SEC Nearing Decision on Freddie Mac and Fannie Mae
One of the more high-profile fall-outs of the financial crisis, the plight of mortgage giants Freddie Mac and Fannie Mae, is finally reaching conclusion; the Securities and Exchange Commission is finalizing their investigation and settlement concerning Freddie and Fannie's knowledge of their involvement in the mortgage meltdown of the late 2000's.
The settlement will amount to little more than a slap on the wrist: no financial penalty or admission of the alleged crimes is expected. After a 3-year investigation, civil and criminal charges have essentially fallen apart.
The SEC investigation explored whether the mortgage companies misrepresented the amount of subprime mortgages in their mortgage-backed securities.
Possibilities of a fine were thrown out because of the companies' precocious financial situations. Any fine assessed would essentially come out of taxpayers' pockets.
Ironically, last week Freddie and Fannies' government-appointed overseer sued 17 major financial firms, alleging that they lied about the amount of subprime mortgage loans that they were selling to Freddie and Fannie.
The aftermath of the financial crisis has been gruesome for major financial institutions and mortgage companies. Giants like Lehman Brothers toppled, and powerhouses like JP Morgan, Bank of America, Freddie and Fannie have had their dirty little secrets exposed, and have been raked through the muck.
BoA and JP Morgan were the beginning of an ugly chain of corporate corruption, having authorized risky loans knowing they were not on the hook if borrowers defaulted. Freddie and Fannie then bought these high-risk loans, knowingly or not, and repackaged them into MBS's and sold the stock to investors.
The victims: millions of homeowners living in over-estimated homes, stuck in home loans that they couldn't afford, and investors whose portfolios bottomed out when the mortgage market crashed.
The government's case was compromised by the vague and imprecise definition of the term "subprime." While a subprime loan is popularly understood as a borrower with a low credit rating, Freddie and Fannie defined prime and subprime loans by the mortgage originator, not the borrower.
Finalization of a settlement might still be a few months away.
By: Javi Calderon
