Fannie Mae, Freddie Mac and Sallie Mae
1938 Fannie Mae, the Federal
National Mortgage Association, is founded by government decree as a government
agency in 1938 as part of Franklin Delano Roosevelt's New Deal (an extension of
Herbert Hoover's New Deal), in order to provide liquidity to the mortgage
From 1938 to 1968, the secondary mortgage market in the US
is monopolized by Fannie Mae. To provide competition in the
secondary mortgage market, and to prevent Fannie Mae from continuing to
have a monopoly, Congress chartered - forged by government decree - Freddie
Mac as a private corporation to compete in this same market.
Fannie Mae is converted into a private corporation to help balance the federal
budget. Fannie Mae at one time was the ninth-largest business in the world
according to Forbes.
1972 Sallie Mae, the Student
Loan Marketing Association is iforged in 1972 as a government sponsored
enterprise. The coorporation remains the country's largest originator of
federally insured student loans.
"The dirty little secret of the
guaranteed student loan market is how concentrated it is: only 32 lenders hold
90% of the loan volume. The Education Department has found that at about 300
colleges one lender controls 99% of loan volume - essentially holding a
monopoly on those campuses" - Stephen Burd
Lenders of student loans are specifically exempted from the Fair Debt
Collection Practices Act.
The statues of limitations are removed from
student loans in 1999 so debt is never retired.
Student loans are now never forgiven
in bankruptcy. Student seeking loans are not allowed to shop loans as most
institutions have captive lenders. Student loans may be refinanced only once,
so if interest rates drop the borrower will be stuck with the original rate.
Defaults are typically charged 25% of the loan value. Student loans are also
exempt from "truth in lending" regulations and rules that require lenders to
explain fees and interest rates. Student loan collection rights include the
right to garnish wages, tax refunds, Social Security payments and disability
Student Loan Justice
Sallie Mae started its Opportunity Loan Program.
A lender hands a
college a fixed amount of private loan money which the college then lends to
students with credit problems for higher rates with less consumer protection.
The college then promises to make the lender it's exclusive provider of loans
backed by Sallie Mae. In the past this used to be called monopolizing a
captured market through kickbacks. Sallie Mae denies wrongdoing but agrees to
pay a $2 million fine.
2005 Freddie Mac hires the
lobbying and PR firm DCI Group for a "stealth lobbying campaign." DCI
did not file lobbying reports on the contract, and Freddie Mac executives
referred to the lobbying campaign as their "stealth lobbying campaign." In
2006, the Freddie Mac made "six-figure payments to 52 outside lobbying firms
and political consultants," including former House Speaker Newt Gingrich
($300,000 in 2006 to push for increased
former Senator Alfonse D'Amato.
2006 Fannie Mae
pays a fine of $400 million for alleged accounting manipulations and lying to
investors. Earnings are reduced by $6.3 billion.
Freddie Mac is fined
$3.8 million for illegal campaign contributions arranged by Freddie Mac
lobbyists. Freddie Mac pays Newt Gingrich $300,000 to push for increased
Mac agrees to settle lawsuits stemming from a $5 billion profit reduction
restatement of 2003 earnings.
2007 Private equity
group led by J.C. Flowers that had sought to buy out Sallie Mae informed Sallie
Mae that if reductions in subsidies pending in a legislative bill were passed
by Congress then the sale would be at risk. George Walker Bush requested a
reduction of subsidies to Sallie Mae of $16 billion. The House approved of a
measure that would lower subsidies by $19 billion over five years. No subsidies
= no deal - when J.C. Flowers did not get the promised subsidies the deal
director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III
announces his decision to take Fannie Mae and Freddie Mac into conservatorship
run by FHFA. Over 98% of Fannie's loans were paying timely but $270
billion in loans that Fannie Mae had purchased or guaranteed between 2005 and
2008 were now considered risky.
Fannie Mae and Freddie Mac each had a
positive net worth as of the date of the takeover which was triggered by
credit default swap derivative
credit default swap parlance this is termed a credit event.
triggers the settling of outstanding contracts for the derivatives, which are
used to hedge or speculate on the potential risk that
a incorporation will default on its bonds.
"Credit default swaps are essentially insurance
policies covering the losses on securities in the event of a default.
Financial institutions buy them to protect themselves if an investment they
hold goes south. It's like bookies trading
bets, with banks and hedge funds gambling on
whether an investment (say, a pile of subprime mortgages bundled into a
security) will succeed or fail. Because of
the swap-related provisions of Gramm's
bill - which were supported by Fed chairman
Alan Greenspan and
Treasury secretary Larry Summers - a $62
trillion market (nearly four times the size of the entire US stock market)
remained utterly unregulated, no one made
sure the banks and hedge funds had the assets to
cover the losses they guaranteed." - David Corn
Fannie Mae and Freddie
Mac had approximately $ 1.5 trillion in bonds outstanding, and since
the market in credit default swaps
is not public, there is no
central reporting mechanism to verify how many credit default swaps are linked
to those bonds.
Fannie Mae unveils the "HomeSaver Advance" plan to
provide "foreclosure prevention
assistance to distressed borrowers" to avoid increased losses of as much as
$2.4 billion in credit default
About 71,000 cash advances to forestall
foreclosure with an average
value of $6,500 for a total of $462 million In spring 2009 Fannie Mae valued
those loans at $8 million.
"Whatever credit defaults are in theory, in
practice they have become mainly side bets on whether some incorporation, or
some subprime mortgage backed bond, some
municipality, or even the US government will go bust. Call it insurance if you
like, but it's not the insurance most people know. It's more like buying fire
insurance on your neighbor's house, possibly for many times the value of that
house - from a incorporation that probably doesn't have any real ability to pay
you if someone sets fire to the whole neighborhood." - Michael Lewis &
David Einhorn 01/03/08
"On September 7, 2008, the Federal Housing
Finance Agency (FHFA) placed Fannie Mae and Freddie Mac, two
government-sponsored enterprises (GSEs) that play a critical role in the US
home mortgage market, in conservatorship. As conservator, the FHFA has full
powers to control the assets and operations of the firms. This means that the
US taxpayer now stands behind about $5 trillion of GSE-issued debt." - Mark
Jickling, November 24, 2008
"When Fannie Mae and Freddie Mac were taken
into conservatorship by the government, they were leveraged at an eye-popping
100 to 1." - Mike Whitney
Franklin Raines, Bill
Clinton's White House
budget director, is accused by the Office of Federal Housing Enterprise
Oversight (OFHEO), the regulating body of Fannie Mae, of abetting
widespread accounting errors based on the overstated earnings estimated at $6.3
billion. The OFHEO announced a suit against Franklin Raines in order to recover
some or all of the $50 million in payments made to Franklin Raines. Former
Fannie Mae chief Franklin Raines, chief financial officer Timothy Howard and
former controller Leanne Spencer agreed to a $31.4 million settlement.
2009 David Kellermann, CFO of Freddie Mac, commits
Freddie Mac asks for $31 billion in additional aid after posting a
gargantuan loss of more than $50 billion in 2008. The loss' were driven by
$13.2 billion in hedged trades, $7.2 billion in credit losses from the
declining housing market conditions and $7.5 billion in write-downs of the
value of its mortgage backed securities. The
incorporation also took a charge of $8.3 billion for now-worthless tax
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