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Who Did It? The Subprime Crime

Steve

Well-known member
Tex
We would never have had the sub prime mess if we taxed labor as low as we tax capital.

How often should we tax it quarterly.. annually.. and at the same rate.. ?..any ways thats another arguement... one we'll never solve,.. no such thing as a fair tax....

so back to the subprime mess....

if Appraisers had to use a combination of the three approaches to value. (that you seem so concerned about) instead of picking the one that suits the sale.. it might have slowed the climb and made the fall less painful...

If cost, income potential, and comparables had to be factered in.. increases would have slowed..

an example:
throwing up a 125,000 house on a 75,000 lot wouldn't have shot to $300,000 in days...

using the cost approach the house is worth $200,000

If the potential rent is $1500 is the house still worth $200,000 nope.

In fact with out the "excited buyers" the house wouldn't even have been worth building.. thus the comparables would be used...

it's simple.. compare it to existing sales.. take any random sale even if it is from a builder to his cousins sister.. and use it..

add in a "market upswing" and the whole thing is based on mood and not anything professional.. (kinda like oil prices...)



It would not have spiked so quickly..and while the mess still would have happened, because the investment policy it was based on was fundementaly flawed,.. it wouln't have been as large of a price tag and the fall would have been easier and not such a high precentage of the properties values...

Wonder when they decided to go to the existing appraisel method? in 2000 when Bush was elected ... no again..



Sure it would have risen but not in the leaps it made..
 

nonothing

Well-known member
aplusmnt said:
nonothing said:
Go ahead Steve I expect to be told how wrong I am....I would be dissapointed if you did not try to belittle my words .

Is Steve the only one that can play or can we all tell you how wrong you are and belittle your words? :lol:

honestly Aplus.i respect Steve even though he and I clash,he at least is his own man....He says what he feels his way..he rarely piles on ...Sure I dislike his methods and style but i will tell him that...I also say my own words to him,i dont need permission form others to say how I feel...If you need to ask if you can leave your words then a wimp you will always be...Hard for me to hold much weight in your flip flopping words anyways.... Aplus....What you say in this post will change in the next one....
 

Tex

Well-known member
Steve said:
Tex
We would never have had the sub prime mess if we taxed labor as low as we tax capital.

How often should we tax it quarterly.. annually.. and at the same rate.. ?..any ways thats another arguement... one we'll never solve,.. no such thing as a fair tax....

so back to the subprime mess....

if Appraisers had to use a combination of the three approaches to value. (that you seem so concerned about) instead of picking the one that suits the sale.. it might have slowed the climb and made the fall less painful...

If cost, income potential, and comparables had to be factered in.. increases would have slowed..

an example:
throwing up a 125,000 house on a 75,000 lot wouldn't have shot to $300,000 in days...

using the cost approach the house is worth $200,000

If the potential rent is $1500 is the house still worth $200,000 nope.

In fact with out the "excited buyers" the house wouldn't even have been worth building.. thus the comparables would be used...

it's simple.. compare it to existing sales.. take any random sale even if it is from a builder to his cousins sister.. and use it..

add in a "market upswing" and the whole thing is based on mood and not anything professional.. (kinda like oil prices...)



It would not have spiked so quickly..and while the mess still would have happened, because the investment policy it was based on was fundementaly flawed,.. it wouln't have been as large of a price tag and the fall would have been easier and not such a high precentage of the properties values...

Wonder when they decided to go to the existing appraisel method? in 2000 when Bush was elected ... no again..



Sure it would have risen but not in the leaps it made..

Tax it annually just like homeowners are taxed annually with their property tax.

Had the underwriting standards not been so loose, people would be able to afford the mortgage even if prices for the real estate went down.

And no, steve, you still get a 33% failing grade because after you are given the answer, you can't consider it your own on the test. That is called cheating. I only brought this point up because the other methods of valuating properties, the income (which has a lot to do with rental properties), has a lot to do with the subprime mess as do the lax credit standards. This is NOT all because of a drop in property values.

We will work on getting you extra credit in the future.
 

