Uh-Oh, Trouble For Fannie & Freddie

Who's Surprised?

"Washington-based Fannie Mae disclosed Monday that it had found more errors in its accounting review."

"Fannie Mae is now reworking its books and struggling to emerge from the debacle that erupted in September 2004 when regulators discovered pervasive errors and the company's stock dropped amid the revelations."

"The Bush administration and a key House lawmaker on Tuesday cited the investigation that found a breakdown in financial controls at Fannie Mae to bolster their push for tighter federal control of the mortgage giant and its government-sponsored sibling, Freddie Mac."

"The probe by a team led by former Sen. Warren Rudman, R-N.H., detailed major accounting deficiencies and an arrogant corporate culture at Fannie Mae, the largest U.S. financier of mortgage loans."

"Treasury Secretary John Snow told a conference of bankers that the two companies' mortgage portfolios are "much, much larger" than needed for them to conduct their mission of making home ownership affordable."

"The House in October overwhelmingly passed legislation written by Oxley that would bring stricter federal oversight of the two government-sponsored companies. But the White House opposes the bill because it would not force them to reduce their mortgage investment holdings, now worth a combined $1.5 trillion."

"We are focused on doing what is right for the taxpayer," Emil Henry, assistant Treasury secretary for financial institutions, told reporters at a briefing Tuesday. "While many of the issues in the report are in the process of repair, I think it is clear that the elephant in the corner, the legacy of that era, is the extensive retained portfolio which ... in our judgment is something that presents systemic risks."

Housing bubble trouble?

"Dozens of civil lawsuits, reflecting millions of dollars in damages, have been filed nationwide against mortgage brokers, bankers, investors and, increasingly, appraisers."

"In January, Ameriquest Mortgage Co., one of the largest home refinancers, paid $325 million to settle complaints by 49 states — that it misled thousands of consumers into high-cost loans involving fudged appraisals. Hundreds of consumers defaulted on their loans."

"Real estate investor Brent Barber pleaded guilty to orchestrating the Midwest’s biggest mortgage fraud to date, one that relied on inflated appraisals and sham documents to fabricate 300 fraudulent loans worth almost $20 million."

"An independent and unbiased appraisal — once considered the bedrock of any home sale or loan — today is often built on shifting sands, according to concerned appraisers."

"Concerned appraisers, say that the problem goes far deeper than that. They contend that thousands of homeowners across the country, from the urban core to the suburbs, are unwittingly victimized by an epidemic of inflated appraisals."

"Appraisers said the problem began to grow with the housing boom and low-interest rates that spurred aggressive loan brokers to encourage consumers to refinance their loans. The carrot dangled in front of consumers — in thousands of direct-mail campaigns, TV commercials and Internet ads — is freed-up cash to consolidate debts."

"But to make such high-dollar loans pass muster with underwriters, unscrupulous loan brokers chasing big commissions pressure appraisers to meet predetermined values. In other words, artificially inflate the value of the homes to justify the costlier loans."

“We are seeing a bigger rise in mortgage fraud, and inflated appraisals have always been a part of that,” said Jenny Brawley, lead mortgage fraud investigator for Freddie Mac.

"Thousands of these loans are pooled and sold on the secondary market to other banks and financial institutions, including Freddie Mac and Fannie Mae. If the loans later fail, they might not be discovered before they hurt other institutions that unwittingly purchased them down the financial food chain."

"The FBI estimates that last year loan fraud bilked lenders and consumers of more than $1 billion — twice the loss reported in 2004."

"A go-go real estate market is partly responsible for the inflated appraisal epidemic that gives consumers a false sense of their home’s worth. One disastrous result: mortgages and refinanced loans that exceed the value of a home and create crushing debts that can take years to pay off or lead to foreclosures."

"Wildly inflated values were partly to blame for the savings and loan debacle of the 1980s, which cost financial institutions and taxpayers billions and created a drag on the economy for years."

"Many appraisers have succumbed to pressure from brokers and some real estate agents to stay in business, if not to grease their own greed. Consequences for consumers can be costly."

"A false appraisal influences the fair market price when you buy or sell your home. It also determines how much money you can borrow against your home. Unfortunately, many consumers don’t learn that the true value of their home is inflated until it’s too late."

"If home prices suddenly plunge — the much feared bursting of the “housing bubble” — many loans could default."