Fast and Easy Fannie

The Wall Street Journal had a very disturbing story on Wednesday about the "Fast and Easy" loan program of Countrywide Financial Corporation (CFC), many of whose mortgages were bought up by Fannie Mae.

WSJ reports:

Some of the problems are surfacing in a mortgage program called "Fast and Easy," in which borrowers were asked to provide little or no documentation of their finances, according to [people with knowledge of a Federal probe] and to former Countrywide employees.... Fast and Easy borrowers aren't required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn't even require loan officers to verify employment, according to an October 2006 presentation by Countrywide's consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.

But here's the part that really scared me:

Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as "prime," meaning low-risk.... A Fannie spokesman agreed that the verification of employment wasn't required on all loans, but added that Countrywide was expected to verify employment details on a "sampling" of loans. The Countrywide spokesman said his company fulfilled that obligation.

It's news to me that Fannie was buying no-doc loans and calling them prime. I presume that if the WSJ article is correct as to the magnitude of fraud, Fannie would have a case in trying to recover any losses by suing Countrywide. But if Countrywide goes bankrupt, that plus a few dollars will get you a cup of coffee. Or perhaps we hope our Fannie is covered by credit default swaps that are supposed to pay if these loans default. Unfortunately, it doesn't require much imagination to conjecture a scenario in which the counterparty to those CDS also lacks the resources to make good on their promises. So who's holding the bag here?

From page 102 of Fannie's 2007 Annual Report, as of the end of 2007, the enterprise had leveraged $44 B in stockholders' equity with $796 B in short- and long-term debt to acquire $761 B in mortgages either held outright or intended for resale or trading. I read that as an equity cushion against a 5.8% loss on the mortgages held directly (44/761 = 0.058). But in addition (page 1), Fannie has guaranteed $2.1 trillion in separate mortgage-backed securities it has sold to outside investors, for a ratio of core capital to total book of business of 1.6%.

From the beginning, my conception of a really big financial meltdown would be one that pulls one of the GSEs into insolvency. Please tell me why it can't happen.

Comments

[oldgoldbug]

Thank you! Sometimes the facts are beyond our comprehension.
A friend was here a few weekends ago who was in the banking business in the bad old 80's when loans require something like 20% down and documentation and oh by the way, it was a local bank that knew you and your Mom so they had a good idea if you were good for the dough. How things have changed!

[klemenv]

Wow, that is stunning.

There is joke regarding vergine olive oil, extra vergine oil, very extra virgine oil, truly extra vergine oil.

Now we have prime loans, extra selection prime loans, truly prime loans, non-lying very prime loans, etc.

[clitosil]

Fast and easy, like a whore.

[ArnoldCountry]

But you forgot the most important part... "you mean those consumers were lying when they said they could afford those loans?" Right... dangle a beautiful big home in front of them and give them a payment on an pay option arm they can afford and they will sign anywhere! These guys would make Houdini proud.

[User 187593]

And to think that Congress wants to bail out the consumers who lied with our tax dollars. Maybe those of us who suffered losses in the tech stock meltdown should petition Congress for reimbursement because we lied about our ability to purchase the stocks and suffer the losses. I really couldn't afford it.
Honest.

[cromag]

CWBC Fast & Easy guidelines were abused by the loan officers. They would just put whatever income they needed to qualify the borrower. Borrowers didn't understand and/or were ignorant to the full scope and ramifications of the fraud. Borrowers signed the applications written by the loan officers without even reading them.

Fast & Easy were real A-paper loans and very high jumbo loan amounts in California.

The worst part is that this fraud is still going on in the industry. I don't think that the people who work for lenders care because there are no consequences for their actions so they recommend them to their wholesale clients and the wholesale clients are just dumb enough to do what they are told is OK. The borrowers just go with the flow. The sad thing is the good Brokers lose a lot of business because they don't play along. It's terrible. But it happens at the in-house bank level too. More even! I personally caught one and had the regional VP of this huge bank pay for it by redoing the loan properly at a huge cost to the bank and very low rate to me.

