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Time for an Independent Audit of Freddie Mac

Posted by Larry Doyle on November 3, 2011 3:20 PM |

Freddie Mac On December 24, 2009 President Barack Obama and Treasury Secretary Tim Geithner provided a blank check to the wards of the state known as Freddie Mac and Fannie Mae. I highlighted that ‘Christmas’ gift in writing at the time, Fannie and Freddie’s Huge Christmas Bonus.

That blank check runs throughout 2012. Do not think for a second that the administration will not keep adding zeros to this check throughout next year. Why do I make that assessment?

Well, let’s review the fact that today Freddie announced a third quarter 2011 loss of a mere $6 billion!! What is behind this loss of our American taxpayer funds? 

Let’s navigate and ask the hard questions, as Yahoo! News reports, Freddie Mac Reports Q3 Loss, Asks for $6B in Aid,

Freddie Mac said Thursday that it lost $6 billion, or $1.86 per share, in the July-September quarter. That compares with a loss of $4.1 billion, or $1.25 a share, in the same quarter of 2010.

This quarter’s $6 billion request from taxpayers is the largest since April 2010.

How is this possible? Is the decline in the housing market with subsequent increase in delinquencies and defaults actually worsening thus generating this loss? I do not buy that. The pace of decline has been slowing. Freddie’s losses should be lessening. Let’s continue.

Freddie’s losses are increasing mainly for two reasons: Many homeowners are paying less interest because they are able to refinance at lower mortgage rates. And failing and bankruptmortgage insurers are not paying out as much money when homeowners default.

I do not buy Freddie’s first reason. Having engaged with this company for many years Freddie would always enter into a variety of hedging strategies to mitigate a loss from a shift in interest rates. Have they stopped engaging in hedging? I have never seen nor heard this argument used to explain an impact on Freddie’s earnings, especially of such a sizable magnitude.

In terms of mortgage insurers not performing, this is not a new development.

I would like to know how aggressively Freddie’s books are being audited and whether its earnings —or dare I say—its losses are being managed or rather manipulated. Why do I inquire? Let’s navigate a little deeper.

The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. Since then, a federal regulator has controlled their financial decisions.

Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates it could cost up to $51 billion more to support the companies through 2014.

With the government effectively calling the shots at Freddie and Fannie and simultaneously trying to nurse our banking institutions back to life, my instincts lead me to believe that Freddie and Fannie remain a conduit to funnel funds into our banks.

Who is minding the store and protecting taxpayer interests?

How about an audit?

Questions, comments, constructive criticisms encouraged and appreciated.

