Fannie Mae Challenges Slows Housing Sector Recovery
Businesses always face issues that impede its growth regularly and GSEs are not an exemption. In fact, Fannie Mae and Freddie Mac are always being watched out by the critics, primarily because it is backed by the government and its failure means that the taxpayers’ money has also failed. Huge controversies hounded the Fannie Mae and Freddie Mac after the new millennium and there are a lot of problems faced by the institution in the last years that impedes the recovery of the already slow growth of the housing sector.
The subprime mortgage crisis of 2003 left the housing sector in a huge deficit in Fannie Mae until the end of 2010. In the effort of Fannie Mae, Freddie Mac and Federal Home Loan Banks to provide affordable housing and reach out to low-income Americans, it provides affordable methods such as low down payment and fixed-mortgage rates. Financial institutions wanted to earn more, so they slowly shifted to private level securitization operated by investment banks. Private level securitization (PLS) means that it provides nontraditional, adjustable mortgage rates which are riskier for borrowers. Fannie Mae lowered its standards to compete with PLS and please its shareholders. The unregulated standards led to a lot of borrowers in debt due to poor credit with adjustable mortgage rates which resulted in home foreclosures. The effects of this crisis are still being felt by consumers to date and lately, the bailout of Fannie Mae and Freddie Mac would likely cost the government around $300 million.
In 2004, high ranking Fannie Mae officials were held under the scrutiny of the Congress because it has been reported that these officials are manipulating accounting reports for their personal gain. Civil charges were filed to get back $115 million in bonuses from 1998-2004.
The robo-signing case took the housing sector into more debt than it already has. In 2008, employees of financial institutions such as Bank of America and JP Morgan Chase were found to approve foreclosures without sufficient facts and documents. This forced the banks to suspend foreclosure and investigate the matter first which forced the GSEs to implement strict guidelines regarding Fannie Mae foreclosures.
In order to regulate the standards, Fannie Mae released Loan Quality Initiative (LQI) to detect issues with compliance on Fannie Mae standards before foreclosure. This would force the banks to adhere to the underwriting standards and double check all requirements prior to delinquency.
