Freddie Mac is in the spotlight of the Republican presidential contest, as Mitt Romney attacks Newt Gingrich for his 2006 work for the mortgage finance firm.
But what the firm did, and the role it and larger rival Fannie Mae played in the housing crisis of the last decade, remain a source of confusion for many Americans.
What do Freddie Mac and Fannie Mae do? The two of them support the housing industry by providing billions in financing to the mortgage market.
They buy mortgage loans from lenders that conformed to their guidelines, typically safer loans with a large down payment, good credit scores for the borrowers and verification of their income.
Because there is an implicit guarantee that the federal government stands behind both firms, which were set up by Congress, they borrow money at the lowest possible rates and get a good return on their investment.
Did the two firms create the housing bubble that caused the financial meltdown? Not really.
The two firms were major players in the mortgage market, and so the rising home values were at least partly funded by their flow of money.
But the bubble really inflated when Wall Street started buying riskier loans made to borrowers who didn’t qualify for a Fannie or Freddie conforming loan. Those loans carried higher interest rates, with relatively little risk for investors while home prices were going up.
Experts say it was the growth of those riskier loans that caused home prices to rise and the bubble to inflate.
"When you bring in 5 million marginal buyers who under normal circumstances would not qualify for a mortgage, that’s what ends up driving home prices," said Barry Ritholtz, CEO of Fusion IQ.
He said the big Wall Street firms that became major players in the mortgage market, such as Citibank (, Fortune 500), Bank of America (, Fortune 500), Goldman Sachs (, Fortune 500), Morgan Stanley (, Fortune 500) and AIG (, Fortune 500), are as or more guilty than Freddie and Fannie.
"If Freddie and Fannie never existed, we would have had the same problem," he said.
What caused problems for Fannie and Freddie? By the middle of the last decade, Freddie and Fannie had lost their dominant position in the home loan market, as the riskier loans became a larger share of the mortgage market.
So they adjusted their underwriting standards in order to participate in the riskier lending as well.
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Even though the riskier loans were a minority of the loans each purchased, because each was so huge, they ended up with a large volume of those loans.
They also were relatively late to the game. That meant they got into riskier loans right before the decline in home prices — which began in 2006 — led to a spike in foreclosures. After that, home buyers started to default on loans that were safer, adding to Freddie and Fannie’s losses.
"What killed Fannie and Freddie is the housing market went to hell and they were 100% exposed to housing," said Jaret Seiberg, analyst with Guggenheim Washington Research Group.
How much money did the collapse cost taxpayers? So far Freddie has received $72.2 billion from Treasury, while Fannie, which is larger, received $111.6 billion. The combined $183.8 billion makes it the most expensive bailout by taxpayers of the financial crisis. But part of that bailout has been repaid to taxpayers in the form of dividends. Freddie has repaid $14.9 billion, while Fannie paid $17.2 billion.
Seiberg said that the bailout might have been avoided, or been relatively minor, if Fannie and Freddie had stayed away from the riskier loans.
"Best-case scenario would have been they were knocked down, but not knocked out," he said.
Why did Freddie and Fannie hire Washington insiders such as Newt Gingrich?Gingrich’s contract with Freddie is short on specifics of the work he performed for $25,000 a month. But even if he did no lobbying, as he says, the contract came at a time when Freddie and Fannie were eager to buy as much Washington influence as possible.
For years, the two firms were among the most powerful companies in terms of Washington muscle, getting free reign from both Congress and their regulator, then known as the Office of Federal Housing Enterprise Oversight (OFHEO).
"Fannie and Freddie had Congress wrapped around their fingers," said Guy Cecala, CEO of Inside Mortgage Finance, which publishes trade publications following the mortgage market. "They were untouchable."
Because of the public-private nature of their charters, the firms wanted to make sure Congress and OFHEO allowed them to operate with few restrictions. But they also wanted to keep government’s implicit backing in place so they could borrow money cheaply.
"They were very aggressive lobbying Congress and OFHEO to stay out of their way," said Ritholtz.
