Time to Stop Undermining Homeownership

Here’s a startling fact — more than 10 million Americans have been evicted from their homes since 2007. That’s nearly the entire population of the state of Michigan. Just imagine if the people of an entire state were rendered homeless overnight — it would be quite a calamity. The news media would no doubt cover it 24/7, millions of dollars would be raised in aid, and thousands would volunteer to help shelter the displaced. Any companies responsible for such a massive displacement of people would be vilified — think of the public relations lashing BP received after the Gulf of Mexico oil spill. While the housing crisis does not spur the same emotional response from the media and the general population as say, a natural disaster or a terrorist attack; perhaps it should. The housing crisis was not an inevitable glitch in the system, but rather a long-foreseen consequence of an industry running rampant in the name of profit.

The housing crisis is a multi-faceted issue with many moving parts, but here are some recent developments that warrant discussion.

In her new book, A Dream Foreclosured: Black America and the Fight for a Place to Call Home(Zuccotti Park Press) author Laura Gottesdiener details how poor, African American communities were specifically targeted and exploited by the banks with inferior or too-good-to-be-true loans over the course of several decades. Gottesdiener reports the touching, personal stories of these tragedies and, importantly, how four of the families fought back. The book is a gripping account of the rampant predatory corporate practices that took place all across the country and which have caused our economy so much harm — and how abused communities can begin the rebuilding process.

The post-financial crisis reality is that the dream of owning a home has ended for too many Americans. Looking ahead, it is unfortunate that much of the same flawed thinking that led to the subprime mortgage crisis is now re-occurring. President Obama recently announced his plan for a housing recovery, intending to “wind down” the two main federal mortgage agencies — Fannie Mae and Freddie Mac. (Recall Fannie and Freddie were bailed out by taxpayers with $185 billion.) Eliminating these agencies would effectively privatize the mortgage guarantee market, which many analysts say would undoubtedly result in higher costs to potential homeowners. Under the current Senate and House plans, borrowers would be paying about $75 and $135 more a month in interest, respectively, on a conforming loan of $200,000 with a 20 percent down payment according to Mark Zandi, chief economist at Moody’s Analytics.

In short, this action and its resulting, deceptive free-for-all could effectively end the ability of low-income earners to receive mortgages at all.

Notably, Fannie Mae and Freddie Mac have returned to profitability and are repaying their debt to the United States Treasury. The agencies have paid back more than two-thirds of the bailout money they received — about $146 billion so far. (Fannie Mae and Freddie Mac common stockholders have not been able to recover any value of their stock, however, despite having been repeatedly misled by government officials about the financial health of the agencies in 2008 prior to the bailout. See my May 18, 2013 letter to Treasury Secretary Jacob Lew.)

Joe Nocera of the New York Times writes:

[Fannie and Freddie’s] sole role now is to guarantee and securitize mortgages. And they are making huge amounts of money — much of which is going to the government. Fannie Mae, for instance, recently announced a quarterly profit of $10.1 billion, and said it was making a $10.2 billion payment to Treasury. ‘At the current pace,’ The Wall Street Journal reported, ‘over the next year, Fannie and Freddie are likely to repay the government more money than they borrowed.’

Economist Dean Baker, in an article for the Guardian, writes:

The moral hazard problem of the pre-crisis Fannie and Freddie — private profit and public risk — was eliminated when they went into conservatorship. In the last five years, they have been operated to sustain the housing market, together buying up more than 80% of the mortgages issues since the onset of the crisis.

Given that both are now covering their costs and making profits, which are, arguably, too large even, it’s difficult to see what the problem is. But President Obama wants to wind down them down and replace them with a new and ostensibly improved public-private system.

I and other advocates told members of Congress, government regulators and the media about the structural and operational problems of Fannie and Freddie for years leading up to the government takeover. We pointed out how these agencies had increasingly turned themselves into casinos before the crash, ignoring the many risks and taking advantage of an implied U.S. government guarantee. In a speech in 1998, I cautioned that one of the unintended consequences of fat profits over a long period is the tendency of governments and private corporations to start believing in fantasies about living happily ever after in the glory of ever-rising profits.

So yes, Fannie and Freddie aren’t perfect. But despite this, under conservatorship, the agencies have stabilized the housing market. The ideal path forward is to recapitalize, not liquidate. Jim Millstein, the former chief restructuring officer at the U.S. Treasury who worked on recouping the bailout of AIG in 2009, proposed such a plan in an op-ed in theWashington Post last year.

To shutdown Fannie and Freddie now is unnecessary and is akin to throwing out the baby with the bathwater. The problem, as it has always been, is reeling in the big banks whose primarily goal is to profit and pass on their risks despite any and all human and taxpayer cost.

Local initiatives are spreading. Look to Richmond, California. This town of just over 100,000 is standing on the front line of the housing crisis debate. Richmond officials are in the process of enacting a unique plan to save the homes of many Richmond residents. Nearly half of Richmond’s residential mortgage holders are currently at risk of foreclosure — 900 homes were foreclosured there in 2012. Gayle McLaughlin, mayor of Richmond, toldDemocracy Now: “The banks sold our community predatory loans, and now they have no solution that they’re presenting for this crisis. So we are stepping in to fix the situation.”

