The news from Wall Street has been positive for years… the stock market is at record highs, lower oil prices mean Americans have more spending money, the job market has slowly expanded (at least the politicians say so) and housing prices are up. With respect to the housing market, one would think America learned a lesson in recent years. We haven’t. If a recent op-ed in the Wall Street Journal is correct, bad loans are once again flying out the door and this time Uncle Sam bears some responsibility.
In 2008, Congress established the TARP program (Troubled Asset Relief Program). Officially called the “Emergency Economic Stabilization Act of 2008”, most people call it the great Wall Street bailout. Taxpayers shelled out $426 billion in an effort to prop up failing banks and other financial institutions. This figure doesn’t include the billions needed to bail out Freddie Mac and Fannie Mae.
Did we learn anything from the 2008 crisis? Maybe for a few short years. Now, it’s back to business as usual and if William Isaac’s (former FDIC chief) op-ed piece is accurate, the future looks pretty bleak. Quoting from a recent Federal Housing Finance Agency Inspector General’s report, Isaac says Congress is looting both Fannie and Freddie. The two loan guaranty agencies are plowing through their reserves like drunken sailors.
Unfortunately, that means both agencies could soon come crawling back to taxpayers seeking more money.
One of the prime factors behind the mortgage crisis was the lack of cash reserves at Fannie Mae and Freddie Mac. Both companies were overleveraged. When the market crashed, Freddie had an asset to equity ratio of 81. Fannie Mae also clocked in quite high with a ratio of 68. To put those numbers in perspective, even the “too big to fail” banks had ratios of 25 to 1 or less.
Both companies ran out of money during the crisis. Today they are under conservatorship of the government and over the last few years began to build up reserves again. Congress can’t help but notice extra cash laying around, however, and in 2012 decided to confiscate their cash.
The very problems that got both agencies in trouble before are back today. Bad loans, too much leverage and inadequate reserves. With Treasury pilfering their cash and banks once again up to their old tricks, Fannie and Freddie don’t stand a chance. At least without another taxpayer bailout.
According to Isaac, the new asset to equity ratios are insane… 734 to 1 for Freddie Mac and 873 to 1 for Fannie Mae!
Even a slight downturn would immediately deplete what little reserves each agency has. And without money to insure mortgage loans, the housing market and economy collapses once again.
Both Democrats and Republicans agree that something needs to be done but relief simply gets postponed. Perhaps Congress doesn’t think we are in for another downturn. In February 2008 as the economy was crashing, Fed Chair Ben Bernanke said, “The Federal Reserve is not currently forecasting a recession.” President Bush was quoted in August of 2007 as saying, “The recent disturbances in the subprime mortgage industry are modest — they’re modest in relation to the size of our economy.” In that same speech, Bush said the federal government wouldn’t bail out lenders.
After our law firm helped the Justice Department score a huge $16.65 billion victory in the Bank of America case, I boldly predicted that the era of huge False Claims Act cases was over. (Our whistleblower clients received over $100,000,000.00 in the last 12 months.)
I may have spoken too soon. Like the original temptation of Adam and Eve, bankers and politicians are simply too greedy.
We have closed the door on certain mortgage scams and used the federal False Claims Act to collect billions of dollars for taxpayers. Unfortunately, greedy bankers are one step ahead of everyone and already inventing new ways of gaming the system. With Fannie and Freddie virtually broke, it will only take a slight hiccup in the housing market to create another mess.
We believe the latest scam involves lenders twisting the arm of appraisers and in some instances buying appraisal management companies. Once again we are looking for whistleblowers that have original source information about fraud involving residential mortgages or engaging in conduct that weakens our banking systems.
While not everyone will receive $40 million or $50 million whistleblower awards, the potential for big awards remains. Under the False Claims Act, whistleblowers can receive up to 30% of whatever the government collects. The FIRREA statute also pays banking sector whistleblowers.
Need more information? We would love to speak with you. All inquiries are kept strictly confidential and protected by the attorney client privilege. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731.
MahanyLaw – America’s Whistleblower Lawyers