United States (ProPublica) – by Cora Currier

Earlier this week, ProPublica and NPR detailed how Freddie Mac placed bets against homeowners that paid off if borrowers were unable to refinance their mortgage loans. The story highlighted the conflicted role of the behemoth and now government-controlled Freddie Mac and Fannie Mae: They are at once supposed to maximize their profits and thus pay back taxpayers, but they are also now government wards and many feel should be helping the millions of Americans struggling to stay in their homes.

Here’s our attempt to explain Fannie and Freddie’s role in the housing market, and why it seems like their actions often go against the interests of homeowners.

What are Freddie Mac and Fannie Mae supposed to do?

Fannie and Freddie were created to make homeownership more accessible. They are Government-Sponsored Enterprises — private companies chartered by the government to expand access to credit, particularly for low and mid-income homeowners, and to foster stability in the mortgage market. Fannie Mae was founded as a government institution during the Great Depression and privatized in’68. Freddie Mac has been private since it started in’70. But “private” is not exactly the right word — Freddie and Fannie are exempt from most state and local taxes, some S.E.C. regulations, and they have access to a credit line from the federal government. And they still have their chartered obligation to make mortgages more available.

Fannie and Freddie can’t make loans directly. Instead, they guarantee existing mortgages, and repackage and pool them into bonds called mortgage-backed securities. Someone who buys the bonds from Freddie gets the interest and the original principal, even if a homeowner defaults. In exchange for that guarantee, Freddie collects a fee from the buyer of the bonds and can use that to guarantee more mortgages. (Or to buy mortgages that stay in their portfolio). This handy New York Times graphic shows the various flows of debt: The idea is that by basically ensuring that someone (often Freddie or Fannie) will guarantee a mortgage, it makes it easier for anyone to get a mortgage.

So how did they get so big?

Because Fannie and Freddie have been able to borrow lots of cheap money.

For years, investors have loaned them money at lower than average interest rates, allowing Fannie and Freddie to expand their portfolio of mortgages and securities. As a history compiled by the Congressional Budget Office shows, investors have treated Fannie and Freddie as essentially risk-free. The assumption, which turns out to be correct, was that the government would never let Fannie and Freddie fail. The two companies used that windfall not only to invest in more mortgages, but also tried to increase its profits by pouring money into a variety of fancy financial instruments.

Fannie and Freddie became, as the New Yorker’s James Surowiecki described them, the “duck-billed platypuses of the financial world;” strange institutions with the perceived safety of a government guarantee, and the high-risk strategies of a private corporation. And that led them to become the giants of the mortgage market, managing a massive portfolio of debt. In 2008 they had a combined $5 trillion in debt and guarantees.

Why are taxpayers on the hook for their mistakes?

The bubble burst — and Fannie and Freddie’s execs had overreached.

In the last stretch of the boom, the two companies had loaded up on iffy mortgages. When the housing market began to turn in mid-2006, delinquency rates rose, increasing the chance that Fannie and Freddie would have to make good on their guarantees. Compounding their problems, it became harder for Freddie and Fannie to borrow money as concerns mounted about the companies’ health. In the mid-2000s, they admitted to overstating earnings and billions of dollars’ worth of accounting errors.

By 2008, they were in trouble. That $5 trillion in debt and guarantees was backed by only $80 billion in core capital. The federal government took them over, becoming the major shareholders of both companies, while the Fed bought up most of their debt and the Treasury pledged to cover their losses. The taxpayer buyout of the two companies has cost roughly $169 billion to date.

The SEC filed a lawsuit against the companies’ executives this December, accusing them of misleading investors about the riskiness of their investments.

The companies’ high compensation of their executives has also been under fire from Congress. Although the bailout calls for Fannie and Freddie to wind down their portfolios of mortgages, they continue to make billions of dollars’ worth of risky investments, like the “inverse floaters” we described.

So do Fannie and Freddie actually help homeowners? And why can’t the government force their hand?

