Andrew Cuomo and Fannie and Freddie
The Village voice
There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac. Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
What he did is important—not just because of what it tells us about how we got in this hole, but because of what it says about New York's attorney general, who has been trying for months to don a white hat in the subprime scandal, pursuing cases against banks, appraisers, brokers, rating agencies, and multitrillion-dollar, quasi-public Fannie and Freddie.
It all starts, as the headlines of recent weeks do, with these two giant banks. But in the hubbub about their bailout, few have noticed that the only federal agency with the power to regulate what Cuomo has called "the gods of Washington" was HUD. Congress granted that power in 1992, so there were only four pre-crisis secretaries at the notoriously political agency that had the ability to rein in Fannie and Freddie: ex–Texas mayor Henry Cisneros and Bush confidante Alfonso Jackson, who were driven from office by criminal investigations; Mel Martinez, who left to chase a U.S. Senate seat in Florida; and Cuomo, who used the agency as a launching pad for his disastrous 2002 gubernatorial candidacy.
With that many pols at the helm, it's no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors.
And that's not an accident: Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth. But, as Paul Krugman noted in the Times recently, "homeownership isn't for everyone," adding that as many as 10 million of the new buyers are stuck now with negative home equity—meaning that with falling house prices, their mortgages exceed the value of their homes. So many others have gone through foreclosure that there's been a net loss in home ownership since 1998.
It is also worth remembering that the motive for this bipartisan ownership expansion probably had more to do with the legion of lobbyists working for lenders, brokers, and Wall Street than an effort to walk in MLK's footsteps. Each mortgage was a commodity that could be sold again and again—from the brokers to the bankers to the securities market. If, at the bottom of this pyramid, the borrower collapsed under the weight of his mortgage's impossible terms, the home could be repackaged a second or a third time and either refinanced or dumped on a new victim.
Those are the interests that surrounded Cuomo, who did more to set these forces of unregulated expansion in motion than any other secretary and then boasted about it, presenting his initiatives as crusades for racial and social justice.
Cuomo was shrewd enough at the age of 24 to manage his father's successful 1982 gubernatorial campaign, and to help run his government. The only statewide campaign his father ever lost was in 1994—when Andrew was at HUD as an assistant secretary and couldn't manage it. He is as quick and as silver-tongued as the elder Cuomo he sounds so much like, but HUD was a test of his depth, so he found himself balancing competing forces and making deals on a grander scale than he was used to in Albany. We now know that he was also making history.
In 2000, Cuomo required a quantum leap in the number of affordable, low-to-moderate-income loans that the two mortgage banks—known collectively as Government Sponsored Enterprises—would have to buy. The GSEs don't actually sell mortgages to borrowers. They buy them from banks and mortgage companies, allowing lenders to replenish their capital and make more loans. They also purchase mortgage-backed securities, which are pools of mortgages regularly acquired by the GSEs from investment firms. The government chartered these banks to pump money into the mortgage market and, while they did it, to make a strong enough profit to attract shareholders. That created a tug-of-war between their efforts to maximize shareholder value, which drove them toward high-end mortgages, and their congressionally mandated obligation to finance loans for those who needed help. The 1992 law required HUD's secretary to make sure housing goals were being met and, every four years, set new goals for Fannie and Freddie.
Cuomo's predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income." Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren't granting mortgages to minorities at the same rate as the private market. William Apgar, Cuomo's top aide, told The Washington Post: "We believe that there are a lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible."
While many saw this demand for increasingly "flexible" loan terms and standards as a positive step for low-income and minority families, others warned that they could have potentially dangerous consequences. Franklin Raines, the Fannie chairman and first black CEO of a Fortune 500 company, warned that Cuomo's rules were moving Fannie into risky territory: "We have not been a major presence in the subprime market," he said, "but you can bet that under these goals, we will be." Fannie's chief financial officer, Timothy Howard, said that "making loans to people with less-than-perfect credit" is "something we should do." Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals. "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas," his report on the new goals noted.
Moody's didn't sound an immediate alarm, but its senior analyst, Stanislas Rouyer, said the expansion into subprime loans and the lower level of documentation that came with them could mean that Fannie 's loss levels would increase in the future. Steven Holmes, a reporter from the Times's Washington bureau, wrote at the time: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But," he added, "the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."
When HUD released the next set of goals in 2004, it reported that after Cuomo's previous edict, there had been a sudden spurt of GSE subprime investment, "partly in response to higher affordable-housing goals set by HUD in 2000." Fannie had gone from $1.2 billion in subprime-mortgage and securities purchases in 2000 to $9.2 billion in 2001 and $15 billion in 2002. Freddie's numbers were murkier, but clearly also on the rise. In 2003 alone, the two bought $81 billion in subprime securities—which also count against the goals.
Fannie also developed a "flexible" product line, providing up to 100 percent financing and requiring borrowers to make as little as a $500 contribution, and bought $13.7 billion of those loans in 2003. In addition to subprime loans and securities, both banks burst into the "alt-a" market, making alternative products easily available to borrowers who had slightly better credit histories than subprime borrowers, but were unwilling to provide full documentation of their financial histories. (It was the "alt-a" investments that recently brought down the private bank IndyMac.) These risky adventures, according to the 2004 HUD report, prompted Freddie to claim that "the increased goals created tension in its business practices between meeting the goals and conducting responsible lending practices," a self-serving attempt to plant the blame back on HUD.