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Vancouver displaced Sydney as the least-affordable housing market after Hong Kong among large English-speaking cities, as home prices rose faster than incomes, a study of 325 metropolitan areas worldwide showed.
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Canada is looking at alternatives for exporting its oil since U.S. President Barack Obama announced he was blocking a pipeline from Alberta to Texas.
A pipeline executive said Thursday that the company was weighing whether to build a segment of the line _ from Oklahoma to Texas _ that wouldn’t require U.S. State Department approval. And government officials said Canada would push harder for a pipeline to the Pacific Coast, where oil could be shipped to China.
At the same time, Canadian officials said, they are hopeful the 1,700-mile (2,740-kilometer) Keystone XL pipeline will be built.
Alberta Premier Alison Redford, the leader of the Canadian province that has the world’s third-largest reserves of oil, said that while Canada is disappointed at Obama’s decision, the government believes Obama has made it clear the U.S. would consider a new Keystone XL pipeline application with a new routing.
Obama called Prime Minister Stephen Harper to explain that the decision on Wednesday was not on the merits of the pipeline but rather on the “arbitrary nature” of a Feb. 21 deadline set by Republican legislators as part of a tax measure he signed, Harper’s office said.
“The fact that the president has said that the decision was not based on the merits we take as a signal that there is an opportunity to make a decision that is in the national interest that allows the project to go ahead,” Redford told The Associated Press in a telephone interview.
Calgary-based TransCanada Corp., which proposed the pipeline, said Thursday it was considering building the pipeline in segments, with the first connecting an existing pipeline in Oklahoma to refineries in Texas.
The Obama administration had suggested development of an Oklahoma-to-Texas line to alleviate an oil glut at a Cushing, Oklahoma, storage hub.
“If our shippers are interested in building that portion of the pipeline (first), we would look at that,” TransCanada President and CEO Russ Girling told The Associated Press in an interview.
Obama’s rejection of Keystone XL “clearly gives flexibility to do that,” Girling said. He emphasized that the company had made no decisions.
U.S. officials have said that building the pipeline in sections could speed up the process since the U.S. State Department would not be involved if the pipeline does not cross the U.S.-Canada border.
Girling’s remarks were in contrast to a statement TransCanada issued on Wednesday declaring it would reapply for a presidential permit to build the full pipeline. Girling said the company still expects to reapply, but “will take our time for how to refile it.”
He said a new route that avoids environmentally sensitive areas of Nebraska should be made public in a matter of weeks
In Washington, the proposed $7 billion pipeline has become a political hot potato.
Republicans _ who earlier put the president in the awkward position of having to make a decision on it before Feb. 21 _ now hope to force Obama to deal with it yet again before next November’s presidential election. He wants to put it off beyond that.
Republicans are looking to drive a wedge between Obama and two key Democratic constituencies. Some labor unions support the pipeline as a job creator, while environmentalists fear it could lead to an oil spill disaster.
The Alberta-to-Texas pipeline proposed by TransCanada would carry 800,000 barrels of oil a day from Alberta across six U.S. states to the Texas Gulf Coast, which has numerous refineries.
Natural Resource Minister Joe Oliver said it’s clear the process is not yet over and said Canada is hopeful the pipeline will be accepted on its merits.
Redford said Obama’s decision adds urgency to Enbridge’s proposed pipeline to the Pacific Coast of British Columbia that would allow Canadian oil to be shipped to Asia for the first time.
The project is undergoing a regulatory review in Canada.
“Asian markets are a very viable alternative. I say alternative, I probably shouldn’t. It’s not an either or situation. There’s an opportunity here for us to grow our markets in both directions and we’d like to be able to do that,” Redford said.
Canadian officials see the pipeline to the Pacific coast as critical as Canada seeks to diversify its energy customer base beyond the United States, which Canada relies on for 97 percent of its energy exports.
