HAMP – Home Affordable Modification Program administered by the Treasury Department
The conservatorships of Fannie Mae and Freddie Mac were an invention by Henry Paulson, James Lockhart, Ben Bernake and Timothy Geithner designed to assign blame away from government regulators and their big bank friends. The mechanism behind the government takeover was the Paulson Panic. Paulson’s leaked word of the pending government takeover of Fannie and Freddie was met with the companies’ stock being shorted which resulted in substantial stock devaluation. The lowered stock prices meant the companies suffered from an ability to raise capital at a time when they perhaps needed it the most. (1)
In full Paulson Panic mode, the Administration used hyperbole and fear mongering to force their solution on the problem they created. Congress went along with their plan, as did the senior management of Fannie Mae and Freddie Mac with the use of fear and intimidation.
NY Times: “Treasury didn’t arrange a full government takeover or even a bailout of the GSEs. Instead, Paulson marched in the chief executives of Freddie and Fannie and told them that they could either consent to or be forced into conservatorship.” (2)
That was in 2008.
Fast-forward to 2012 and we ask, “Why did the Administration implement the Third Amendment to the PSPAs?”
Was it as advertised at the time “To end the circular Treasury draws?” Nope, that’s been debunked. No one believes that it was to stop the circular lending because the GSEs had already stopped taking draws and it was evident at the time that they would return to profitability.
Was the Sweep Agreement, as some suggest, needed to establish a “time out” to allow for congress to pass reform? No. Congress can pass reform without a profit sweep and even without the forced conservatorships.
To help try to understand the timing of the Third Amendment, let’s review some history to put events into perspective.
Timeline of Key Events:
James Lockhart Director OFHEO/FHFA: June 2006 – August 2009
Conservatorship Began: September 2008
Obama Administration 1st Term: January 2009
Geithner to DeMarco Letter: July 2012
3rd Amendment to the PSPAs: August 2012
Presidential Election: November 2012
Edward DeMarco Acting Director FHFA: September 2009 – January 2014
Obama Administration 2nd Term: January 2013
Mel Watt nominated for Director FHFA: May 2013
Mel Watt Director FHFA: January 2014 – Present
The “Geithner to DeMarco Letter” mentioned in the above timeline is a letter in July 2012, that DeMarco received from Geithner and Michael Stegman outlining the Administration’s desire for FHFA to agree to mortgage principal reductions. (3)
DeMarco had been FHFA Acting Director since September 2009 and until he received the letter from Geithner and Stegman, he had been resisting the Administration’s call for principal reduction. So, why would the Acting Director resist implementing a plan that he did not think was in the best interest of the conservatorships from September 2009 to July 2012? Then, in August 2012 he agrees to the 3rd Amendment, which is far more detrimental to the goals of the conservatorships than principal reduction. That’s like asking, would you like to lower the companies’ profitability “some” or “all”?
What would compel the Conservator to sign away all profits of companies he was charged with restoring? Was he intimidated in the same fashion like the senior management at Fannie and Freddie? Was he misled similar to members of congress?
One thing is clear – DeMarco resisted implementing something he did not agree with for three years and then within one month of getting a full court press by the Administration he hands everything over to Treasury. How does that make sense?
What would those secret Administration communiqués show? Would they reveal that members of the Administration lied about their intentions? Worse, would the documents reveal that certain members made intentionally false statements while testifying under oath? Would they expose certain individuals of securities fraud?
The secret documents could likely show that the Administration knew the GSEs were returning to profitability and perhaps feared they may loose the ability to use Fannie and Freddie to carry out their political agenda.
Would the emails and memoranda show that the Administration had an ulterior motive for taking control of Fannie Mae and Freddie Mac? That could explain the intent behind the 3rd Amendment. By controlling the companies’ financial survival, Treasury would control the entire fate of Fannie and Freddie including the Administration’s pursuit of mortgage principal reduction.
Perhaps Treasury was fearful that with the GSEs returning to profitability it could create an environment where Fan and Fred could object to the losses associated with principal reduction. By Treasury taking control of the companies via seizing their profit stream it made it harder for Fannie and Freddie to object. When your captor has you bound and threatens your oxygen intake, you’re less likely to put up a fight.
