(Conspiracy Nation, 5/20/04) -- Fannie Mae and Freddie Mac used to be government connected. Then they were privatized. But they weren't exactly privatized, they became quasi-public agencies of the U.S. government. They don't have to register their securities with or disclose financial information to the Securities and Exchange Commission (SEC). Who is watching Fannie and Freddie? The Office of Federal Housing Enterprise Oversight. Never heard of them? Look around the sub-basements in the District of Columbia, they must be there somewhere.
Fannie and Freddie give millions of dollars to politicians for "campaign contributions." Fannie Mae and Freddie Mac, also known as "the FMs," have their own lobbyists in Washington, DC. The FMs' lobbyists hound the politicians, who have benefited from the "campaign contributions," to favor Fannie and Freddie in pending legislation.
Fannie and Freddie are sort of federal, then again they are not. There is an implication in people's minds that the U.S. government stands behind the FMs. On the other hand, Fannie Mae and Freddie Mac "grant their managers and executives enormous stock option plans," like private companies do. For Fannie and Freddie it's the best of both worlds: their implied guaranty by the Washington, DC tax-sucker means the FMs have carte blanche to make questionable loans without worrying about damage to their AAA credit rating. And (best of both worlds), the more mortgages that Fannie Mae and Freddie Mac hold, the greater their assets and the larger the bonuses given to FMs' managers and executives.
So in the past twenty-or-so years, coincident to being "privatized," Fannie and Freddie have been guaranteeing stupendously increasing amounts of mortgage. In 1982, the FMs guaranteed $132 billion. About twenty years later, the FMs were guaranteeing $3.7 trillion in residential mortgages. That number, 3.7 trillion, is in other words $3,700 billion. No wonder there's been such a rise in house prices! It's not that the houses, in a true market (see "Housing Bubble 101," www.shout.net/~bigred/HBub1.htm), are actually worth that much more. It's that the residential market is artificially inflated thanks in part to shifting and shuffling Fannie and Freddie.
A regular bank is required not to go beyond a leverage ratio of 24-to-1 on their mortgages. That basically means the bank must have a certain amount of cash relative to mortgages, for example $12,500 cash per $300,000 mortgage. But the FMs are safeguarded by no such requirement! Freddie Mac's leverage ratio is 71-to-1. On a $300,000 mortgage, Freddie has about $4,225 cash on hand. Fannie is even more profligate: a leverage ratio of 116-to-1, and about $2,586 cash on hand for a $300,000 mortgage. Imagine an inverted pyramid teetering on a tiny point, surrounded by taxpayers ready to supposedly prop it up if it tilts.
"When the FMs increased debt leverage in their business, they did it solely to enhance the value of their employee stock options. They didn't care a hoot that they were endangering the entire mortgage market of the United States." Perhaps "Homeland Security" should look into this? After all, we're talking about homes in our homeland threatened by (in)security.
Maybe Arabs have infiltrated Fannie Mae and Freddie Mac, part of a dastardly plot to attack America at her core. Surely our fellow countrymen would never have done this to us.
To skyrocket mortgage holdings and thereby increase stock option benefits for their managers and executives, Fannie and Freddie are even gobbling up sub-prime mortgages, in spite of that being in violation of the FMs' charters. The "campaign contributions" fend off congressional prying, and anyway, a notion of the omnipotent taxpayer stands ready to prop up the pyramid.
The unsettling facts (above) are documented in John R. Talbott's book, The Coming Crash in the Housing Market. Point by point, Talbott, a visiting scholar at the Anderson School at UCLA, shows how precarious the housing market is. The housing market crash may have already begun, not spectacularly, but in bits and pieces. Declines in price for residences are slow to manifest because sellers (homeowners) are reluctant to lower the asking price for their property. Values on houses, supposedly high, are proven not to be so when confronted by the true market of actual buyers. Talbott concretely offers homeowners 10 suggestions for protecting their most valuable investment, their home.
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