After this initial uptick, the two banks purchased $434 billion in securities backed by subprime loans between 2004 and 2006. The Washington Post noted this June that the GSEs' aggressive acquisitions "created a market for more such lending" by others, feeding the fire. No one knows just how big a bite the subprime mess is now taking out of the GSEs, or how much of that portfolio will ultimately go bad, but it has become axiomatic that, whatever the total, it is too much, since it will have seriously shaken confidence in these two linchpin institutions.
That June Post story focused its critical reassessment of HUD's affordable-housing goals on the department's 2004 decision—during the Bush re-election campaign—to juice them up again, pushing the target to 56 percent by 2007. Though the story never mentioned Cuomo—whose three-year, eight-point goal hike exceeded Bush's more gradual six-point increase—it did quote his top aide William Apgar, who helped craft the 2000 policy, saying: "It was a mistake." Apgar, who now teaches at Harvard, conceded, "In hindsight, I would have done it differently."
But raising the affordable-housing goals was only half the Cuomo story.
The HUD secretary is also required to produce voluminous rules that govern how the GSEs meet those goals, and the 187-page rules Cuomo issued opened the door to abuse.
The rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn't want to hear just how risky they were.
HUD conceded in the rules that many consumer groups had urged it to insist that the GSEs provide "loan-level data" revealing how many of their loans contained high interest rates, prepayment penalties, or other requirements that presaged bad loans.
Read more:
Additional links:
http://spectator.org/archives/2010/09/23/andrew-cuomo-up-to-old-tricks
http://www.techdirt.com/articles/20100701/01232010037.shtml
http://www.fromthewilderness.com/free/ww3/092106_about_cuomo.shtml
http://www.esquire.com/features/andrew-cuomo-bio-0510-4
From Nancy:
In addition to the following (below this) you can add:
$59 Billion dollars went missing during Cuomo's tenure at HUD.
Cuomo is endorsed by the Working Family's Party -- WFP and the unions are thisclose. WPF
and ACORN (under investigation in 17 states for voter fraud during the '08 election) are
branches of each other.
By strong-arming banks into sub-prime mortgages, he is as responsible as Frank and Dodd
for the housing bubble followed by the bubble bursting, resulting in a global
recession.
Refusal to debate Paladino one-on-one (However, there will be a debate among Paladino,
Cuomo and four other (I think) candidates on Monday, Nov. 18. It can be viewed on
News Twelve at 7:00, I believe.
From the series entitled "Fees for Our Friends: The Scandal that Taints Andrew Cuomo" by Lucy Komisar:
"When Cuomo became HUD Secretary in 1997 he axed a federal program that had saved the
U.S. $2.2 Billion between 1994 and 1997 and reinstituted a system that lost the government
money while earning billions for favored friends."
"As Sec'y of HUD, Cuomo reversed the policy of selling defaulted mortgages so that families
could keep their homes. Instead he chose to foreclose on mortgages, which meant that
families lost their homes and insiders cleaned up on fire-sale priced properties. The US
Treasure also lost billions."
"Throughout Cuomo's tenure, HUD's Single-Family Mortgage Insurance Program remained
on the annual GAO (Govt. Accounting Office) list of federal programs vulnerable to waste,
fraud, abuse and mismanagement."
Isn't this what we have in Albany now? Isn't this exactly the kind of behavior we've come to abhor in our elected representatives?
I know. I know. Paladino is crass. Well maybe Albany needs a little more crass and a lot less political correctness. He's promised to serve one term only -- time enough to cut taxes by 10% and spending by 20%, which is what he promises to do. (I saw a headline yesterday from Bloomberg. It said that Paladino's "Impossible" Cuts May Be Inevitable Anyway.)
Pack up your crass, Carl, and cast it over the entire legislature. Just get the job done.
A message from Carl:
As US Secretary of Housing, Andrew Cuomo set Federal Housing Goals that required FannieMae and FreddieMac to purchase hundreds of millions of dollars of bad sub-prime mortgages.
IT WAS CUOMO who lowered lending standards.
IT WAS CUOMO who eliminated down payments.
IT WAS CUOMO who offered 105 percent financing.
IT WAS CUOMO who pushed sub-prime mortgages containing a two percent increase in interest rates, guaranteeing they would crash.
IT WAS CUOMO who cost taxpayers $2.4 trillion and the value of our 401k's when the sub-prime mortgage market collapsed.
As The Village Voice correctly reported in 2008: Cuomo "turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded 'kickbacks' to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why."
When the ultra-liberal Village Voice blames Cuomo for lighting the fuse on the sub-prime mortgage meltdown, even mainstream media reporters sit up and listen:
http://www.villagevoice.com/2008-08-05/news/how-andrew-cuomo-gave-birth-to-the-crisis-at-fannie-mae-and-freddie-mac/