“U.S. is set to sue dozen big banks over mortgages,” reads the front-page headline in today’s New York Times. The “deck” below the headline explains that that the Federal Housing Finance Agency, which oversees the government-sponsored enterprises Fannie Mae and Freddie Mac, is “seen as arguing that lenders lacked due diligence” in the loans they made.
A more apt description would probably be that Fannie and Freddie are suing the banks for selling them the very loans the GSEs helped designed and that government mandates encourage — and are still encouraging them to make. These conflicted actions are just one more of the government’s contributions to the uncertainty that is helping to keep unemployment at 9 percent.
Strangely the author of the Times piece, Nelson Schwartz, ignores the findings of a recent blockbuster book by one of his colleagues that Fannie and Freddie took the lead in creating the shoddy loans. “Reckless Endangerment” by Pulitzer Prize-winning Times reporter and columnist Gretchen Morgenson and financial analyst Joshua Rosner write that the GSEs “led both the private and public sectors down a path that led directly to the financial crisis of 2008.”
In the Times, Morgenson has written that Fannie and Freddie were the “biggest and most steadfast collaborators” of the notorious Countrywide Financial. Fannie “assiduously … pursued Mr. Mozilo and 14 of his lieutenants to make sure the company continued to shovel loans its way,” according to Morgenson. In 2004, Countrywide “sold 26 percent of the loans Fannie bought,” she reported.
But today in planning to sue, among others, Countrywide’s now-parent company Bank of America for selling it the very mortgages it so aggressively sought, the GSEs are doing their best imitations of Sgt. Schultz from the classic ’60s comedy “Hogan’s Heroes.” “We knew nothing!” the steadfastly proclaims. And Schwartz, despite all that his colleague Morgenson has written, buys their excuses without question.
Then there is the Obama Justice Department practically mandating that lenders return to all the bad practices that led to the crisis or face discrimination suite. As Hans Bader noted recently in OpenMarket:
Assistant Attorney General for Civil Rights Thomas Perez has argued that bankers who don’t make as many loans to blacks as whites (because they make lending decisions based on traditional lending criteria like credit scores, which tend to be higher among white applicants than black applicants) are engaged in a “form of discrimination and bigotry” as serious as “cross-burning.” Perez has compared bankers to “Klansmen,” and extracted settlements from banks “setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit,” treating welfare “as valid income in mortgage applications’ and providing ‘favorable interest rates and down-payment assistance for minority borrowers with weak credit,” notes Investor’s Business Daily.
This is not to say that all investor lawsuits against mortgage lenders and servicers are without merit. CEI has vigorously defended investors, such as Greenwich Financial Services’ William Frey, who were attacked by politicians when they challenged banks doing government-backed mortgage modifications as violating their contracts. It looks there is also some merit in investors’ challenging Bank of New York Mellon for allegedly breaching its duty as a trustee by jumping into a settlement with Bank of America on investors’ behalf without seeking their consent.
If the GSEs’ suit is filed, there may also be some technical provisions on which they prevail. But for these government mortgage giants to say they were misled about the quality of the loans, well all I say is, “Duped, my Fannie!”