A popularly held view of recent history offers some small support for beleaguered Fannie Mae and Freddie Mac. It has been fashionable to note that the quasi-federal lenders were merely helping to facilitate a larger national policy of increased homeownership in the decade leading to the 2008 financial crisis.
If the goal was to get more people into more homes, then the two GSEs could hardly be blamed for bankrolling still more home loans. Fannie and Freddie were merely following orders and executing their mission, the ends justified the means (at the time), and the buck shouldn’t stop with them.
But it’s easy to forget that while the two lending giants were helping execute this massive public homeownership expansion policy, they were also reaping massive profits for their private shareholders.
We know that being profitable is not an automatic indictment of the companies’ practices. But passing the buck and blaming a larger national policy should also not absolve them of their role in the current housing market morass.
Earlier this year, Fannie and Freddie enacted strict new regulations mandating a final credit check before closing on a home loan. Any new credit lines or abnormalities not present when a borrowers’ credit was originally pulled were to serve as a red flag to lenders that a borrower may be more risky than believed.
At the time, we were generally supportive of the intent of the idea, noting that the effort to weed out careless borrowers today would go a long way towards improving the larger loan pool tomorrow. But if we’ve learned nothing else from the housing bubble collapse, it’s that good intentions don’t always translate into good policy.
Anecdotally, we’ve heard horror stories of good borrowers offered good terms, only to be de-railed at the closing table because of some implied increase in their level of risk attributed to an aberrant credit report. If they were stable enough to receive certain terms on one day, how much can possibly change in just a few days or weeks enough to alter those terms so drastically?
With hindsight, the credit check policy enactment seems to point, at least in part, to an effort on behalf of the GSEs to be able to say “Well, we double- and triple-checked everything, its not our fault,” if and when a loan went sour.
The latest non-mea culpa from Fannie and Freddie touches on the firestorm surrounding the recent robo-signing controversy. In Congressional testimony last week, Fannie and Freddie deflected any blame relating to poor servicing of loans, saying they’re not responsible for the day-to-day management of mortgages, but instead rely on banks to deal fairly with borrowers.
That’s all well and good, but it ignores the GSE’s own policy, which provides servicers with a financial penalty for delaying potential loan workouts and/or foreclosures. Fannie Mae imposes a $100 fee on contractors for each day they fail to notify the firm that the foreclosure process was a success and that it has the right to move ahead with the resale of a home.
It seems logical to assume that a financial disincentive to take time with foreclosure documents may have, however indirectly, led to the too-rapid paperwork turnover at the heart of the robo-signing issue.
It’s unfortunate that the once mighty money machines that were Fannie and Freddie have fallen on such hard times. Certainly, we realize it’s unfair to place all of the blame for the housing bubble collapse at their doorstep.
But just because they shouldn’t shoulder all of the blame doesn’t mean they can shirk responsibility for their share. The ultimate failure or flaws within a given policy lie with its authors, good intentions notwithstanding.
And Fannie and Freddie have been the authors of plenty of poor policies. It’s time they owned up to it.