The companies say that by bolstering the companies’ finances, they are helping to stabilize the housing market as a whole, but Freddie and Fannie have hampered many of the administration’s plans for relief for struggling homeowners.

The two report to a regulator called the Federal Housing Finance Authority, which, since the bailout, has acted as their board of directors and shareholders, making their major decisions. In the wake of our story, the White House and several senators called for more oversight and an explanation as to why Freddie’s investment strategy seems to run counter to their mandate to help homeowners.

More broadly, the Obama administration and the head of FHFA, Edward DeMarco, have often clashed over the goals of the companies.

This week, Obama outlined a new set of initiatives aimed at making it easier for homeowners to refinance and encouraging loan forgiveness. But Fannie and Freddie have previously refused to participate in loan forgiveness programs, and they continue to tussle with the administration on the issue. (It seems unlikely that any of Obama’s proposals will get through Congress, and ProPublica has documented extensive problems with similar programs aimed at preventing foreclosures).

The two aims of Fannie and Freddie are continually at odds — policies encouraging refinancing and forgiveness for more mortgage holders can increase costs to the taxpayer-owned companies. While the administration has made relief for homeowners their priority, DeMarco says his agency’s priority is to protect Fannie and Freddie’s profits, aka taxpayers’ assets. Of course, many taxpayers are those same struggling homeowners, and that is at the heart of the dilemma over Fannie and Freddie’s future.

Sen. Barbara Boxer, D-Calif., told NPR she was shocked by a recent meeting with DeMarco. “It was the worst meeting I’ve ever had in my life,” said Boxer. “His interest is making sure Fannie and Freddie do well financially.”

Will they be around much longer?

Probably, even though there’s rare bipartisan consensus that they shouldn’t be.

Both the Obama administration and congressional Republicans want to get rid of Fannie and Freddie. Obama’s plan gradually winds them down to a position equivalent to private sector mortgage companies, while giving the market time to adjust to their removal, while the Republicans want a more immediate rollback of their influence.

These plans were unveiled almost a year ago, but the companies are still massively important to the mortgage market, guaranteeing approximately 70 percent of the country’s home loans. Their elimination might make it more difficult to get a mortgage loan, and it remains unclear what kind of assistance for homeownership could, or should, replace them.

– Provided by ProPublica.org

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Cleveland, OH, United States (AHN Sports) – Deron Williams racked up 27 points and 10 dimes and Anthony Morrow added 22 as the New Jersey Nets sneaked past the Cleveland Cavaliers, 99-96, Friday night at Quicken Loans Arena.

The Nets captured back-to-back wins behind another outstanding performance from Williams and solid contributions from their supporting cast.

Williams, who’s averaging 19.4 points and 8.6 dimes assists this season, shot 9-for-8 from the field (5-for-9 from 3-pt arc) and 4-for-5 from the free-throw line to pace the Nets in scoring.

Morrow filled the slack of rookie sensation MarShon Brooks with his 22 pints and Kris Humphries chalked up a double-double with 18 points and 11 boards.

Coming off a victory against the Philadelphia 76ers, the Nets jumped to a 17-point advantage but the home team got back in the match.

2011 first-overall draft pick Kyrie Irving scored 21 of his 32 points to lead the Cavs furious fourth-quarter run and Antawn Jamison tallied 20 points but their efforts were not enough to foil down the Nets.

After a slow start, the Nets (7-13) are gaining momentum in the East as the won four of their last six games.

Meanwhile, the Cavs (7-11) have been struggling to find consistency, losing to the Nets after dominating the star-loaded New York Knicks.

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Washington, D.C., United States (AHN) – The upcoming Republican caucuses in Florida are turning into a two-man race between Mitt Romney and Newt Gingrich, according to the latest polls.

At the same time, Florida’s former governor warned that the campaign rhetoric is becoming so mean that it overlooks the concerns of voters.