Alberta has more than 170 billion barrels of oil reserves. Daily production of 1.5 million barrels from the oil sands is expected to increase to 3.7 million in 2025. Only Saudi Arabia and Venezuela have more reserves.
Sinopec, a Chinese state-controlled oil company, has a stake in Enbridge’s proposed $5.5 billion Northern Gateway Pipeline. Chinese state-owned companies also have invested more than $16 billion in the oil sands in the last two years.
Tens of billions more are expected to be invested in Canada’s oil sands if the Pacific pipeline is built.
There is fierce environmental and aboriginal opposition to the Pacific pipeline, but Harper’s government has called it a nation-building project that is crucial to the country’s goal of becoming an energy super power.
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French President Nicolas Sarkozy secured a small boost from Moody’s rating agency Monday following a bruising downgrade last week of the way the country had been handling its economy.
Moody’s said Monday it was maintaining France with a top AAA rating and stable outlook for its debt. Rival agency Standard & Poor’s, more downbeat about the prospects for France and Europe as a whole, stripped France of its long-cherished triple A rating last Friday.
In early trading, markets appeared to brush off S&P’s decision to cut the credit ratings of nine European countries, including France. Though the downgrades late Friday had been expected, they served as a reminder that the 17 countries that use the euro as their currency still have a long way to go to get a handle on the two-year debt crisis.
Europe’s economies will likely remain the focus of attention across markets all week as a number of bond auctions are due at the same time as Greece tries to clinch a debt-reduction deal with its private investors.
Sarkozy’s budget minister Valerie Pecresse said Monday she was optimistic that S&P’s knockdown would not lead to a rise in the country’s borrowing costs. A short-term French bond auction later on that day is seen as a test of the impact of the downgrade.
In its announcement, Moody’s cited the French economy’s overall strength but said bleak growth prospects in France and the region present “risks to the French government’s fiscal consolidation plans.”
Moody’s had said in October it was putting France on review, as Sarkozy and other European leaders struggled to find solutions to Europe’s protracted debt crisis.
Moody’s said Monday it “will update the market during the first quarter of 2012 as part of the initiative to revisit the overall architecture of our sovereign ratings in the EU.”
The rating agency detailed the strengths of the French economy, but noted that the country’s debt levels have deteriorated because of the “global economic and financial crisis” and were now among the weakest of all AAA countries.
“France, like other eurozone sovereigns, may face a number of challenges in the coming months. The need to provide additional support to other European sovereigns or to its own banking system cannot be excluded no teletrack payday loan. In that case this could give rise to significant new (contingent) liabilities for the government’s balance sheet,” Moody’s warned.
Moody’s notes the government has less room to maneuver than during the 2008 meltdown. “The domestic and external economic growth outlook presents significant risks to the French government’s fiscal consolidation plans.”
Sarkozy meets later Monday with Spain’s new Prime Minister, Mariano Rajoy, whose country was also downgraded Friday by S&P.
The S&P move was especially brutal for France, one of the world’s biggest economies and a financier of bailouts for smaller, poorer eurozone countries.
Sarkozy has yet to speak publicly about the downgrade, leaving his government ministers to try to calm the public.
Pecresse said on Europe-1 radio Monday that she doesn’t expect “mechanical consequences” of the downgrade because France has “credibility” and is a “sure value.”
She noted that the United States didn’t see its borrowing costs spike after last August’s decision by Standard & Poor’s to strip it of its AAA rating. Like France, the U.S. is rated AA+.
Pecresse and the prime minister promised to continue cost-cutting reforms, despite criticism from the left _ and S&P itself _ that austerity measures alone could crimp growth.
Sarkozy’s challengers for the presidency have seized on the downgrade as what they call evidence that his policies are wrong-headed and ineffective.
Sarkozy hasn’t announced his candidacy but is near certain to seek a second term in two-round elections in April and May. He trails Socialist Francois Hollande in polls and is facing increasing pressure from far-right candidate Marine Le Pen and a centrist, Francois Bayrou.