Steve

Well-known member
Tex
And no, steve, you still get a 33% failing grade because after you are given the answer, you can't consider it your own on the test.

had I know it was a "test" and not just your control issue. I would have faxed/e-mailed you my certificate saying I was exempt becuase of prior experiance...

escalating appraisels led many "misguided" unknowledgeable people into beliveing there was a huge actual increase in the value of the houseig market, so a value correction is now required...

and since we are only discusing one part of the equation, Appraisels,... and not flawed investment fundimentlas...and you never answered my questions... when did Bush change the existing appraisel method?
 

Steve

Well-known member
Tex
I only brought this point up because the other methods of valuating properties, the income (which has a lot to do with rental properties), has a lot to do with the subprime mess as do the lax credit standards.

Maybe I'm taking your point wrong but the income approach is independent of the lax credit standards, it has nothing to do with the ability of the buyer to repay...

It is an independent appraisal of the properties ability to produce income and only that,.. so effectively if the property was valued properly is should be able to produce an income even if the investment fundamentals of the investor are flawed...

or did Bush change that to?
 

aplusmnt

Well-known member
nonothing said:
aplusmnt said:
nonothing said:
Go ahead Steve I expect to be told how wrong I am....I would be dissapointed if you did not try to belittle my words .

Is Steve the only one that can play or can we all tell you how wrong you are and belittle your words? :lol:

honestly Aplus.i respect Steve even though he and I clash,he at least is his own man....He says what he feels his way..he rarely piles on ...Sure I dislike his methods and style but i will tell him that...I also say my own words to him,i dont need permission form others to say how I feel...If you need to ask if you can leave your words then a wimp you will always be...Hard for me to hold much weight in your flip flopping words anyways.... Aplus....What you say in this post will change in the next one....

:lol: Loosen up a little it was a Joke! You might want to switch from tighty whiteys to boxers, you are wound up a little too tight. :lol:
 

MoGal

Well-known member
I think you all are bypassing the bigger picture..... the FEDERAL RESERVE created and promoted this subprime mess and the S&L mess and all the messes we've had.... the Federal reserve is nothing but a group of private people who have monopolized the American citizens money and print it for free and obtain real assets for it.

Here are a couple of links about the Federal Reserve:

http://www.bigeye.com/federalreserve.htm

http://www.bigeye.com/griffin.htm

Until you understand that these people are crooks and we dismantle them and bring the money printing press back under the people and receive the interest ourselves our economy will always bluster and defibrillate.
 

Tex

Well-known member
Steve said:
Tex
I only brought this point up because the other methods of valuating properties, the income (which has a lot to do with rental properties), has a lot to do with the subprime mess as do the lax credit standards.

Maybe I'm taking your point wrong but the income approach is independent of the lax credit standards, it has nothing to do with the ability of the buyer to repay...

It is an independent appraisal of the properties ability to produce income and only that,.. so effectively if the property was valued properly is should be able to produce an income even if the investment fundamentals of the investor are flawed...

or did Bush change that to?

Bush didn't do any of it. He is only the decider. He decides what policy people to put in where to do it for him. My gripe is that he has a very fascist picker--going with corporatism and crony capitalism over good government.

Steve, mortgages are based off of 1) the property, 2) the credit of the borrower, and 3) the income of the borrower as related to debt--also called the debt ratio. Debt ratios on loans did have to be 28/36 which means 28% of the income could go for debt outside of the house payment (monthly income/monthly expenses) and the back end, which included the housing debt could be 36%. It kept creeping up, and the cronies who ran Fannie Mae and Freddie Mac kept increasing what they would allow in the govt. backed securities programs, increasing their business and reaping huge management bonuses based on fraud. These were political appointees who were looting the system and destroying it in the process.

Study Finds 'Extensive' Fraud at Fannie Mae
Bonuses Allegedly Drove the Scheme

By Kathleen Day
Washington Post Staff Writer
Wednesday, May 24, 2006; Page A01

Fannie Mae engaged in "extensive financial fraud" over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules.

Regulators at the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight, in announcing a settlement with Fannie Mae that includes $400 million in penalties, provided the most detailed picture yet of what went wrong at the congressionally chartered firm.