A Time Magazine/CNN poll released this week showed Romney with only a slight lead as the preferred candidate of 36 percent of Florida Republicans. Gingrich is favored by 34 percent of Republicans.

Other candidates, such as Rich Santorum and Ron Paul, fall further down in the rankings with 11 percent support for Santorum and 9 percent for Paul.

Both candidates have been concentrating their efforts in other states, where they believe they have stronger chances of winning.

The primary election is scheduled for next Tuesday.

An American Research Group poll of Florida Republicans showed Romney leading with 41 percent of the vote compared with 34 percent for Gingrich. Once again, Santorum and Paul could claim only small portions of the support.

Romney also appears to be the best candidate to challenge President Barack Obama, according to a Quinnipiac University poll released Thursday.

Florida voters split evenly, with 45 percent favoring Romney and 45 percent Obama if the election were held now. In a race between Gingrich and Obama, Gingrich trailed by 11 points with 50 percent for Obama and 39 percent for Gingrich.

The tight race between Romney and Gingrich has made the two candidates launch tough allegations and insults against each other.

Romney has started running television ads that imply Gingrich contributed to the Great Recession that began in September 2008 through his links to federal mortgage agency Freddie Mac.

Economists blame the recession largely on loose credit terms granted by mortgage lenders to home buyers, who later were unable to repay the loans.

The ads are running in Florida and Nevada, where another presidential caucus is scheduled for Feb. 4.

A narrator for the Nevada ads says, “While Nevada families lost everything in the housing crisis, Newt Gingrich cashed in.”

The ad continues by saying, “Gingrich was paid over $1.6 million by the scandal-ridden agency that helped create the crisis.”

The ad also mentions that Gingrich was cited for ethics violations while he was in Congress and “resigned in disgrace.”

Gingrich hammered back during speeches he gave while touring Florida this week. He accused the former Massachusetts governor of lying and hypocrisy.

Gingrich has been saying that Romney is out of touch with most voters, as shown by the tax returns he recently released from last year showing that he earned more than $24 million but paid slightly more than 14 percent of it in taxes. Most Americans pay around 25 percent of their annual earnings in income tax.

The returns also showed Romney held investment accounts in the Cayman Islands and in Switzerland.

Romney’s hypocrisy about representing the interests of most Americans should make “every American angry,” Gingrich said.

He criticized Romney’s attack ads by saying, “This is the desperate last stand of the old order. This is the kind of gall they have to think we’re so stupid and we’re so timid.”

“Here’s a guy who owns Freddie Mac and Fannie Mae stock,” Gingrich told a crowd of about 1,000 supporters in Mount Dora, Fla. “He owns a Goldman Sachs subsidiary, which is foreclosing on Floridians. And on that front he decides to lie about my career? There’s something about the hypocrisy that should make every American angry.”

Former Florida Gov. Jeb Bush said the candidates should leave the heated rhetoric they direct against each other behind and begin appealing to a broader audience of voters.

Bush said he would remain neutral in the Republican primary race.

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Cleveland, OH, United States (AHN Sports) – Antawn Jamison scored 15 points, while Omri Casspi and Anthony Parker added 13 each as the Cleveland Cavaliers knocked off the New York Knicks 91-81 Wednesday at Quicken Loans Arena.

Anderson Varejao had the best all-around game for the Cavs, with 10 points and 16 rebounds.

Varejao added four assists and four steals for the Cavs, who held the struggling Knicks to just 36 points in the second half.

Cleveland collected 28 assists to just 18 for the Knicks, who fell to 7-11, 4-5 away from Madison Square Garden.

Amare Stoudemire led the Knicks with 19 points and 14 rebounds, while Carmelo Anthony added 15 points and six rebounds. ‘Melo connected on just 5 of 14 field goals.

New York hit just 3 of 20 trey attempts, while Cleveland was 9 of 20, including a 3 of 4 effort from Jamison.

The Cavs improved to 7-10 and leveled their home mark to 3-3.