Larry Doyle

  • coe

    LD – This gets my blood boiling – sorry for the lengthy response. Let’s look at the facts, at least as I see them:
    o – Freddie and Fannie still have billions of dollars of non-/underperforming legacy loans in their portfolios…private equity firms, vulture capital, hedge funds stand ready with discounted bids to pick off “value” – good idea? who knows…and there remains political, regulatory and economic gridlock – not to mention paralysis by analysis..the “bad bank” seems totally adrift;
    o – The GSEs remain the main source of secondary market liquidity for newly originated conforming loans- arguably, this marginal book of business is better underwritten and the guaranty fee has been more intelligently priced to reflect the risks of GSE insurance and funding…my point is they are still the 500lb gorillas in the room – the private market mechanisms are still hopelessly rusted shut…and we play hot potato with the strategic wisdom of high or low loan limits;
    o – The politicians, especially the Republicans, want the GSEs to be eliminated/consolidated/reformed, and have been shouting this from the rooftops for years now – nothing has happened, nor will anything likely happen in an election year – what politician wants to run the risk that their seat would be vulnerable if they sponsored something in housing that turned ugly and further crippled the fragile economy;
    o – US housing policy is a travesty, BUT it is still hugely vital to the consumer and to the economy as a whole – tough to focus when Greece and Europe are on pins and needles, when the Fed is “doing the twist”, when banks are handcuffed by uncertainties (and have clearly been part of the problem), and when our President continues to feather the demonization of Wall Street and the OWS movement, however ill-defined, gets more media attention than does the incompetence of our political and economic leadership;
    o – The GSE regulator, the FHFA, has come out strong stressing their mission to “conserve” assets of the GSEs – not serve as a dumping ground for any and all misguided attempts by the Administration and/or Congress to engineer a nuclear refi of all mortgage product – hence, the ridiculous new provisions of HARP – another doomed to fail fiasco in the making;
    o – This regulator also happens to be suing many of the largest originators – essentially trying to put back loans that were in violation of the purchase program reps and warranties – chasing down the rascals after looking the other way for decades…has this sent a scare into the origination quality control process – undoubtedly…but it also is another cross for the big banks to bear when contemplating just how strategically important mortgages should be in their “new world order” business plans;
    o – On an ongoing entity basis, albeit one in dire straits with impending reforms looming, both Freddie and Fannie are facing huge morale problems for the existing staff…in my opinion, the appointed leadership ranks post-crisis had/have no clue, clipped a healthy salary for acting as political caretakers, all the while chronicling how terrible things have become, but did NOTHING effective to address the problems…compound this by acknowledging that circumstances make any recruiting of talented and ethical mortgage professionals extremely challenging, and it’s no surprise the performance continues to deteriorate…btw, don’t misjudge my comment – there are tons of high quality employees working at both firms who get it, are dedicated to the fix, but, in my opinion – there is an absence of real leadership at both companies – people are out there who can lead, who do care, who would make things better – fire the headhunters who propped the wrong folks, fire the Board members who also are clueless, and bring in a swat team of people who can make a difference;

    Should the companies be hedging risks, LD, as you suggest – you bet..will an audit expose shocking news of underperformance – yeah, and that will only validate the obvious..

    Here’s what I think we need – a government linked insurance program for a modest conforming loan limit (perhaps with a public/private risk sharing component built in)- strict program characteristics – lower conforming limits that would allow banks to originate and hold product profitably while the non-agency private market rises slowly from the ashes – some limited political sensitivity to the “affordable housing” dimension of policy (and, sorry if this sounds harsh – but people who cannot afford to own a home, should not own a hard is that to understand) – restructuring the guaranty fee and underwriting standards to reflect the real risks of today’s global and domestic economies and attendant liquidity and pricing risks…and, perhaps most importantly, true leadership – not political appointees and hacks, but people with experience that get the joke, have been there, understand mortgages, understand capital markets, and who can lead!

    Maybe a new job for you, LD?

    This is fixable in my opinion – but the inmates are running the asylum in Washington and at the GSEs. And taxpayers are paying a high price for the resulting chaos.

  • Peter S.

    How in the world did Charles “Ed” Haldeman, who has virtually no mortgage bank experience, become CEO of Freddie Mac? Haldeman was the former CEO of Putnam Investments who was immediately demoted and then shown door after the April 2008 Dartmouth Review article “Blowing the Whistle on Haldeman” (it is no longer available in DR archives). What was Chuck’s first concern at Freddie Mac? – increasing the CEO’s salary from hundreds of thousands of dollars to millions. As far as I am concerned, Chuck’s (aka the “fixer”) is a crook – and I have proved it. What is Chucks philosophy in business – me, me, me…@&%$ everybody else.
    Hey Chuck – how come you did not sue me after the Dartmouth Review article?
    Because you can’t – the $100,000,000 million you made at Putnam for failing to provide honest services (at the very least) would become very public. You should be right next to Bernie – God knows you done as much financial damage as he has – your just smarter to have screwed millions – spreading the wealth (to you) so to speak.
    I am relentless Chuck – you are bull’s-eye number two for me.
    Cutler is bull’s-eye number one.
    I am only hoping others are willing to expose you before I do.

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