Franklin D. Raines received $52.8 million in earnings-related bonuses from 1998 to 2003.
Franklin D. Raines received $52.8 million in earnings-related bonuses from 1998 to 2003. (Brendan Smialowski - Bloomberg News)
On the Web

* OFHEO Report

Regulator Says Mudd Knew of Misdeeds
Fannie Mae chief executive Daniel H. Mudd was aware as early as the fall of 2003 of serious allegations of accounting misdeeds and failed to pass key information on to the company's board of directors, according to Fannie Mae's federal regulator.
Examining Fannie Mae
When James A. Johnson walked out of his office as chief executive at Fannie Mae for the last time, in December 1998, the longtime Democratic Party operative and investment banker could look back at his nearly decade-long tenure at the helm knowing the company had lived up to his promises of...
Graphic
'An Uncanny Coincidence'
Investigators found that Fannie Mae's reported earnings per share closely tracked the targets set for executives to receive their maximum bonus payouts.
Graphic
Pay for Key ExecutivesPay for Key Executives
Federal regulators sharply criticized earnings-related compensation granted to senior executives by Fannie Mae, saying that those bonuses played a key role in a $10.6 billion accounting scandal at the mortgage finance giant.
Graphic
Creating a Political PowerhouseCreating a Political Powerhouse
Fannie Mae and Freddie Mac

Accounting irregularities at national mortgage-lending firms Fannie Mae and Freddie Mac have triggered government probes and the ouster of several top executives.

* Freddie Mac, a Buffer Against Crisis, Posts $2 Billion Loss
* Fannie Mae Expenses Up Sixfold From Bad Loans
* Cuomo's Loan Probe Turns to Fannie, Freddie
* Brendsel, OFHEO Agree to Settle
* Fannie, Freddie Portfolios Shrink
More News

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They portray the District-based mortgage funding giant -- a linchpin of the nation's housing market -- as governed by a weak board of directors, which failed to install basic internal controls and instead let itself be dominated and left uninformed by chief executive Franklin Raines and Chief Financial Officer J. Timothy Howard, who both were later ousted.

The result was a company whose managers engaged in one questionable maneuver after another, including two transactions with investment banking firm Goldman Sachs Group Inc. that improperly pushed $107 million of Fannie Mae earnings into future years. The aim, OFHEO said, was always the same: To shape the company's books, not in response to accepted accounting rules but in a way that made it appear that the company had reached earnings targets, thus triggering the maximum possible payout for executives including Raines, Howard and others.

The settlement closes regulators' civil probe into Fannie Mae's accounting scandal, the result of the company's misstating earnings by about $10.6 billion from 1998 through 2004.

SEC Chairman Christopher Cox and acting OFHEO director James B. Lockhart III said they now will turn their focus to individuals, including Raines and Howard, to determine what role former and current executives played in the accounting fraud and if they should be forced to forfeit millions of dollars in what the regulators called "ill-gotten" compensation. They said the Justice Department is continuing a criminal probe.

"Fraudulent financial reporting cheats investors of their savings," Cox said. "Those whose actions led to the accounting fraud you've heard described today will be vigorously pursued."

Lockhart agreed. "You could argue none of it was deserved," he said in response to a question on how much of $52.8 million in bonuses Raines received during the six years might have been linked to improper accounting manipulation. As the settlement was announced, OFHEO released a 340-page report summarizing what it found in its nearly three-year probe of the company.

"The conduct of Mr. Raines, CFO Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity," the report said. "Those individuals engaged in improper earnings management in order to generate unjustified levels of compensation for themselves and other executives."

Raines's lawyer Robert Barnett said in a prepared statement that Raines "has repeatedly stated that he never authorized, encouraged, or was aware of violations" of accounting rules. Even so, Raines "strongly believes that, as the leader of Fannie Mae, he should be accountable for what happened within the organization, regardless of personal involvement or fault."

Howard's lawyer had no comment.

Fannie Mae agreed to the settlement with the SEC and OFHEO without admitting or denying guilt. The company is in the midst of trying to create accurate accounting records for the years in question, an undertaking that is costing it hundreds of millions of dollars.

article continues....

