Christopher Whalen: Freddie and Fannie Helped to Create Epidemic of Mortgage Fraud

George Washington's picture

Chris Whalen (co-founder of Institutional Risk Analytics)
knows a thing or two about banking and mortgages. Whalen has been
hailed by Nouriel Roubini as one of the leading independent analysts of
the U.S. banking system, and there are few people who know more about
mortgage fraud.

Whalen points out in a must-read article that Fannie and Freddie helped create the epidemic of mortgage fraud:

summer of 2007 most of the bulk GSE pools underwritten by the MIs
[mortgage insurers] started to experience extremely high levels of
delinquencies. But rather than curtail MI operations and shore up
underwriting, the MIs made a big push and increased subpirme production insuring large amounts of subprime product (lots of 220s) all the way into first quarter 2008.


MIs tripled down and did so in hopes of making enough fee income to
(1) meet plan and (2) shore up capital that had started to bleed. This
push, which was not always reported honestly to share and bond
holders, signed the respective death warrants for Fannie and Freddie.
But the zombie dance party rocks on.


today the MIs are still operating, though they are not providing
insurance because they can't. Observers in the operational trenches
tell The IRA that virtually no MI claims are being paid - even if the
claim is legitimate. The MIs are very undercapitalized and still
bleeding heavily. But they get continued business because the GSEs
demand MI on high LTV loans. Lenders are forced to use the MIs and
consumers are made to pay the premium. Thus the auditors of the GSE
continue to respect the cover from the MIs, even though the entire
industry is arguably insolvent.


we go back to the low-income borrower, who is forced by the GSEs to
pay for private mortgage insurance that will never pay out. The
relationship between the GSEs and the MIs is identical to the "side
letter" insurance transactions between AIG andGen Re, and come to
think of it, the AIG credit default swaps trades with Goldman Sachs
(GS) and various other Wall Street dealers. In each case the substance
of the transaction is to falsify the financial statements of the
participants. And in each case, the acts are arguably criminal fraud.

Whalen blasts the cowards in Washington for failing to unwind the mortgage fraud:

invidious cowards who inhabit Washington are unwilling to restructure
the largest banks and GSEs. The reluctance comes partly from what
truths restructuring will reveal. As a result, these same large zombie
banks and the U.S. economy will continue to shrink under the weight of
bad debt, public and private. Remember that the Dodd-Frank
legislation was not so much about financial reform as protecting the
housing GSEs.

Because President Barack Obama and the leaders of
both political parties are unwilling to address the housing crisis and
the wasting effects on the largest banks, there will be no growth and
no net job creation in the U.S. for the next several years. And because
the Obama White House is content to ignore the crisis facing millions
of American homeowners, who are deep underwater and will eventually
default on their loans, the efforts by the Fed to reflate the U.S.
economy and particularly consumer spending will be futile. As Alan
Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This
is not a monetary problem."


policy of the Fed and Treasury with respect to the large banks is
state socialism writ large, without even the pretense of a greater
public good.



The fraud and obfuscation now
underway in Washinton to protect the TBTF banks and GSEs totals into the
trillions of dollars and rises to the level of treason.



in the case of the zombie banks, the GSEs and the MIs, the fraud is
being actively concealed by Congress, the White House and agencies of
the U.S. government led by the Federal Reserve Board. Is this not

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Hook Line and Sphincter's picture

Oh those very bad banksters!

We call them a criminal syndicate, thieves they are! 

This is a site for discourse of financial matters. And being so, it's kosher to state the obvious, right? 

Let's see,

I'm just saying, but just what have any of you produced? If the answer is nothing, then you've stolen what you've got too. This is just an observation so take a quaalude. If I happen to mention a passing of something that smells of morality, it is only for those of you willing to listen to yourself. If you're hearing 'right or wrong' in these comments, it's because its coming from you, not me Mr. 

I not saying it's right or wrong to game a system.

I not sayin you shouldn't fight back.

All I'm requesting is that you realize your nemesis has been your bed buddy for some time. So they're cheating on you now. Well, you built your lean-to on the side of a fire-hazard home, and now your pissed. Whine whine whine. 

Everyone here has been sticking a mirror under the coin dispenser at the slot machines. We've been counting cards at the blackjack table, dice dumping, palming, and pulling the hold out dump shot.

So, you figure that these makers of the game are corrupt, and in your righteous indignation slam the game originators for changing the rules mid-stream!

Don't you think it's a butt load of hilarity?

It's curious that we use a term like 'criminal', a term that penuriously points fingers shouting, 'it's them, they are the ones who have breached the rules and laws of a governing authority'. And WTH, we all knew that entity had no credibility in the first place. Remember Vietnam? Rule of law? Even 4 year olds throw the monopoly board across the room when they see the contradiction. We all knew better when we were 3, or didn't we?

We want our conditioning, we need it. We want the opportunity to learn the great skill of compartmentalization. Now that's power! And the shame you ask? Well, that's cured quite easily with a little more indignation.

