It’s almost so ridiculous it’s not believable. The federal government is suing the same banks that we bailed out. The same banks that were forced by the government – via the Community Reinvestment Act – to make bad loans that customers (who had no business even getting) defaulted on.
So once again, it appears that we will be bailing out Fannie and Freddie, to the tune of over $30 billion. At the same time, they are suing these mega banks which will make the financial sector even more unstable – if that’s even possible.
Fannie and Freddie had other reasons to buy the [bad] securities, Mr. Rood added. For starters, they carried higher yields at a time [before 2007] when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.
In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.
“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.
In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.
As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion. NYT