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Chicago, IL, United States (AHN Sports) – Luol Deng tallied 21 points and Carlos Boozer racked up a double-double and the Chicago Bulls overcame the absence of starting guard Derrick Rose to pummel the Cleveland Cavaliers, 114-75 Friday night at Quicken Loans Arena.

With reigning NBA MVP Derrick Rose still out with a turf toe injury, the Bulls leaned on their other stars to step up as Deng and Boozer led a Bulls squad that shot .554 percent on the floor in the match.

Deng shot 6-for-13 from the field and 4-for-4 from the free-throw line, while Boozer chalked up 19 points and 14 boards in the win.

Anderson Verajao and rookie sensation Kyrie Irving combined for 27 points to pace the Cavaliers, who tried to keep themselves in the opening quarter before collapsing in the succeeding periods.Irving had 13 points on 5-for-11 shooting.

The Bulls (14-3) continued their dominance despite Rose’s absence, relying on their solid team defense and steady point guard play from back-up guard C.J Watson.

The Cavs will travel to Atlanta Saturday to face the Hawks, while the Bulls play host to the Michael Jordan-owned Charlotte Bobcats at the United Center also Saturday.

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New York, NY, United States (AHN) – Bank of America reported a fourth-quarter profit of $2 billion compared with a $1.2 billion loss in the same period in 2010.

The nation’s second largest lender said it had a full-year net profit of $1.4 billion compared with a net loss of $2.2 billion during 2010.

Bank of America credited its two years of streamlining and simplifying the company for helping it return to profitability and enter 2012 as a stronger and more efficient business.

Shares of the company’s stock rose 4.7 percent in pre-market trading in New York.

The banking giant had lost 58 percent of its share value during 2011 because of investors’ lingering worries over the bad mortgage loans on Bank of America’s books after the 2008 sub-prime mortgage crisis when the United States government had to bail the bank out.

Bank of America has since been building up its reserves to protect against the risk of more bad loans.

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Rome, Italy (AHN) – Italy’s banking system has a new “boss.”

Thanks to the country’s ballooning debt crisis, the Mafia is Italy’s biggest “bank,” according to a study by Confesercenti.

The country’s four mafia groups have expanded from their storied strongholds in the sun-baked “Mezzogiomo” south of Rome, and have spread their tentacles across the entire country, taking advantage of the economic crisis to purchase ailing businesses, “juice” others and charge large “vigs” to most.

Organized crime in Italy has generated an annual turnover of about $178.89 billion in profits and more than $100 billion euro in profits, making it the head “Capo” or biggest bank in Italy, the study found.

The country’s top crime groups, like the Sicilian Cosa Nostra, the Naples Camorra and the Calabrian “Ndrangheta, have long had a stranglehold on the Italian economy, generating profits equivalent to some 7 percent of national output.

Extortionate lending has become a sophisticated and lucrative source of income, alongside drug trafficking, arms smuggling, gambling and racketeering, according to the report released Tuesday.

The old style gangsters hanging out in bars, lurking in dark alleys and hiding in big black cars have been replaced by “reputable” bankers, lawyers and notaries, the report noted.

Small businesses, which have struggled to get credit during the economic recession, have turned to the mafia for loans, seeing no other choice.

The typical victims of extortionate lending are small businessmen and middle-aged shopkeepers.

The exorbitant “vigs” (interest) the Mafia charges for loans have many pushed against a wall and worried they might be “clipped.”

As the Mafia chiefs moved into new areas in Italy, they also moved into new businesses such as public health, transport and logistics.

Confescercenti, which represents 270,000 small-to-medium businesses, said the new technocrat government of Mario Monti must work to help firms retake territory occupied by the Mafia.

But it will be tough going as organized crime in Italy controls everything from gambling to construction to the disposal of industrial and residential waste.