It will be a bruising battle for Sarkozy, a dynamic leader who has a strong international profile but is widely disliked at home. Leftists say he has coddled the rich, while many of those who supported him in his 2007 campaign say he hasn’t fulfilled his promises.
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When a collection agency contacted Letitia Mika in the summer of 2010 about $5,640 in credit card debt, she agreed to a settlement in which she would make monthly payments on half of it and the rest would be forgiven.
Then about a year later, a different company began calling her to try to collect that same debt. As the Chicago resident began to untangle a confusing web, she discovered that the first agency - P.N. Financial - did not have authority to collect her debt, but the second one did.
Illinois Attorney General Lisa Madigan filed suit against Skokie-based P.N. Financial last week, alleging that the company not only pursued debts it was not authorized to collect, but also broke laws by revealing information about debts to employers and family members and intimidating consumers with fake court case numbers.
Complaints about harassment from debt collectors have spiked nationally in recent years. Part of that may be a reflection of more Americans being unable to pay their debts in these shaky economic times. But consumer advocates also say that collection agencies have become more aggressive in their tactics.
Both states’ attorney generals offices in Missouri and Illinois rank complaints against debt collectors among one of the top consumer complaints they receive every year.
Madigan said she has seen a rise in brash - and illegal - techniques employed by the commission-based industry.
Of the 52 complaints her office received about PN Financial, she said, “Those were among the most egregious of violations that we’ve seen.”
An employee at P.N. Financial on Friday said no one was available to comment on the lawsuit and then hung up.
The Federal Trade Commission, which says it receives more complaints about debt collection than any other industry, logged a 17 percent increase in consumer complaints about debt collection in 2010 for a total of 140,036 complaints. The FTC hasn’t yet published the 2011 figures.
Nearly half of the complaints were about collectors harassing consumers by calling them repeatedly or continuously, which is prohibited under the Fair Debt Collection Practices Act. Another common issue was consumers being contacted about debts they did not owe or that had been discharged in a bankruptcy.
In a recent study and survey by the Better Business Bureau in St. Louis, a third of respondents said they were called at least 20 times by debt collectors.
Another problem flagged by the report was consumers often don’t show up in court to defend themselves in suits and so default judgments are often entered, leading to garnishment of the debtor’s wages payday loans.
So Michelle Corey, the BBB’s president, said it’s important that consumers show up for those court dates, even if they don’t think they owe the debt or else they risk losing some of their wages.
There are a number of collection agencies in the St. Louis region who have a mixed track record. Some of them have an A rating from the BBB all the way down to an F, Corey said.
The BBB report also notes that Missouri is one of few states in the country without its own debt collection law that mirrors the federal law, making it difficult for state law enforcement authorities to take action against debt collectors. Illinois does have such a law.
Mark Schiffman, a spokesman for the trade group Association for Credit and Collection Professionals, said it’s hard to pinpoint exactly why the number of complaints against debt collectors have been on the rise.
“There was a significant volume increase in the amount of debt defaulted on in the last 3 to 4 years through the recession,” he said. “So significantly more volume would result in a rise in complaints.”
And he cautioned that many of the numbers of logged complaints, including those with the FTC, are not verified and are not necessarily about illegal behavior.
According to his group, third-party debt collectors recovered $55 billion and employed 148,000 people in 2010. But despite an increase in volume in the last several years, the amount of recovered debt has not increased much, he added.
“Consumers are struggling with the economy,” he said. “Many don’t have the ability to pay what they owe. It’s not boom time for the collection industry as people might think. Just because there is more volume doesn’t mean you can collect it.”
Rob Swearingen, an attorney at Legal Services of Eastern Missouri, sees a steady flow of complaints come into his office about harassment by debt collectors. One company told a client that a sheriff was on the way to arrest him so he should give them access to his bank account right away, he said.
“Debt collectors will say all kinds of things - there are as many crazy things as you can imagine,” he said. “They frighten people who are the most vulnerable.”
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World markets mostly rose Wednesday on hopes that the U.S. economic recovery will gather pace, helping corporate earnings and easing some of the stress generated by Europe’s debt crisis.
