is a ticking time bomb according to an article By E. Thomas McClanahan, Kansas City Star Editorial Page columnist. Last week the Financial Crisis Inquiry Commission started its hearings to find out the root cause for the 2008 meltdown and near collapse of the financial markets. While the inquiry is focused on Wall Street for the meltdown as this was evident by the first testimony to the committee was from four top Executives from Wall Street who fell on their swords and accepted some responsibility for the crisis. Yes their is blame to be spread that Wall Street has to take some responsibility for the debacle but the truth of the matter is, the seeds were planted by the government as early as 1993 and we are only harvesting the bounty now.
Peter Wallison a Treasury Official in the Reagan Administration in a interview with the Wall Street Journal stated that Edward Pinto a former Credit Manager for Fannie Mae discovered that Fannie Mae and Freddie Mac had consistently over stating the the quality of the mortgages they were buying and then selling to the open market!
As early as 1993 the two government sponsored enterprises (Fannie Mae and Freddie Mac) had been buying sub-prime and Alt-A mortgages and slapping a Prime label on them. Fannie Mae and Freddie Mac reasoning is that they were forced into this through the Governments pressure to provide more Home ownership and this was accomplished by lowering the credit standards.
What is not defensible is to buy horse meat and sell it as PRIME meat! By 2008 there were 26 million Sub-prime and Alt -A loans sold with Fannie Mae owning 10 million and Freddie Mac owning 5.2 million and the four banks questioned in the first meeting owning 1.4 million mortgages.
Because of the ratings by Fannie Mae and Freddie Mac 7.2 million Sub Prime and Alt-A mortgages were packaged up as AAA bond rated and were sold as Mortgage Back Securities hiding the true risks that are associated with these mortgages. Fannie Mae and Freddie Mac were passing on the risks they knew about to other unsuspecting investors. Investors assume that AAA rated Securities will follow a statistical model for risks associated by historical data. When the risks are hidden behind bad ratings then the risk models are meaningless!
The line of questioning should be did Fannie Mae and Freddie Mac commit fraud? Did the rating agencies show a lack of fiduciary responsibility by not smelling the manure the two agencies were packaging and selling with a AAA ratings?
With the Treasury lifting the $400 Billion Cap on taxpayers bailout to Fannie Mae and Freddie Mac and the recent change from the implicit government back agencies to explicit backed agencies we as tax payers own, one has to wonder how deep of a hole are we digging?