Tuesday 6 September 2011

Poor Information about Borrower Quality

The New York Times writes in "U.S. Is Set to Sue a Dozen Big Banks Over Mortgages" that

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks,...

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.


It seems the claim is that the banks purposely refrained from checking whether the borrowers were lying about their creditworthiness, since the banks intended to resell the loans to Fannie and Freddie anyway.

19 comments:

  1. " If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims."

    A good example of how we always wait till near deadlines...

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  2. This is the governments desperate attempt at trying to make some money in a time of penny pinched pockets. EVERYONE is aware that banks were giving mortgages out to people who couldn't afford them. We have been dealing with these ramifications for years already. Interesting that they decided to wait so long to file suits against these banks (ie the 24th hour) This just makes our government look more desperate then we already are at getting some extra cash.

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  3. This does seem like a feeble effort at scratching out some extra money at the last minute. It is inexplicable to why they waited this long to file a suit because this has been going on for way too long.

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  4. I find it interesting that, in this circumstance, the agency is seeking reimbursement for losses rather than urging banks to buy back the mortgage-backed bonds. Maybe the government is trying to distinguish itself from private holders and feels, with this strategy, it could attain desired results.

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  5. While I agree with the statements made above, I think there is probably a little more to the story that we don't know about. Still, I think this attempt from the government is both feeble and ill-timed. This blame game is great for re-elections but not necessarily for the climate of the country.

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  6. This mortgage policy is a clear example of banks practicing adverse selection. Not enough information was collected from borrowers, which made the banks choose "bad" buyers who defaulted on their mortgage. Instead of having a well planned strategy to deal with the situation, the federal agency was left scrambling to fix the damage done

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  7. As we have all heard the housing market has a long way to recovery, but what needs to be made clear for investors sake is the last appraisal date of housing prices on banks balance sheets. If these appraisal dates remain unknown how can investors gain confidence in the housing market? They don't even know when the valuations were completed. I hope through all of this litigation we will have a clearer picture of housing prices and the current state of the housing market regardless of who is held accountable. There are too many parties involved to blame anyone individually. The litigation seems to be individual parties trying to point fingers at other parties for being more at fault than themselves. Until all the involved parties accept a portion of the blame the housing market cannot recover and the stagnant economy will drag on.

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  8. At the end of the day most of all the crap we’re going through right now is a consequence of Alan Greenspan’s policy of practically free capital. He pumped tons of money into the global economy in an effort to give every American a home, which even if they eventually couldn’t afford their mortgage after the teaser rate, it wouldn’t matter since their homes wouldn’t be underwater. They wouldn’t be underwater because our government thought that home values would increase for decades and decades to come. They were wrong. Now we have hell to pay for it.

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  9. I agree with Matthew. At the fountainhead of the problem is the fact that large banks took comfort in the fact that they could pass any acid on their balance sheets on to Fannie and Freddy. I think there should be more stringent requirements for both individual financial institutions as well as housing giants

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  10. While the financial crisis and downfall of the housing market accelerated, I was curious to see how the blame would be distributed amongst our federal government and the institutions that propelled our country down this path of destruction. It's reassuring to know that Uncle Sam hasn't wavered and the government is still trying to squeeze out a few dollars from the banks. Also, as noted from above, it is intriguing to see the push for accountability from the federal level correlate to an upcoming election period.

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  11. It is the take-for-granted belief that the housing price would continue rising and lack of regulation to refrain banks from taking excessive risk to own profit that have resulted in this. Just recall how crazy people were to acquire all these sub-prime securities. People knew those mortgages are from irresponsible borrowers, but they just didn't care as long as they were not at the end of the chain.
    It's right to hold the banks responsible but doing it now is just too late.

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  12. I think that there should be more harsh and strict rules or penalties to the banks to prevent any kind of false statements. Banks should be more responsible to what they are doing and how they should act in the industry.

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  13. According to the Wall Street Journal, Fannie Mae and Freddie Mac, although it does not mention it here, are not only going after US big banks, they are also going after some European banks as well.
    I think it's interesting that the Federal government would do this, especially to the European banks, which the ones Fannie and Freddie were targeting were state run banks. I feel like this would cause unneeded tension between the US government and the European banks.

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  14. "In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals."

    This quote from the article says a lot in my opinion. Didn't Fannie Mae and Freddie Mac have to at least think this had a chance of happening? The answer:

    "In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured."

    The policy to make benchmarks for houses like this could easily lead to malinvestment, and it did. If applicants truly stated their income and the loans weren't recommended by credit agencies, then I'm sure someone would have still footed the bill to pay for all these mortgages in hopes to meet the goals set out by the government. Maybe this will continue to be a blame game for a while.

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  15. I think these federal agencies are still cranky from the losses they bought and are looking for someone to blame. Don't get me wrong, the banks did show negligence at times which led to the financial crisis. But the unfortunate truth is that it is everyone's fault. It is the Fed's fault, the banks fault, the rating agencies fault, and, even though people don't like to admit it, it was the borrower's fault for letting common sense drift.

    I think this lawsuit is another way to find an entity to hold accountable. I think the topics of Freddie and Fannie should be best talked about in another blog, but this lawsuit is another ripple effect of anger the crisis caused.

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  16. To give an economic example, the benefit these banks gained from cheating outweighed the cost of getting caught. Fannie and Freddie failed to implement measures that would increase the cost of cheating to prevent it because their concern was only the quantity of securities sold as they were very risky anyway. The measures to prevent this should have been put in place long before the meltdown happened.

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  17. It seems as though collectively as a country we wish to completely eradicate personal responsibility. While I don't doubt that banks took advantage of a unique and fragile situation we should also be looking at the millions of people who bought houses that were clearly not anywhere within the confines of their wealth.

    Conversely, it does seem like the banks conveniently decided to overlook people's financials and issue them loans that they would never be able to come out from underneath. I think both parties are equally responsible, if the banks are getting sued for their practices then someone who makes minimum wage, and accepted a $400,000 loan should be held equally accountable.

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  18. I strongly feel that there are too many parties involved in the housing crisis and resulting fallout to blame the banks who loaned individuals cash or the financial institutions that cleverly repackaged mortgages into securities. In hindsight, it is easy for the federal government and upset individuals who are underwater on their mortgages to blame the 'greedy' Wall Street executives. But at some point, fault has to be excepted (as Dario said) by the individuals that purchased homes they could not realistically afford. This blame then has to be shared by the credit unions and local banks that issued loans, the larger lenders that structed adverse VPR mortgages, the Fed for keeping interest rates arguable too low for too long, and all the way back to the Clinton administration that made a policy agenda out of the housing market.

    To suggest that someone 'saw' this housing crisis coming and the banking industry ignored the warnings is absurd. The nation and finacil sector had never seen such a sudden a profound depreciation in a once-safe asset class of housing. Individuals did not see the coming crisis, banks did not, and neither did the federal government.

    For the DoJ to go after banks is a purely political move that should not disguise itself as anything less.

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  19. Though I too, as an angry American, want to hold the most accountability to banks and financial institutions handing out mortgage loans, I think it was fair of the executives to allocate some of the blame to investors like Fannie and Freddie who they claim "knew the securities were not without risk."

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