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Is the GSE Conservatorship All Worth It?

A former executive divulges the cracks in two agencies.

The market was rocked by the statements of former Fannie Mae CEO Edward J. Pinto when he disclosed that both Fannie Mae and Freddie Mac ignored risk warnings regarding its 10.5 million nonprime loans worth $1.6 trillion. It was mainly the reason why the two agencies went downhill during the first half of the year and fell into conservatorship last September. This includes Alt-A loans known to lack full documentation of the borrowers’ real income and possess high risk because of high debt-to-income ratios. There were made available to investors instead of first-time buyers.

Fannie Mae and Freddie Mac took the bait with such massive amounts due to the higher rates that these loans contain aside from the fast approval of applications that they have taken advantage of. The combined $14.9 billion in losses was enough reason for the Federal Reserve to take over the two GSEs, infusing $200 billion in capital to jumpstart their downbeat finances in exchange for 80 percent stake in both companies. Pinto’s expose was a reconfirmation of the beleaguered financial institutions’ excessive risk taking at the expense of debt buyers. We are all aware of Fannie Mae and Freddie Mac’s unwarranted dealings and Pinto has successfully quantified the transactions. Backing mortgages against high risks was the easy way to drum up cash in the points of view of former CEOs Daniel Mudd and Richard Syron as against to the constant warnings by the risk department. There can never be any justification for meeting loan quotas in exchange for unmitigated risk and so-called “affordable housing” schemes. Pinto may have answered the critics against the oversight plan for the two GSEs with this announcement.

Had the government refused to step in, the $11.5 trillion guarantee in outstanding loan debt will be further imperiled and lead to more drastic effects in the buying and selling of mortgages. The Congress probing has still a long way to go and prosecutions against Mudd and Syron may take some time but on the bright side, the Congress has taken the initial steps in averting greed in Wall Street.

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