The appraisal is based off of comps, income approach, and replacement cost. The income approach for valuation in the appraisal is different from the definition of income for loans or mortgages.
 

Tex

Well-known member
The Revolving Door of Politics and money: You will see in this article some of the same important names that Mogal brings up in her Fed Reserve, Loose money articles (I haven't read any of them, but I know pretty much what they say because I was watching it happen). Washington has become nothing more than a way for politicians to appoint their friends to places of power and loot the system. Both parties are doing it.

Fannie Mae Fires Raines, Howard Over Accounting Flaws (Update1)

By James Tyson

Dec. 22 (Bloomberg) -- Fannie Mae, the largest source of money for the U.S. mortgage industry, fired Chief Executive Officer Franklin Raines and Chief Financial Officer J. Timothy Howard yesterday, five weeks after saying it may have to restate profit by $9 billion.

The firings come after both the U.S. Securities and Exchange Commission and the Washington-based, government-chartered company's federal regulator said Fannie Mae made mistakes in accounting for contracts designed to protect its more than $900 billion of securities from swings in interest rates.

Raines, who championed corporate responsibility after the collapse of Enron in 2001, became a target for the administration of President George W. Bush and some members of Congress, who want to increase regulation of the $7.6 trillion U.S. mortgage market.

``The faster the board acts, the better it is for the shareholders and for the relationship with the regulators,'' said David Dreman, chairman and chief investment officer at Dreman Value Management LLC in Jersey City, New Jersey. Dreman owns more than 8 million shares of Fannie Mae, making it one of the company's 25 largest investors.

Mudd Takes Over

Raines, a 55-year-old Harvard-educated Rhodes scholar and former budget director under President Bill Clinton, was replaced on an interim basis by Daniel H. Mudd, a vice chairman and chief operating officer, Fannie Mae said in a statement in Washington. Stephen B. Ashley, a Fannie Mae director and past president of the Mortgage Bankers Association, will take over as chairman from Raines.

Raines lost the confidence of many investors after 18 months of assurances, including testimony to Congress in October, that the company's accounting was sound. The Office of Federal Housing Enterprise Oversight, or Ofheo, Fannie Mae's regulator, said yesterday the company is ``significantly undercapitalized.''

Ofheo said in September that Fannie Mae made bookkeeping errors, a charge that Raines denied under oath to Congress in October. Raines then asked the SEC to make a ruling.

Raines's denials were ``a chink in their armor'' and ``tainted'' him in the eyes of investors, William Van Arnum, an analyst at Principal Financial Group in Des Moines, Iowa, said before the announcement. ``It's difficult to get out from under that cloud.''

Principal sold 12 percent of its 790,410 shares in the third quarter, according to regulatory filings.

Howard, KPMG

The board also accepted the resignation of Howard, 56, whom the regulator called the ``chief architect'' of the accounting policies, and fired auditor KPMG International. Chuck Greener, a Fannie Mae spokesman, declined to comment.

The report by Ofheo, the regulator, said Fannie Mae wrongly accounted for hedging transactions on its mortgage holdings, using improper ``cookie jar'' reserves, and deferring expenses in 1998 so executives could get their maximum bonuses.

Raines's ouster may remove an obstacle to efforts in Congress to create a stronger regulator for the company and Freddie Mac. The two companies together have more than $1.7 trillion of debt, exceeding either France or the U.K.

``Given the unbelievable statements Fannie executives made at our last hearing, this action was entirely necessary,'' Representative Richard Baker of Louisiana, the third-highest ranking Republican on the House Financial Services Committee, said in a statement yesterday.

Job for Congress

U.S. Representative Barney Frank of Massachusetts, the senior Democrat on the Committee, said the job of Congress next year will be ``to improve the regulatory system'' for Fannie Mae and Freddie Mac.

U.S. Treasury spokesman Robert Nichols also declined to comment on the board's decisions. ``The administration has long believed the GSEs need strengthened oversight,'' he said. Fannie Mae and Freddie Mac are known as government-sponsored enterprises, or GSEs.