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Ramallah, Palestinian Territory (IRIN) – Izz Tawil draws a black circle on the flip-chart in his office in Ramallah, capital of the West Bank in the occupied Palestinian territory (oPt).

“The Palestinian economy is a closed cash-circle,” the general manager of the Palestinian microfinance network Sharakeh explains.

He goes on to draw several small arrows on the line, meant to indicate different elements of an isolated system: At the bottom, there is the construction worker, who gets his salary from a company contracted by the Palestinian Authority (PA), while the PA itself is kept alive through foreign aid.

“And this aid is the only fuel that keeps the circle running,” Tawil says, with a serious mien.

Humanitarian aid to oPt increased dramatically from US$863 million in 2008 to $1.3 billion in 2009. After Sudan, oPt was the second largest recipient of aid in the world in 2010. Economists and businessmen warn that the PA’s dependency on aid and vulnerability to external shocks could lead the entire West Bank economy to collapse, provoking a humanitarian crisis. Among the most vulnerable are the owners of small businesses and all those who depend on foreign aid channeled through the PA.

Tawil is among a number of people in the West Bank with suggestions for a better way forward.

Coping with aid cuts

Shortly after the 2006 elections which brought militant group Hamas to power in oPt’s Gaza Strip, donors cut off more than $1 billion in aid to the PA as a means of boycotting Hamas. Since then, the West Bank economy has trembled over and over – despite a resumption of aid transfers to the PA in December 2007.

The year 2011 was an especially troublesome year for the PA’s budget, which was hit by delayed payments from Arab countries, temporary aid cuts of $200 million by the U.S. Congress, and a temporary freeze on Israel’s monthly transfer of $100 million in tax funds to the PA. Though both Israel and the US later resumed payments, Israeli officials made clear that they would freeze funds again should Fatah, the dominant political party in the West Bank, form a unity government with Hamas.

The threats raised fears of a crisis scenario similar to 2006, when the PA’s budget slid from $180 million to $55 million a month, amid running debts of $1.7 billion. The crisis left government employees, who have a relatively high spending power, without salaries. Banks imposed a more restrictive borrowing policy on businesses; and the unsafe environment made foreign investment appear risky and less attractive.

As withholding aid has become a way to punish the Palestinians for unwanted political maneuvering, the PA is now seeking more financial independence. 2013 is supposed to be the last year “in which the PA will need any external financing to help with recurrent expenditures,” Prime Minister Salam Fayyad announced in a 2011 interview with the Associated Press.

But it will not be easy, given such aid amounted to about $1.5 billion of the PA’s $3.7 billion budget in 2011. The remaining sources of income were about $105 million in monthly tax refunds from Israel, and much smaller domestic tax revenues.

The dangers of credit

At first glance, the Ramallah-centered West Bank economy seems solid. Many new neighborhoods are being built around the city and expensive cars are not uncommon. The West Bank economy grew by 7.6 percent (GDP) in 2010, according to the World Bank.

But much of what may have seemed like a boom in Ramallah is veneer.

The economy grew by only 4 percent in the first half of 2011, according to the Bank, and unemployment remained at about 16 percent. According to one employee at a Ramallah branch of the Arab Bank, everything is bought on credit – “even wedding dresses… $300 is enough for a loan of 10,000″.

With a total of $1.09 million in debts, the PA – including its public institutions and employees – is the biggest of all Palestinian debtors, representing 40 percent of what is owed to Palestinian banks, according to Shirin al-Ahmad, a division chief at the Palestinian Monetary Authority (PMA).

“A political shock like that of 2006,” al-Ahmad added, “would mean that these 40 percent become a risk factor for hundreds of thousands of Palestinians, because no money from the PA means no salaries, and no salaries means that people can’t pay back their loans, or need to take out new ones.”

Even more vulnerable than PA-employees are those with no regular income at all. Without steady work, they are not eligible for loans from any of the 18 banks that operate in the West Bank and the Gaza Strip. This is why 43,100 Palestinians need to borrow from one of Sharakeh’s 11 microfinance institutions, with a total credit portfolio of $74.6 million, of which $54.7 million can be attributed to clients in the West Bank.

