ProPublica: Fannie, Freddie Are Being Set Up to Fail — Again

Sunday, 16 Jun 2013 08:27 PM

By John Morgan

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Efforts in Washington to reform mortgage giants Fannie Mae and Freddie Mac have been a glaring failure to date, and in fact could boomerang to make the next housing crisis worse, according to the investigative journalism group ProPublica.

It has been five years since the government took over the teetering companies and their giant debt. ProPublica said efforts in Congress to repair Fannie and Freddie have been beset by "emotional battles and financial interests."

In general, conservatives favor shutting the two companies down while more liberal D.C.
interests claim they can be fixed.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

Lurking on the sidelines in favor of fixing the companies are investors like hedge fund managers John Paulson and Bruce Berkowitz, who own big positions in Fannie and Freddie, and would stand to "profit handsomely," ProPublica said on its website.

"It's a time-honored strategy: Make one Wall Street investment and then make a second investment in some Washington lobbying to protect the first,” ProPublica commented.

Fannie and Freddie had serious flaws even before the 2008 financial meltdown, ProPublica
noted. "They were hybrids, privately held institutions with government charters – along with too much political influence and too little capital."

A bipartisan bill by Sen. Bob Corker, R-Tenn., and Sen. Mark R. Warner, D-Va., is seeking to fix the problems by adding insurance oversight, perhaps led by mortgage lenders, to protect Fannie and Freddie, and ensuring that large investors in the revitalized companies, such as banks, are adequately capitalized – both so that taxpayers will not take an even bigger bath next time around.

But ProPublica is skeptical the efforts will be successful, and maintains Congress is ignoring lessons from the last housing meltdown.

"We have learned, for example, that the mortgage servicers have been unholy disasters, foreclosing on homeowners incorrectly, fighting principal reduction and dragging their feet on mortgage modifications that would have helped people stay in their homes. One lesson, then, is that separating mortgage servicing from ownership is a bad idea. The banks that kept loans on their books have been more ready to work out loans to keep people in their homes. The current Washington plans don't do much about this."

ProPublica also slammed big bank practices. "We've also learned that having an oligopoly of giant banks controlling the mortgage market leads to higher rates."

Home repossessions in the U.S. climbed 11 percent in May after declining for the previous five months. Bloomberg reported rising prices and limited inventory for sale across the country encouraged banks to pursue foreclosures.

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