Stocks have been largely buoyant since U.S. jobs data last week showed an increase in the rate of hiring, suggesting that American consumer spending _ one of the drivers of world economic growth _ could recover faster than expected.
In Europe, however, the outlook is dark. Though Germany’s economy expanded 3 percent in 2011, new figures Wednesday implied it contracted slightly in the fourth quarter. Earlier figures showed industrial production and retail sales had fallen in recent months, indications that even Europe’s largest economy is feeling the pinch of the debt crisis.
Those concerns were mostly offset Wednesday by hopes that an improving U.S. economy would translate into solid fourth-quarter profits, which companies will announce over the next few weeks.
One positive early sign came from aluminum maker Alcoa _ considered an economic bellwether because so many companies use its products _ which said late Monday that its fourth-quarter revenue far outpaced analysts’ projections.
By mid-morning, Germany’s DAX gained 0.1 percent to 6,167.64 and France’s CAC-40 rose 0.6 percent to 3,230.51. while Britain’s FTSE 100 was flat at 5,695.42.
Wall Street appeared set for small gains on the open, with Dow Jones industrial futures up 0.1 percent at 12,406 and the broader S&P 500 futures also up 0.1 percent, to 1,286.90.
European debt markets also improved, with Italy’s benchmark 10-year bond yield falling below the 7 percent threshold that many consider dangerous over the longer-term. The performance of Italian bonds is a key indicator for the eurozone debt crisis because the country, the currency bloc’s third-largest economy, is too large to bail out.
Italian Premier Mario Monti was meeting with German Chancellor Angela Merkel in Berlin later in the day, and will likely ask for greater support from fellow EU countries.
In an interview with Germany’s Die Welt newspaper, Monti said Italy wanted to see more concrete support in exchange for having passed painful austerity measures.
Some economists say the European Central Bank should help Italy more by buying its government bonds on the open market in larger quantities. That would lower Italy’s borrowing rates and ease pressure on its finances free online credit report. But the ECB, along with Germany, resists such a move.
The ECB will hold its monthly policy meeting on Thursday but most economists expect it to keep interest rates steady.
Another key focus in the debt crisis is Greece’s talks with private creditors about having them take a 50 percent cut in their Greek bondholdings. That demand is considered crucial to reducing Greece’s enormous debt load, and Merkel has indicated that Greece would not get any more rescue loans until that deal is clinched. A deal is expected by next week, according to Greek officials.
Earlier in Asia, financial markets closed mostly higher on expectations that China will tweak its monetary policy to encourage growth, but in a limited way to prevent inflaming its already sizzling property market.
Andrew Sullivan, principal sales trader at Piper Jaffray in Hong Kong, said he believes a move from monetary authorities could come shortly after Chinese New Year, which begins Jan. 23 and lasts a week.
“I think we’re in a little bit of a wait-and-see period. A lot of larger things are waiting in the wings at the moment,” he said.
Japan’s Nikkei 225 index rose 0.3 percent to close at 8,447.88. Hong Kong’s Hang Seng index gained 0.8 percent to 19,151.94. Australia’s S&P ASX 200 added 0.9 percent to 4,187.50.
Benchmarks in Singapore, Taiwan, and India also rose. South Korea’s Kospi fell 0.4 percent at 1,845.55.
Mainland Chinese shares edged lower as traders booked profits following two days of sharp gains. The benchmark Shanghai Composite Index lost 0.4 percent while the Shenzhen Composite Index was marginally lower at 880.71. Inflation data was expected out of China on Thursday.
Commodity prices, which rose on expectations that China’s economy will continue to grow this year, helped boost mining and energy shares.
Benchmark crude for February delivery lost 12 cents to $102.12 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 93 cents to finish at $102.24 per barrel in New York on Tuesday.
In currency trading, the euro fell to $1.2759 from $1.2790 late Tuesday in New York. The dollar rose to 76.97 yen from 76.82 yen.
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