Building an independent economy

“Most of our clients want to run a small business. They are the backbone of the West Bank economy,” said Tawil, the general manager of Sharakeh. “If the cash injections from foreign aid delay PA employees’ salaries, small businesses like groceries are the first that feel the results.”

Mazen Khayyat, owner of a clothing shop in the center of Ramallah, told IRIN his business was hard hit by the cuts in aid in 2006.

“My debts rose in 2006 from almost nothing to 27,000 New Israeli Shekel [NIS - $7,013]. At the end of 2011, my debts reached 39,500 NIS [$10,260]. In 2006 alone, my profit decreased by 17 percent compared to the year before. All this was because people generally look for cheaper products when the economy is weak. And because most of my clients are government employees or their families, the problem was especially severe in 2006. When their salary comes late, they buy only the most necessary.”

Tawil hopes that by lending to people with no steady income, micro-credit institutions can help build a more independent economy from the bottom up. He suggested the PA support these businesses by giving them tax exemptions. He also recommended university graduates be given more incentives to open a business.

“No one takes the risk involved in business in this unsafe environment,” he said, “because a regular income, financial safety and a loan have become core values for young people.”

His call for less aid is shared by leading Palestinian entrepreneurs, such as Bashar Masri, who is leading the construction of the new West Bank city of Rawabi for 40,000 future residents between Ramallah and Nablus.

Some foreign companies have refrained from investment in the West Bank because of the recurrent danger of violent conflict, the political unpredictability and the many restrictions on trade, mobility and access, imposed by Israel.

The World Bank has identified these restrictions as the main obstacle to private sector growth in oPt. So-called Investment Guarantee Funds had provided insurance for some investors against risks resulting from war and conflict in the past, but their reach is limited. Businessmen argue independence from aid would make the arena more attractive.

“Although cutting aid might hurt in the beginning, more businesses also bring more tax revenues for the PA,” Masri said, adding that “sometimes it has to get worse, before it can get better.”

Despite the many obstacles, some private equity funds recently started investing in the West Bank, Masri explained, adding that one of them, a British fund called Blakeney, invested around $100 million in local projects. “Foreign funds [are showing] more and more interest,” he said.

“Private sector could collapse”

Rawabi’s budget of $800 million is entirely financed by a fund from Qatar, providing independence from the PA and from foreign aid – something most private sector projects in the West Bank lack.

Take for instance the 750 local construction companies represented by the Palestinian Contractors Union (PCU).

“Many projects contracted by the PA got their money far too late and had to take out expensive loans,” PCU-chairman Adel Odah explained. “This way at least 30 companies went bankrupt in the last two years. Much profit is lost by paying interest rates to banks. If the PA goes bankrupt, the entire private sector could collapse,” he warned.

Replacing aid

The PA is well aware of the risks: “The PA is teetering at the edge of collapse at any point of time,” Prime Minister Fayyad said at the beginning of December, and began curbing its dependency on aid three years ago, according to Ghassan Khatib, a senior PA official.

Between 2008 and 2011, the PA brought down the deficit covered by donors from $1.8 billion to about 1 billion, he said, adding that this trend would continue, “hopefully until the PA needs no more aid”.

Fayyad said the PA’s operational costs should become independent of aid by 2013.

The question is how.

“On the one hand, we will replace aid by raising taxes and collecting them more effectively. On the other, we will reduce expenditures,” Khatib explained. Some saving measures, such as restricting PA employees’ use of their government sponsored cars outside working hours, have already been taken.

Khatib said the need for external support would decrease this year, but noted the PA had no control over Israel’s behavior.

“But their withholding of our tax money will not keep us from pursuing national unity with Hamas,” he added.

ah/ha/cb

– Provided by Integrated Regional Information Networks.

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