A Peek Inside Successful Lending Shops

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the latest SERVICING a An opinion-editorial by Mark Lieberman, Five Star Institute, Chief Economist The M Report se c on da r y m a r k e t The president's recent remarks on the fate of the GSEs leaves many to wonder if he's looking in the wrong direction. a na ly t ic s Light and Washington Mutual (WaMu) foisted on would-be homebuyers. By gobbling up the poorly unwritten, unaffordable mortgages, the investment banks became enablers, encouraging the lenders to do more and more questionable loans. Shortly after the federal government allowed Lehman to collapse, Merrill sold itself to Bank of America before suffering a similar fate. While the institutions suffered significant financial setbacks, the individuals leading them have emerged unscathed. Even WaMu executives who settled a multi-million dollar lawsuit aimed at them personally were covered by insurance. But Fannie and Freddie became the poster children for the crisis with critics charging the private investors were able to take the profits while the government struggled with any losses. After their creation, Fannie and Freddie were able to significantly reduce mortgage costs by standardizing applications and setting prudent underwriting standards, which if followed, gave lenders an outlet for their loans. The system broke with the arrival of private capital—the same capital the president proposes to use to replace them. Private investors demanded profits, which Fannie and Freddie attempted to provide by developing and increasing an appetite for riskier and riskier loans. To believe the private sector will step into that role is naïve. It's the reason we have a government: to provide necessary services affordably, which the private sector can't or won't. Private, profitdriven companies aren't building and maintaining streets or roads, nor will they. Instead of suggesting replacing Fannie and Freddie to restore the nation's housing markets, the president should be proposing to return them to their original charters (without private investors) supporting the "plain vanilla" loans, which would not be profitable—or profitable enough—for private investment banks. The two agencies can continue to play a vital role in the housing sector as boring companies, without the bright lights of Wall Street. Maybe then we can find the keys to solving the housing mess. s e r v ic i ng Shine Or ig i nat ion T he story is told of a Good Samaritan walking down the street one evening spotting a man on his hands and knees patting the ground. "Can I help?" the Samaritan asks. "I dropped my keys," the man replies. Where? "Over there, across the street." "Then why are you looking here?" "The light is better," he says, pointing to the street lamp overhead. Just like the man looking for his keys, President Obama is trying to solve the wrong problem by calling, as he did in his speech in Phoenix, for the end of Fannie Mae and Freddie Mac as we know it. The White House, in its suggestions to reform the housing finance system, describes the government guarantee of "more than 80 percent of all mortgages" as "unsustainable" and says the president wants to "put private capital at the center of the housing finance system." The "reform," according to White House propaganda, will end "an era of housing bubble and taxpayer bailouts." He's right about the bubbles and bailouts, but wrong to blame Fannie and Freddie, who strayed from their mission when they morphed into quasi-public companies, emulating Wall Street counterparts, all but abandoning their original objectives dating back to Fannie's birth in the 1930s to develop and sustain a secondary mortgage market. To be sure, Fannie and Freddie were not the hallmarks of responsibility in the mortgage meltdown, but have gotten a bad rap. For all their housing expertise, they missed all the signals of the housing bubble (but then again so did Federal Reserve chairman Alan Greenspan and his successor Ben S. Bernanke who dismissed it when the first signs of the meltdown emerged). The fact is, though, Fannie and Freddie did not buy and securitize the worst of the junk mortgages generated ahead of the housing collapse. That honor goes to Citigroup, Merrill Lynch, Goldman Sachs, Lehman Brothers, and other private investment banks, which eagerly swallowed the worst of mortgages that Countrywide, Ameriquest, | 41

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