I'll take this one further in the Prime Alt-A direction, where guidelines allowed a No Ratio loan. Borrowers with 80% equity (LTV), good credit scores like 700+ FICO or even 680 and with 2-months PITI reserve assets like 401k or IRA, were allowed to leave the income line BLANK. They just needed to verify that they had a job. If you gave the lender tax returns you were suppose to black out the income. Rates for these No Ratio Alt-A loans were not much higher than the Fast & Easy rates. 0.25% to 0.50% higher in rate. That's a quarter to half a percent higher rate! for NO Income.

The only thing protecting us 'investors' is the tighter liquidity and declining home values. Most people just don't qualify anymore.

SIDE NOTE: We had a plumber come by the house yesterday to quote a re-pipe and when he found out I was a mortgage broker he asked if there was anything he could do because he took all his equity out of his inflated Silicon Valley CA home and bought FOUR rental properties in Florida. All the properties have lost a lot of value since then and he is in negative cashflow in all but one. This is not an isolated thing. I think there is a lot more pain coming.

[QualifiedBuyer]

So there's plenty of blame to go around (borrowers, lenders, mortgage brokers, bankers, builders, etc.) in varying degrees depending on the circumstances. Meanwhile, the holders of these toxic mortgages are slowly transferring them off their balance sheets and onto the balance sheets of government backed entitites, in one way or another. So those of us that thought we were being responsible are the very same who will foot the bill by lower home equity, lower real value in your retirement accounts and ultimately higher taxes. While the investment banks, builders, etc. that made plenty of profits on the upside are not accountable on the downside. Their stock value may declide temporarily, but as they transfer these bad debts to government back entities (you and I), their value will surely recover. There you have it. Our government at work. And by the way, you home buyers looking for a good deal, be ready to watch that down payment your going to be required to pay evaporate as the value of that home continues to fall, thanks to your government letting the air out slowly, and essentially transferring your dollars back to the investment banks.

[ArnoldCountry]

qualifiedbuyer... more truth to what you say then people realize. If the government were to truly step up and say that the banks did a poor job of making these loans available and tell the public that it makes no sense to keep paying on these awful loans that will take them 10 years to recover from anyway (their houses are still going down in value, when it hits bottom it will stay there for a while and when it increases it will be slow, hence the 10 years). If they were to say the best thing is to give the keys to the lender, the prices would plummet even more, even though that is what is best for the consumer with those bad loans. So, welcome to being snookered by your government! Add onto that the fact that FNMA/FHLMC will punish you for 3-5 years if you dare try to walk away (ahem, isnt FNMA/FHLMC really owned and sponsored by we the people), the ones really giving those consumer the screwing is the good ole USA.

[Details]

I am surprised that at this late stage in the mortgage crisis, people can write about this subject as if they are surprised. It also surprises me how the reporters and analysts commenting from the investor viewpoint seem to be so far removed from the details of how the mortgage industry works.

I agree with all comments posted. I would add to cromag’s post. It’s not just that loan officers abused the product guidelines. It’s that it is implicit in their job duties. It is their job. That’s part of the unwritten, unspoken rules of mortgage origination.

If you want to see some downright weird human behavior and rationalizations ad nauseam, ask someone employed in the mortgage industry (especially management level types working for lenders) to explain and justify stated income products. Their physical demeanor actually changes and they become very defensive. I think they secretly worry that you might be working undercover for the FBI’s Mortgage Fraud Task Force and they know they’re guilty. It’s bizarre but fun.

[brokerbila]

As far as who is most resposible for this giant disaster, it must be the bankers who with hundreds if not a thousand years of data and experience relaxed time tested lending rules. Simply, they knew that they didn't have to stand behind the loans they made, because they were going to sell them. Shame on them. They knew what they were doing. The loan agent on the street was in lemming like fashion just following the leaders of the industry off the cliff, thinking all the while that the leaders in the industry knew what they were doing. There is some measure of culpability for nearly everyone, but the industry leaders certainly took the cake.


