Andrew Gordon at Investor’s Daily Edge responds to his readers’ comments about the U.S. housing crisis and the fate of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM). Banks, mortgage financers, lawyers, speculative buyers, no comes out looking good in this mess. How could such widescale deceit be allowed to happen? Naked greed, says Andrew…

The fate of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) hang in the balance.

Some observers think that the Treasury will act before the week is out. I’m not so sure. Freddie was able to float $2 billion worth of bonds at decent interest rates yesterday. It probably bought the F&F flim-flam twins some time.

I don’t know how much time. The market hates uncertainty. And this administration is very good at listening to Wall Street’s concerns. Too good, I believe. Why not listen to Main Street for a change?

Most of you thought Freddie and Fannie should survive – but with additional government safeguards or as small pieces sold to the private sector. I love to hear from insiders – people who worked in the mortgage business. So let’s hear from Richard M. first. He was in the thick of the real estate market when all those sub-prime loans were being made. But he says we should look elsewhere for the housing market’s fall from grace.

I read your article on Fannie & Freddie, most of it I agreed with. However when you say most of the home owners that are in foreclosure should not have owned homes I don’t agree with you for the following reason: I was in the mortgage business and I have processed hundreds of loans from sub-prime 500 FICO scores to A Loans 700 FICO scores and above. I did fixed loans, interest only loans, pay option loans, adjustable loans, stated income stated asset loans (these loans had to produce 12 to 24 months of bank statements to prove they could service the loan) All of the loans that I did were refinances of existing homes. I did not do any financing for purchases.

This is where I believe the market got into trouble, is with home purchases and the people that were buying called SPECULATORS! I read that someone had calculated that more than 25 percent of all homes sold were sold to SPECULATORS and these are the people that caused the market to collapse! Why? The only reason they purchased the homes was to flip them within a year or two and when the market began to turn they just walked away from the homes. I saw this happen to a builder in San Diego, CA. He had all of his luxury homes pre-sold around 120 and when the market begin to tank he found out that all of the people that had put deposits (purchase contracts) on the homes walked, as they were all SPECULATORS!

Very interesting point of view, Richard. You don’t say so specifically, but I take it that your refinancing loans for the most part didn’t get into trouble.

Those speculators that you’re calling out? They were the happy recipients of “Alt-A” loans – which often didn’t require proof of income and other terms typical of prime loans. You probably know that these loans are now affectionately called “liar’s loans.” And a lot more of these kinds of loans (about $950 billion) were made than subprime loans ($650 billion).

You’re right, Richard. We shouldn’t forget about the speculators. They took a festering situation and turned it into a rotten mess.

Let’s hear from another person with a first-hand account of how greed and opportunism took over the mortgage business. Ted S., the floor is yours:

I completely agree with you about the break up of F&F. I had a very successful career in the mortgage business as a loan officer, sales manager of 75 loan officers, underwriter, and underwriting manager before opening my own brokerage and doing very well.

The quality of the loans was pretty good through 2003 and into early 2004. Since that point, everything became in stated income as the banks realized they didn’t want to know what they already knew - people can’t really afford these loans. Best thing to do is don’t ask for income verification…

Those in charge knew exactly what was happening. Even “scoundrel” loan officers (former cell phone kiosk employees who dabbled in the drug trade on the side - were everywhere in Southern California) who’d rip off their own mothers for a $15,000 commission, knew people couldn’t afford the loans.

F&F shouldn’t be saved because they allowed this, along with the banks. They dug their own grave. Every person within the banks that I spoke with knew that people didn’t really make what we had put on the application. They even told us in most cases to “re-submit the application and increase their income to $9,000/mo (on a bank teller for example) and call them a bank manager.”

Best solution, break them up into many parts the way Standard Oil was broken up.

I always suspected Southern California was like that, Ted. It really reminds me of the Enron debacle. All the law firms, accounting firms, investment firms – and everybody else – working with Enron was in on the deceit and rampaging dishonesty. In hindsight, you ask: “How could they?” But at the time, naked greed took over.

Speaking of “how could they?” that is exactly what Kurt S. asks of me.

I agree with your article and that this is a mess created by the greatest group of screw-ups in our country- Congress. However, I have a mutt named Bailey and I think you do a disservice to him comparing Fannie and Freddie to him and all other mutts. My dog is great. Compare F and F to Congress and that would be a true insult and would not demean dogs like mine. Thanks and keep writing the good stuff.

I’m sorry, Kurt. I have two dogs of my own. They’re noble creatures – representing everything that F&F is not. What was I thinking?! Please accept my apologies.

Source: Nobody Looks Good in This Housing Mess