Fannie & Freddie Repackage Defective Loans and sell them to Naive Investors.

Feb 22, 2018

By J. Guggenheim/Lendinglies staff

Fannie Mae and Freddie Mac have separately announced sales of non-performing loans this week. Offsetting these toxic mortgage securities target smaller investors, including nonprofits and minority- or women-owned businesses who can’t afford to take the hit when they realize they bought defective repackaged securities the big lenders now avoid.

In 2017, through both Fannie Mae and Freddie Mac, the Treasury guaranteed 70% of all new mortgage lending. The taxpayer’s total exposure to housing is unfathomable, at over $6trn, or 30% of GDP, but it is hidden off the government’s balance-sheet. Reform is long overdue but until then- keep repackaging defective merchandise and selling it off to the highest bidder.

The Senate Banking Committee, is considering a draft proposal to replace them with multiple privately capitalized firms, whose equity holders would suffer first during any slump. The government would maintain an insurance fund, supported by fees levied on the firms, to cover catastrophic losses—similar to how bank deposits are insured. The hope is that competition between the new firms would prevent any one entity from becoming too big to fail, and would encourage innovation.

A better idea would be to turn Fannie and Freddie into utilities, privately capitalized but with regulators capping returns. This would in theory prevent shareholders and executives from getting rich by selling mispriced taxpayer guarantees, as they did before the crisis.

LivingLies would prefer that the government get out of the housing market altogether. The state has no business subsidizing home buyers, let alone standing behind most mortgage lending. Fannie and Mae and their lack of transparency and compliance with securitization practices has contributed to the foreclosure crisis.

In reality, a complete withdrawal is a political non-starter although the free market could easily find innovative solutions to these antiquated entities. Fannie and Freddie make possible the 30-year, fixed-rate, prepayable mortgages Americans have come to expect- but there is no reason smaller, more-agile firms couldn’t do the same thing.

The longer today’s system endures, the greater the risk to taxpayers and investors who don’t yet realize the product Fannie and Freddie is selling is defective. Almost a decade after Fannie and Freddie were rescued, it is long past time for a clean-up.

Fannie Mae’s sale includes its eleventh and twelfth Community Impact Pools, which are typically smaller pools of loans that are geographically focused. The three larger pools include approximately 5,900 loans totaling $1.04 billion in unpaid principal balance (UPB) and the Community Impact Pools of approximately 190 loans totaling $35.68 million in UPB. What a deal! Basically $1.4 billion in defective loan pools. The Community Impact Pools consist of one pool geographically located in the metro area of Orlando, Fla., as well as one in the Tampa, Fla., area- areas where LPS and foreclosure mill David Sterns and Co. mucked up many chain of titles.

Meanwhile, Freddie Mac’s sale is an approximately $420 million transaction. The loans, which are currently serviced by Shellpoint Mortgage Servicing, are being marketed via three Standard Pool Offerings and one Extended Timeline Pool Offering.

Fannie and Freddie know that they shouldn’t be reselling these defective loan pools that didn’t comply with their selling and servicing standards- but they will sell off the toxic pools while under government conservatorship and when it ends, they will likely be reestablished as private corporations with enough distance from the fraudulent sales, that everyone will be protected except the small investors and taxpers who takes the hit.

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