SEC Chief Accountant Donald Nicolaisen said Dec. 15 he advised Fannie Mae executives they should fix their accounting for derivatives. Derivatives are financial contracts whose value is derived from debt, equity securities, currencies and commodities. Fannie Mae estimated in November that it would have a cumulative $9 billion after-tax loss for the last three years if the SEC ruled that it would have to fix its accounting.

SEC spokesman Matt Well declined to comment on the ouster of Raines and Howard. SEC accounting and enforcement investigations of Fannie Mae are continuing, he said in an e-mail reply to a request for comment. In October, Fannie Mae said federal prosecutors asked the company to preserve documents for their criminal investigation.

Above Threshold

While Fannie Mae will be undercapitalized, its critical capital level remains above the required threshold and Fannie Mae continues to meet its risk-based capital requirement, Ofheo said yesterday. As of Sept. 30. Fannie Mae had a $2.98 billion deficit in its core capital of $38.03 billion, Ofheo said.

If ``after a thorough review of all the facts it is determined that our company made significant mistakes, our board and our shareholders will hold me accountable and I'll hold myself accountable,'' Raines told Congress. ``That comes with being a CEO. I accepted the burden on the day I took the job, and I accept it today.''

Fannie Mae rewrote employment contracts for Raines, Howard and Mudd, 46, in the days before Ofheo's September report was released to allow severance payments to be withheld if they are fired for ``fraudulent actions.''

$20 Million Pay

Raines earned $20 million last year in base salary, bonus, stock grants and long-term incentive payments, an 8 percent increase from 2002.

``Although, to my knowledge, the company has always made good- faith efforts to get its accounting right, the SEC has determined that mistakes were made,'' Raines said in a statement yesterday. ``By my early retirement, I have held myself accountable.''

Mudd is one of four members of the office of the chairman. Prior to joining Fannie Mae, he was president and chief executive officer of GE Capital, Japan, General Electric Co.'s largest operation outside the U.S., according to Fannie Mae's Web site.

He managed GE Capital Asia-Pacific from 1996 to 1999 and ran that business through the Asian financial crisis.

Shares of Fannie Mae closed yesterday at $70.35, down 6.3 percent for the year. The shares were about $74 each at the end of 1998, just before Raines took over as chief executive. They were at $70.48 in extended U.S. trading.

Limited Damage?

``Everyone wanted to believe that Raines was going to come out of this unscathed,'' said Michael Mullaney, who owns Fannie Mae stock and bonds among the $10 billion he helps manage at Fiduciary Trust Co. in Boston. The shares may ``fall to $68, something like that, but I think it will be pretty contained.''

The departures were ``necessary for Fannie Mae to move forward toward addressing more serious capital issues,'' said James Shanahan, an analyst at Wachovia Securities Inc. in Baltimore, in a research note today. Shanahan rates Fannie Mae shares ``market perform.''

The extra yield investors demand to own Fannie Mae's 4 5/8 percent notes maturing in October 2014 rather than Treasuries has shrunk to 41 basis points from 56 basis points on Oct. 1. A basis point is 0.01 percentage point.

``I'm staying away'' from Fannie Mae debt, said Akira Takei in Tokyo at Fuji Investment Management Co., which oversees about $9.1 billion. ``I believe more bad news will come out of Fannie Mae.''

Fannie's Earnings

The company makes money on the difference between its cost of capital and the returns on the mortgages it buys from banks and their other mortgage investments. Fannie Mae is the second-largest debtor in the U.S. behind the government.

Fannie Mae's earnings have grown at an average annual rate of 18 percent under Raines. The performance was fueled by a U.S. housing boom that has lifted home prices 36 percent since 1995, according to the Federal Reserve Bank of New York.

Fannie Mae's assets rose to $1.01 trillion in 2003 from $575.17 billion in 1999, eclipsing the combined total of Bank of New York Co., Wachovia Corp. and Wells Fargo & Co. During that time, U.S. home ownership climbed to a record high of 68 percent, according to the U.S. Department of Housing and Urban Development.

