Fannie Mae, Freddie Mac and Sallie Mae
1938 Fannie Mae, the
Federal National Mortgage Association, is founded as a government agency
as part of Franklin Delano Roosevelt's
New Deal (an extension of Herbert Hoover's New Deal),
in order to provide liquidity to the mortgage
1938 to 1968 Secondary mortgage
market in the US is monopolized by Fannie Mae.
1968 Fannie Mae is converted into
a private corporation to help balance the federal budget.
Fannie Mae at
one time is the ninth-largest business in the world according to
The Government National Mortgage Association, Ginnie Mae, is
established to promote home ownership.
1970 Emergency Home Finance Act is passed
to provide competition in the
secondary mortgage market, and to prevent Fannie Mae from continuing to
have a monopoly.
charters Freddie Mac as a
private corporation to compete in this same market.
Ginnie Mae begins
creating and guaranting mortgage-backed securities.
securitized as Ginnie Mae mortgage-backed securities (MBSs) are insured by the
Federal Housing Administration (FHA), which typically insures mortgages to
first-time home buyers and low-income borrowers.
1972 Sallie Mae, the Student Loan
Marketing Association is founded as a government sponsored enterprise.
The coorporation remains the country's largest originator of federally
insured student loans.
"The dirty little secret of the guaranteed
student loan market is how concentrated it is: only 32 lenders hold 90% of the
The Education Department has found that at about 300
colleges one lender controls 99% of loan volume -
essentially holding a monopoly on those
campuses" - Stephen Burd
1989 Under the
Financial Institutions Reform, Recovery, and Enforcement Act
Freddie Mac becomes a publically
Lenders of student loans are specifically exempted from the Fair Debt
Collection Practices Act.
1999 The statues of
limitations are removed from license debt
created from student loans.
Student loans are now never forgiven
Student seeking loans are not allowed to shop loans
as most institutions have captive lenders.
Student loans may be refinanced only once, so
if interest rates drop the borrower will
be stuck with the original rate.
Defaults are typically charged 25% of
the loan value.
Student loans are also exempt from "truth in lending"
regulations and rules that require lenders to explain fees and interest
Student loan collection rights include the right to garnish
tax refunds, Social
Security payments and disability payments.
2000 Sallie Mae
starts its Opportunity Loan Program.
A lender hands a college a
fixed amount of private loan money which the college then lends to students
with credit problems for higher rates with less consumer protection.
The college then promises to make the lender it's exclusive provider of
loans backed by Sallie Mae.
In the past this used to be called
monopolizing a captured
market through kickbacks.
Sallie Mae denies
but agrees to pay a $2 million fine.
Mac hires the lobbying and PR firm DCI Group for a "stealth lobbying
DCI did not file lobbying reports on the contract, and
Freddie Mac executives referred to the lobbying campaign as their "stealth
2006 Treasury Secretary Hank
Paulson nationalizes Fannie Mae and
Fannie Mae pays a fine of $400 million for alleged accounting
manipulations and lying to investors. Earnings are reduced by $6.3
Freddie Mac is fined $3.8 million for illegal campaign
contributions arranged by Freddie Mac lobbyists including former House Speaker
Newt Gingrich, who recieved $300,000 to push for increased
deregulation, and former Senator
Freddie Mac agrees to settle lawsuits stemming from a
$5 billion profit reduction restatement of 2003 earnings.
makes "six-figure payments to 52 outside lobbying firms and political
After nationalization, Fannie and Freddie own 90% of US
Private equity group led by JC
Flowers that has sought to buy out Sallie Mae informs Sallie Mae that if
reductions in subsidies
pending in a legislative bill are passed by Congress then the sale would be at
George Walker Bush requested a reduction of
subsidies to Sallie Mae of $16 billion.
The House approved of a measure that would lower subsidies by $19
billion over five years.
subsidies = no deal.
September 6, 2008 The director of the
Federal Housing Finance Agency (FHFA), James B. Lockhart III announces
his decision to take Fannie Mae and Freddie Mac into conservatorship run by
Over 98% of Fannie's loans were paying timely but $270 billion in
loans that Fannie Mae had purchased or guaranteed between 2005 and 2008 were
now considered risky.
Fannie Mae and Freddie Mac each had a positive net
worth as of the date of the takeover.
The takeover was triggered by
credit default swap
default swap parlance this is termed a credit event.
the settling of outstanding contracts for the derivatives, which are used to
hedge or speculate on the potential risk that
a incorporation will default on its bonds.
"Credit default swaps are
essentially insurance policies covering the losses on securities in the event
of a default.
institutions buy them to protect
themselves if assets drop in value.
It's like bookies trading bets, with banks
and hedge funds gambling on whether an investment (bundled subprime mortgages)
will succeed or fail.
Swap related provisions of Gramm's bill -
supported by Fed chairman
and Treasury secretary Larry Summers - a
$62 trillion market (nearly four times the size of the entire US stock market)
remained utterly unregulated, no one made sure the banks and hedge funds had
the assets to cover the losses they guaranteed." - David Corn
Mae and Freddie Mac had approximately $ 1.5 trillion in bonds outstanding, and
since the market in credit
default swaps is not public, there is no central reporting mechanism to
verify how many credit default swaps are linked to those bonds.
Mae unveils the HomeSaver Advance plan to provide "foreclosure prevention assistance to
distressed borrowers" to avoid increased losses of as much as $2.4 billion
in credit default swaps.
71,000 cash advances to forestall foreclosure with an average value of
$6,500 for a total of $462 million.
In spring 2009 Fannie Mae valued
those loans at $8 million.
"Whatever credit defaults are in theory,
in practice they have become mainly side bets on whether some incorporation, or
some subprime mortgage backed
bond, some municipality, or even the US government will go bust.
insurance if you like, but it's not the insurance most people know.
It's more like buying fire insurance on your neighbor's house, possibly
for many times the value of that house - from a incorporation that probably
doesn't have any real ability to pay you if someone sets fire to the whole
neighborhood." - Michael Lewis & David Einhorn 01/03/08
September 7, 2008, the Federal Housing Finance Agency (FHFA) placed
Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that
play a critical role in the US home mortgage market, in
As conservator, the FHFA has full powers to control the
assets and operations of the firms.
This means that the
US taxpayer now stands behind
about $5 trillion of GSE-issued debt." - Mark Jickling, November 24, 2008
"When Fannie Mae and Freddie Mac were taken into conservatorship by
the government, they were leveraged
at an eye-popping 100 to 1." - Mike Whitney
Franklin Raines, Bill
Clinton's White House
budget director, is accused
by the Office of Federal Housing Enterprise Oversight (OFHEO), the
regulating body of Fannie Mae, of abetting widespread accounting errors based
on the overstated earnings estimated at $6.3 billion.
announced a suit against Franklin Raines in order to recover some or all of the
$50 million in payments made to Franklin Raines.
Former Fannie Mae
chief Franklin Raines, chief financial officer Timothy Howard and former
controller Leanne Spencer agreed to a $31.4 million settlement.
David Kellermann, CFO of Freddie Mac, commits
Mac asks for $31 billion in additional aid after posting a gargantuan loss of
more than $50 billion in 2008.
The loss' were driven by $13.2 billion
in hedged trades, $7.2 billion in credit losses from the declining housing
market conditions and $7.5 billion in write-downs of the value of its
mortgage backed securities.
incorporation also takes a charge of $8.3 billion for now-worthless tax
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