Treasury was extremely concerned about the consequences of borrowers being underwater on their mortgages, i.e. homeowners’ ability and desire to repay a debt on an asset that is not worth the amount they are paying.
Jeffery Goldstein, then Treasury Under-Secretary for Domestic Finance, estimated in December 2010 that 11 million Americans were underwater on their mortgages at the time.
First, what is principal reduction? Let’s say someone owned a house once worth $200,000 and they had a first mortgage for $150,000 and a second mortgage for $45,000. Then, the value of this home dropped by 15% and is now worth $170,000. These homeowners are now underwater by $25,000. Principal reduction is a write-off of a portion or all of that $25,000. If Fannie Mae and Freddie Mac were the largest owners of mortgages, then these private companies would have to write-down a significant amount of money under the Treasury’s HAMP program.
Here’s how President Obama described the plan at the time:
“And we will pursue the housing plan I’m outlining today. And through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages so they can afford — avoid foreclosure. And we’re not just helping homeowners at risk of falling over the edge; we’re preventing their neighbors from being pulled over that edge, too — as defaults and foreclosures contribute to sinking home values, and failing local businesses, and lost jobs.
But it will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everybody. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.
So here’s how my plan works: First, we will make it possible for an estimated 4 to 5 million currently ineligible homeowners who receive their mortgages through Fannie Mae or Freddie Mac to refinance their mortgages at a lower rate.
Today, as a result of declining home values, millions of families are what’s called “underwater,” which simply means that they owe more on their mortgages than their homes are currently worth. These families are unable to sell their homes, but they’re also unable to refinance them. So in the event of a job loss or another emergency, their options are limited.
Also right now, Fannie Mae and Freddie Mac — the institutions that guarantee home loans for millions of middle-class families — are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater or close to being underwater can’t turn to these lending institutions for help.
My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee.
And what this will do is it will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero. While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.” (4)
However, Gretchen Morgenson described the situation at the time in her March 24, 2012 article, A Bailout by Another Name:
“Stabilizing the housing market is a noble and desired goal, of course. And legions of borrowers hurt by the bust genuinely need help.
But what the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. The fact is, principal reductions by Fannie and Freddie are not the panacea that they may seem.
Still, the crowd clamors for widespread Fannie and Freddie write-downs, even though they would constitute a direct and sizable gift from taxpayers to the largest banks.
Here’s how: Many banks hold second liens on the same properties for which Fannie and Freddie either own the first mortgage or have guaranteed. If principal amounts on these first mortgages are reduced while leaving the second liens intact, those seconds become much more likely to be paid off over time. With no principal reduction, the banks would have to write off many of those second liens.
As such, principal write-downs are another backdoor bailout for the banks that brought you the mortgage crisis.”
So, would the communiqués being protected by the President’s Executive Privilege expose this backdoor bailout?
Morgenson’s article continues,
“Answering his critics, Mr. DeMarco has agreed to approve principal reductions at Fannie and Freddie, but only when Congress passes legislation enabling it. Writing a law to force taxpayers to bail out the banks in this way, however, might anger constituents. So it’s far easier for members of Congress to rail against the one supposedly intransigent man who is preventing the great American housing recovery.” (5)
Was DeMarco meant to be the fall guy? If so, what did he get in return for signing the 3rd Amendment? Surely there had to exist communication within the Administration – between the White House and the Treasury – on what would possibly motivate a conservator by doing the exact opposite of what he was supposed to do — not just supposed to do, but mandated by an act of Congress. How could a government employee be persuaded to operate outside the law with apparent impunity?
It appears that the Administration thought they were going to get away with misappropriating the assets of two private companies by funding mass principal reductions that ended up being a backdoor bailout of the banks. Apparently, the Administration thought Congress would do as instructed and pass a wind-down bill. If that happened, no need to worry about the misappropriation of Fannie and Freddie’s profits to fund principal reduction, right?
Could the secret documents also connect the dots to the bank settlements? Huge sums of money were transferred from the Treasury to the banks in various different forms. The Treasury “settled” with the banks by no one admitting fault and no one being charged with wrongdoing. The banks paid the fines in supposed reparations to Fannie and Freddie with the ultimate recipient of the money being… Treasury!