The city’s plan is to purchase the mortgages from the banks and offer families fairer deals to stay in their homes. If the banks refuse to sell, the city means to use eminent domain to keep its residents from being displaced. It is a bold plan, and obviously, the corporate interests intend to put up a fight. Congressman John Campbell of California has already introduced a bill intending to squash the plan.

The battle in Richmond is what we should expect to see all over the country as communities fight back against the corporate interests that would see millions more go homeless before it effects their government-subsidized bottom line.

(Autographed copies of my latest book Told You So: The Big Book of Weekly Columns are available at Told-You-So.com)

The Great Fannie and Freddie Rip-Off

I have long fought against the systemic disempowerment of investors in large public corporations, but the mistreatment of the Fannie Mae and Freddie Mac shareholders, including me, is uniquely reprehensible.

For decades Fannie and Freddie behaved like other large, publicly held financial corporations. They were profit-seeking companies, listed on the New York Stock Exchange (NYSE). They displayed an unfettered drive for greater sales, profits, executive bonuses and stock options for the top brass. Their shareholders received dividends and rising stock values.

These so-called government sponsored enterprises (GSEs) dominated the secondary mortgage market. The implied government backstop slightly lowered their borrowing costs in return for a poorly enforced obligation to facilitate a mortgage market for lower-income home buyers. Otherwise, the GSE moniker meant little, since everybody knew that, like Citigroup, Goldman Sachs and other Wall Street giants, Washington viewed them as “too big to fail.”

With the onset of the subprime mortgage collapse, Fannie and Freddie went down with the rest of the financial industry. The federal government moved into high bailout gear during the latter half of 2008 with three distinct rescue models for Wall Street and Detroit.

One model provided capital and credit lines to Bank of America, Citigroup, Morgan Stanley, J.P. Morgan Chase and AIG, leaving their shareholders beaten down but intact to start recovering value.

The second model dispatched General Motors into a well-orchestrated, stunningly quick bankruptcy process. While the bankruptcy court treated the common shareholders like flotsam and jetsam, GM emerged well subsidized and tax-privileged with a clean balance sheet under temporary ownership by the U.S. and Canadian governments and the United Auto Workers.

The third model placed Fannie and Freddie under an indeterminate conservatorship scheme that kept but abused its common shareholders, who had already lost up to 99% of their investment. Neither vanquished nor given an opportunity to recover, the institutional and individual shareholders are trapped in limbo.

Here is how the scheme congealed. In return for providing an open credit line, the government received warrants to buy up to 79.9% of the GSEs’ common stock for $0.00001 per share. The government’s share stayed under 80% to avoid forcing the liabilities of these two behemoths onto the government’s books. Treasury achieved this by having the common shareholders nominally own the other 20%.

Here’s the rub: The zombie common shareholders have no rights or remedies against Fannie and Freddie, both operationally active companies, or their regulator—the Federal Housing Finance Agency. FHFA ordered the Fannie and Freddie boards and executives to suspend communications with shareholders and abolish the annual stockholders meeting.

In 2008, then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke told Fannie and Freddie investors that the companies “are adequately capitalized.” Moreover, another regulator, the Office of Federal Housing Enterprise Oversight (Ofheo), assured investors—including many mutual funds, pension trusts and small banks—of the soundness of their investment.

Fannie Mae’s then-Senior Vice President Chuck Greener, backed by his then-CEO Daniel Mudd, said, “We are maintaining a strong capital base, building reserves for credit losses and generating solid reserves as our business continues to serve the market.” That was on July 11, 2008.

These former officials (both have since left Fannie Mae) should have known better. On Sept. 8, 2008, when Treasury announced the conservatorship, the GSEs’ common stock dropped to pennies and the shareholders realized they were misled.

Such statements by private executives controlling a publicly traded corporation should have prompted a Securities and Exchange Commission investigation. Such was the betrayal of trust of investors who were told for years that putting their money in these GSEs was second only to investing in Treasury bonds.

Still, some faithful shareholders, including me, held on, believing that they might have a chance to recover something—as did their counterparts in Citigroup, AIG and the rest of the rescued.

Then came the cruelest and most unnecessary diktat of all. On June 16, 2010, the FHFA directed Fannie and Freddie to delist their common and preferred stock from the NYSE. The exchange did not demand this move. True, Fannie had dropped slightly below the $1 per share threshold stipulated by NYSE rules, but the Big Board is quite flexible with time either to get back over $1 or to allow companies to offer a reverse stock split. Freddie was comfortably over the $1 level. Why delist with one irresponsible stroke of the government’s pen and destroy billions of dollars of remaining shareholder value? This move took the shares down to the range of 30 cents, chasing away many institutional holders.

FHFA Director Edward J. DeMarco said: “A voluntary delisting at this time simply makes sense and fits with the goal of a conservatorship to preserve and conserve assets.” What nonsense! Real people were affected. As always, shareholders were powerless to challenge management practices, and they were treated like bureaucratically useful apparitions whose last clinging value could be shredded arbitrarily without due process.

In the next few weeks, the Obama administration is sending Congress its proposals regarding the future of the GSEs. The common shareholders of Fannie and Freddie need to organize and make their voices heard in Washington. Clearly, they should have a say in how Fannie and Freddie are managed—in the board room and in Congress—from here onward. It would be the equitable thing to do given the unprecedented delisting, political manipulations and discriminatory abuses heaped on GSE investors.

Mr. Nader is a consumer advocate and the author of “Only the Super-Rich Can Save Us” (Seven Stories Press, 2009).