Testifying in 2002 about the collapse of Enron Corp., Raines told lawmakers: ``It is wholly irresponsible and unacceptable for corporate leaders to say they did not know -- or suggest it is not their duty to know -- about the operations and activities of their company, particularly when it comes to risks that threaten the fundamental viability of their company.''

Ethics Group

Raines was part of a group of executives including Pfizer Inc. Chief Executive Hank McKinnell who this year created an institute for corporate ethics at the University of Virginia.

In 2003, the smaller Freddie Mac ousted its three top executives, including Chairman and Chief Executive Officer Leland Brendsel, after uncovering accounting errors that caused the company to restate earnings by about $5 billion for the previous three years.

Freddie Mac's shares have risen this year after the company hired Richard Syron, the former head of the American Stock Exchange and president of the Federal Reserve Bank of Boston, as chief executive officer.

Raines, born in Seattle, was one of six children of Ida and Delno Raines. The family lived in a house that Delno, who was a maintenance worker for the Seattle parks department, built with his own hands in the city's Rainier section. Ida cleaned offices at Boeing Co., a company that would one day name her son Frank to its board.

Harvard Scholarship

During his senior year at Franklin High School, Raines won a scholarship to Harvard College. One of his professors, the late Daniel Patrick Moynihan, later became urban affairs adviser to President Richard Nixon and a Democratic senator from New York.

Moynihan hired Raines in 1969 as a White House intern and, at the age of 20, Raines briefed the president on campus unrest. For his senior thesis, Raines wrote about welfare. His 1971 Harvard yearbook lists him as chairman of the student Democrat association and a member of the young Republicans.

In 1975, Stuart Eizenstat, chief domestic policy adviser for President Jimmy Carter, hired Raines and named him associate director of the Office of Management and Budget.

Just before Carter lost the 1980 election to Ronald Reagan, Raines joined Lazard Freres & Co. Raines, who specialized in municipal finance, rose to general partner from vice president in six years.

Fannie Mae's former chief executive, James Johnson, hired Raines in 1991 as vice chairman to lead Fannie Mae's legal, credit and finance policies.

Back to Government

Raines went back to the government in 1996, when Clinton named him director of the OMB. With Treasury Secretary Robert Rubin, Raines led the negotiations with Congress to balance the federal budget for the first time since 1969.

Republicans in the Senate Banking Committee and House Financial Services Committee plan next month to reintroduce legislation granting a new regulator power to alter capital standards, reject new lines of business, and control other operations at the two companies.

Raines has said he objects to any legislation that would raise the cost of borrowing for homeowners.

Fannie Mae and Freddie Mac spent $11.7 million during the first half of 2004 lobbying against increased oversight, according to Washington-based PoliticalMoneyLine, a nonpartisan group that tracks campaign finance and lobbying. The companies between them spent more than any single company to influence policy makers, according to PoliticalMoneyLine.

Risk Management

Howard, a native of San Francisco, joined Fannie Mae in 1982 as chief economist and became its chief financial officer in 1990. He was responsible for risk management, credit policy, accounting, strategic planning, capital account management and investor relations, according to Fannie Mae's Web site.

He previously served for five years as senior financial economist at Wells Fargo Bank in San Francisco.

Howard received a master's degree in economics and a bachelor's degree in economics, magna cum laude, from the University of California, Los Angeles. He is also a trustee and member of the executive committee of the Washington Opera, and a member of the board of the Wharton Financial Institutions center at the University of Pennsylvania.

Howard's compensation, including salary and bonus, was $1.8 million last year, a 40 percent increase over the $1.28 million he earned in 2002 and four times his $445,000 of earnings in 1993, according to SEC filings.

To contact the reporter on this story: James Tyson in Washington at at [email protected]
Last Updated: December 22, 2004 04:32 EST


Fannie Mae should never have gone public in my opinion. It was one of the ways the politicians were able to take a public agency and loot the rest of America, helping set up the roots of corruption for the sub - prime mess today.

Franklin Raines should be in jail today but rich people don't go to jail---unless you are Martha Stewart--- to make it look like our Justice system really works.
 

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