Why won't the GSE's fail? If the fed won't let Bear Sterns fail, it seems implausable that they would let freddie-fannie fail. But wait ...what if the treasury couldn't raise enough money.

[johngonole]

Basically because banks are banks they must not be allowed to fail. The government must by them out. The whole purpose of central banking was to eliminate the runs on the banks. The pain the public would inccur when small banks went belly up before the central banking system. Problem is that instead a few scattered banks going broke now we risk the whole banking systems going broke. So government bails them out by relaxing rules, with tax money, etc... So we get monetary inflation instead of scattered bank bankrupcies. Once the banks figured out they had no accountability anymore everything was allowed, loose credit was encouraged, etc... I remember the surprise on my mortgage brokers face when I came in and wanted to put 20% down.

On average over the long term I think we'd be better off placing our money in 10 banks evenly. Easy to do in the internet days. If one bank went broke I'd only lose 10%. Thats a heck of a lot better then losing 3-5% per year via inflation. So lets push to get rid of the Federal Reserve banking system. They are no longer needed. The service they provide (supposedly a sound banking system) can be done in either ways now. With technology people can easily spread their assets these days. I'd rather have a stable currency instead of this costly version of Fascism

Its time to get rid of the Federal Reserve. The banks and the government and way to many other industries are too closely tied together.

[tcornelison]

Fast & Easy was simply Countrywide's version of a product that Fannie Mae made available to every one of it's customers in the nation through it's "easy doc" program. The answer is yes it was a true no-doc loan. They made it available to everyone but not all companies offered it. Many in fact did not so give those lenders credit for seeing that the risk was not deferred by the 1.5% discount point add on it was priced on based of standard prime rates.

[ArnoldCountry]

Its kind of funny when people look at blame... everyone seems to forget the golden rule... "he who has the gold rules". The banks had the gold... they were driving this ship.

[SorryCharlie]

I am with "Details" - It is mind boggling that people are still writing about the same old stuff. It is even more bewildering to see people slinging arrows and passing blame.

The blame is everywhere - including any investor who turned a blind eye while ridiculous returns were paid out. Bottom line is that the incentive was and still is to sell the most profitable product one can. Think about what you do for a living - does the company you work for try to maximize profit? Do your sales people tell their own customers how to negotiate harder? Do you expect your company to provide your client advice on how to reduce the price they pay for what you offer? Does any investor these days want to put money in a company that like that?

The only difference here is that the product is "money" instead of cars or furniture or soap. Brokers, LO's, Lenders, realtor's are all just salesmen. They are motivated by the same thing that motivates anyone who is working for a living - they are trying to make money.

Until you monetize the incentive to provide the consumer the best solution instead of the most profitable solution - you will continue to have the same cycle over and over. Not easy to do in a capitalistic society - where the consumer is short sighted and no longer willing to pay for quality service.

Until someone figures out that rule we all must live by another - Caveat Emptor (buyer beware)!

[SorryCharlie]

I am with "Details" - It is mind boggling that people are still writing about the same old stuff. It is even more bewildering to see people slinging arrows and passing blame.

The blame is everywhere - including any investor who turned a blind eye while ridiculous returns were paid out. Bottom line is that the incentive was and still is to sell the most profitable product one can. Think about what you do for a living - does the company you work for try to maximize profit? Do your sales people tell their own customers how to negotiate harder? Do you expect your company to provide your client advice on how to reduce the price they pay for what you offer? Does any investor these days want to put money in a company that like that?

The only difference here is that the product is "money" instead of cars or furniture or soap. Brokers, LO's, Lenders, realtor's are all just salesmen. They are motivated by the same thing that motivates anyone who is working for a living - they are trying to make money.

Until you monetize the incentive to provide the consumer the best solution instead of the most profitable solution - you will continue to have the same cycle over and over. Not easy to do in a capitalistic society - where the consumer is short sighted and no longer willing to pay for quality service.

Until someone figures out that rule we all must live by another - Caveat Emptor (buyer beware)!