Fannie and Freddie Start Returning Fraudulent Mortgages to Banks, But Crime Goes Unpunished

In a February regulatory filing with the SEC, Fannie Mae and Freddie Mac, now owned by the federal government, say they intend to return $21 billion in home mortgages to banks in 2010. Four commercial banks now dominate the home mortgage market: Citigroup, JP Morgan Chase, Bank of America, and Wells Fargo, and they will receive the bulk of these repurchases. Since the banks sold these mortgages to these agencies for full value, they must buy them back at full value, but at least one bank, JP Morgan Chase, says these mortgages will then be immediately written down by 50%.

Fannie and Freddie have already written off $200 billion in losses on their mortgage portfolio, and late last year they had a $400 billion cap on losses removed by the Treasury, meaning the losses could be unlimited. These losses have been localized in the agencies' mortgage-backed securities portfolios, built up around 2006-2007 at the height of the housing boom, and consisting of thousands of "non-qualifying" mortgages that Fannie and Freddie based on their own policies would not normally have purchased as individual mortgages. The mortgages now being returned to the banks are in fact qualifying mortgages - the supposed cream of the crop sold individually to the agencies by the banks, but now that Fannie and Freddie are looking at each of these mortgages carefully, they are finding the documentation riddled with errors, fraudulent income claims, over-stated appraisals, and serious omissions. Banks "represent and warrant" that all mortgages sold to the agencies are in compliance with high standards, and must buy them back if they are proven otherwise.

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What you can count on is that, between the Treasury and the Fed and the administration, very little will be said about this situation. As much as possible will be done to keep this out of the public eye and away from the hands of Congress. This might explain why there is no mention that Fannie and Freddie, who are now sitting on a prosecutors wet dream of information about criminal behavior in the mortgage market, are sending any of their files over to the Justice Department. The Attorney General seems to have no interest in this gold mine of prosecutable information, and no task force of lawyers and FBI agents has been set up in Washington to look into this cesspool of fraud, deceit, malfeasance, bribery, and theft, involving billions and billions of dollars.

Nobody in Washington wants these sorts of investigations. The biggest banks in the country would have to be subpoenaed, along with Goldman Sachs and Morgan Stanley for their role in issuing securities that were obviously fraudulent. Moody's and Standard & Poor's would have to answer for their grossly negligent and misleading Aaa ratings stamped on these securities. The founders and owners of dozens of bankrupt mortgage broking firms would need to be tracked down and brought to justice, along with thousands of corrupt attorneys, bribed appraisers, and duplicitous real estate agents.

This is, however, exactly what was done during the 1980's Savings & Loan crisis. Hundreds of criminal convictions were obtained after years of hard work involving an army of prosecutors, agents, analysts, and lawyers. Back then, the government, including the Congress, was zealous that justice be done. What has happened 25 years later to America's criminal justice system, needed now more than ever when the damage done to the country is many magnitudes greater?
When the government, as the dispenser of justice, turns a blind eye to the most outrageous and now well-documented fraud of the past century, the government itself is corrupt to its very core. That is the only explanation we can as taxpayers come up with when no one in Washington is willing to stop the stench that is wafting across the Potomac all over this country.

For more details on the Fannie and Freddie repurchase program, see this Bloomberg story: http://tiny.cc/eqa5r