How could dozens of banks pay billions in settlements and not one bank executive be held accountable? Even Bernie Madoff’s administrative assistant received a six-year prison sentence (not to mention Bernie’s 150 year sentence). Could it be that no bank executive was sentenced with a crime because the whole Madoff-like Ponzi scheme was orchestrated by Treasury? The recent announcement by the Justice Department stating they would pursue charges against wrongdoing is like OJ Simpson stating he would find the real killers.
Stuck between a rock and a hard place
It is clear the Administration is protecting someone. It is highly unlikely that the documents being shielded under Executive Privilege relates to national security. Rather, the communiqués would likely expose wrongdoing.
At this point, it appears too late for Congress to enact reform under the Obama Administration, meaning they have effectively painted themselves into a corner.
Secretary Lew made some interesting comments under oath during congressional testimony last week. He made the duplicitous statement that Fannie Mae and Freddie Mac’s profits were being used to “reduce the deficit” but that the companies were “not of the woods.”
Congressman Capuano’s response was quick and brilliant, “You won’t let them out! You won’t let them pay off their debt.”
As Forbes commented on the Third Amendment, “Seeing a golden political opportunity, Treasury re-wrote the rules to allow it to go beyond its dividend and instead lay claim to all of the profits generated by the GSEs. Such a move allowed the federal government to report lower deficits while also allowing it to declare its GSE intervention a rousing success. The only problem with this maneuver is that it contravenes the rule of law. Under the terms of a conservatorship the bondholders retain a stake in the company and, as a result, are entitled to be repaid.” (6)
ProPublica wrote: “It undermines the foundation of the capitalist economy,” said Phillip Swagel, a Bush Treasury official. “What separates us from [Russian Prime Minister Vladimir] Putin is not retroactively changing contracts.” (7)
“The administration launched the program…in early 2009, promising it would help three million to four million troubled American borrowers rework the terms of their mortgages. Amid widespread reports that servicers have been wrongly rejecting homeowners, losing paperwork, and otherwise breaking the program’s rules, it appears the program will fall far short. The Congressional Oversight Panel now estimates fewer than 800,000 homeowners will ultimately get lasting mortgage modifications.
The reason Treasury hasn’t changed them, Gordon said, is that Treasury is afraid servicers would drop out of the voluntary program, known as the Home Affordable Modification Program (HAMP), in the face of real penalties.
The government’s oversight has also been hampered by a lack of transparency by Treasury itself. The department has kept its audits of servicers secret. It also does not have a written policy for how it would address rule violations by banks, an omission criticized in a Government Accountability Office report last year and not yet addressed. Treasury says it does have a process for dealing with banks’ noncompliance, just not a written one.
The lack of oversight has been particularly damaging, since mortgage servicers have little incentive to do modifications on their own.” (8)
Here is how FHFA OIG summed up the situation last week in a report:
“Absent Congressional action, or a change in FHFA’s current strategy, the conservatorships will go on indefinitely. The Enterprises’ future status is beyond their control. At present, it appears that Congressional action will be needed to define what role, if any, the Enterprises play in the housing finance system.
Congress and the administration appear to agree that the current housing finance system is not viable and that legislation is needed to address fundamental industry issues. At present, there is no indication that the final resolution of these issues will occur in the near term. FHFA’s current expectation is that the conservatorships will continue until legislation is passed and the Enterprises’ future is settled.” (9)
So, the Administration is punting to Congress. Even if Congress is able to pass a reform bill they move too slowly to get anything done while the Obama Administration is still in office.
That means the current Administration will hand this problem to the next Administration. Providing that they will take office in January 2017 and the GSEs are intentionally set to be depleted of all capital as of January 2018 that is an incredible burden to hand to a new President. The next Administration will not accept that burden lightly.
Recall how often and how long President Obama’s team blamed the previous Administration? One could assume that this next Administration will investigate and identify exactly what happened and why they inherited such a mess – one that could have been avoided. Along that line, we may likely see an overuse of preemptive Presidential Pardons – much like the overuse of Presidential Privilege – in Obama’s last days in the White House.