MANHATTAN’S US Attorney is wrongly suing Bank of America for mortgage fraud against Fannie Mae and Freddie Mac, the American mortgage giants.
The complaint asserts that Bank of America, and its predecessor Countrywide, implemented a loan origination process called “Hustle” – designed to process loans at high speed and without quality check points. Strangely, Fannie and Freddie are painted as innocents abroad, naively accepting the assurances given by Countrywide and Bank of America.
But this ignores the whole history of “affordable housing” in the US, which began in 1995 with President Bill Clinton’s National Homeownership Strategy. This scheme would eventually help 8m American families become home owners without costing “any more tax money”. But these families, who rarely had enough for deposits, had high debt and uncertain employment prospects. Deposits of 3 per cent were routinely accepted, and income could be welfare payments, child support, unemployment benefit or alimony. Underwriting standards were thrown out of the window.
Fannie and Freddie had to meet the ever-increasing “affordable housing” goals, imposed on them by the Housing and Urban Development Department. From the late 1990s, they announced that they would buy loans with a 3 per cent deposit or less.
In other words, Fannie and Freddie made it clear that they would buy subprime loans to meet targets set by their “mission regulator”. And these targets were increased every year – goals for 2001 to 2004 were 50 per cent for low-to-moderate income groups, and 20 per cent for those on very low incomes. For 2008, they were 57 per cent and 27 per cent respectively. In 1989, one in every 230 home buyers bought a home with a 3 per cent deposit or less. By 2007, it was one in three.
Fannie and Freddie dominated the market, partly because of their automated underwriting systems, which could give increasingly speedy loan decisions. Lenders also found it advantageous to use their systems, as they could arrange lower guarantee fees. They could also arrange agreements with Fannie and Freddie so that they had the certainty of buyers for their low quality loans.
And no account has been taken in the complaint against Bank of America of the longstanding strategic partnership between Fannie Mae and Countrywide, established in 1999 by Fannie’s chief executive Jim Johnson. It was a standing discount, whereby Countrywide only had to pay 13 basis points for each loan purchased, a practice unknown in the industry. It was renewed in 2005 and continued until 2008. Fannie would “provide special marketing and other assistance” to help Countrywide to reach low income borrowers. Each party pledged to continue a “favoured relationship” in which they were “committed to the business success of the other party”.
Their partnership included lobbying Congress to ensure that reform legislation didn’t become law. Similarly, they jointly opposed attempts to more effectively regulate Fannie and Freddie. Countrywide also lobbied against bills to curb predatory lending.
Countrywide continued its low quality lending until its near collapse in 2008. This led to Bank of America’s acquisition of Countrywide in January, 2008, a move which the bank has regretted ever since. Against that background, it is difficult to see why Countrywide would set out to “defraud” Fannie Mae, given the access to each other’s affairs and the long-standing strategic partnerships between them.
Fannie and Freddie purchased subprime loans in response to government policy. They also bought some $613bn in subprime mortgage-backed securities from other banks between 2002 and 2006 to meet their ever-increasing affordable housing goals.
The result of all of this is that, even now, the state-guaranteed Fannie and Freddie own or guarantee some $5 trillion in US mortgages. These will not be part of the coming “fiscal cliff” negotiations – Barack Obama’s administration refuses to acknowledge that they are on budget.
The guilty party in this situation is not Bank of America. Others are to blame. They’re Bill Clinton and other politicians who supported the affordable housing ideology. And they’re the regulators who failed to define subprime lending, or recognise its risks until it was all too late.
Dr Oonagh McDonald is a former Labour MP and board member of the FSA.