Don't get too hard on yourself that you were an accessory to a crime. 

Come on, you weren't there, finger in your cranny dreaming up the creation of a fiat currency, so your not AS guilty. But come on now, if we just 'have' to use law vernacular, you did however, knowingly, and voluntarily participate in the commission of a crime. Perhaps you weren't present at the scene of the original crime (fed printing, HFT, the smelting of contract law, naked short counterfeiting, wearing a Cramer mask for halloween), but you did aid, abet, and incite. Now that you know your nature. I think this is fair to say, since we have collectively decided to label 'their' activities as 'criminal', don't you think it high time we start accepting reality as we continue to comfort, relieve, and assist.

Yeeeaahhh, so which one of you have dumped your bank?


And which one of you has attempted to transact in barter?

And, who here has closed their eyes, looked the other way, and signed their corporate asset soul to birth a mortgage, whereby creating value out of the thin air?

Where is the person here who hasn't benefited in some short-term way either monetarily, psychologically, or have experienced greater physical security from the bubble housing?

And who here has given a rats nalgas that we have exported our inflation to our fast lane challenged asian compadres?

And who has invested in stocks of companies that play exploding tiddlywinks with our neighbors (MIC), a game soon to be played with us. How much money you make? 

What about that beautiful Monsanto abortion of a company that would love to feed you GM corn, suspend you from the roof, and make you drink beer to create the ultimate Kobe Beef US citizen? I did well on that one. 

What about that lucrative squalene/mercury pusher Pharm-complex of ours? Yes, I know, you all have taken the profits from your deals and invested in in educating the public. Me too!

And what do you call a gay Zerohedger that front runs the POMO? (hint: it's not Mario Cuomo). O.K., wasn't that funny at all.

Anyhow, so who among us can proudly announce that we have allowed through our complacency, our inaction, the creation of deranged derivatives of derivatives ad infinitum that can possibly and literally set up such a sewage blow out storm that logarithmic amounts of brothers and sisters abroad will die of starvation, and war conflict.

Don't get me wrong. I'm not currently saying that these things have to be crimes, nor immoralities, nor anything but simple observations of actions ; )

While everybody drowns in the cacophonous kvetch, gnashing their teeth about the great swindle, do you know that some think that the government is looking to 'disappear' them first because of their participation here? I might submit, albeit in a slight self-mocking tone, that Zerohedger's actually are an accessory to the ongoing 'crime'. No worries, you're needed (obligatory: 'until you're not'). 

For part of the team you are!

The great seeing eye pyramid as it has turned out, is really but a series of smaller and somewhat autonomous fractal pyramids.

Maos Dog's picture

Wow, project much?


Someones feeling a little guilty...

Stormdancer's picture

Eaiser to dismiss than soberly consider and inspect eh?  For men of integrity the easy road is seldom the most profitable.

Hook Line and Sphincter's picture

I've made peace. But I can see it did dilate you Mr. Shorty Answer Pants!

tahoe69's picture

The subprime boom was led by investment banks and mortgage

brokers not by gov. sponsored enterprises. They were pushed

by shareholders/managers to recover the securitization market

share they lost to unregulated investment banks getting absurd

AAA ratings for packaged subprime dross. The notion it was 

a mandate is wishful thinking and linguistic nonsense for those seeking

a simple talking point.

covert's picture

morgage fraud as a way of laundering money? interesting...


JimboJammer's picture

This  is  why  Larry  Summers  quit  his  job  2  weeks  ago...

He  knew  this  mess  was  getting  too  Big...

End  the  Fed ... !

Bagbalm's picture

Musical chairs more than Dodge Ball - but whomever is NOT seated when it collapses wins - a little.

3M TA3's picture
I guess we just need to have a little patience. I think the loan put backs are a good start and a giant step in the right direction. It would be nice to see an independent audit and public disclosure of the findings. Hopefully that will come in the New Year. I don't know what the Main Stream media has been reporting on all this, because I don't get it. I do know, most of the people I associate with are oblivious to what we all know here, and there is anger when I try to explain what is/was going on. I think it would be better to focus on specific facts in a ethical way to illuminate the corruption instead of feeding the beast of wild accusation/speculation and calling for the heads of those in high places. The facts are out there, they just need to be built on the micro level in order to reach a critical mass and create the much needed change. Presenting the facts in a straight forward judicious way builds a better base than condemning the whole system. Even if condemnation is justified.   
f16hoser's picture

Either politicians "Defend the Constitution" or wipe their asses with it. Whats it gonna be????? Fuck, I'm buying more Silver this weekend. My gun safe is almost full!

Ruth's picture

Totally agree Chris and George, TREASON!  END.THE.FED.

RingToneDeaf's picture

I volunteer to run the guilotine until I die of exhaustion.

There is a long list of worthy clients.

I will do my part in cleaning up this mess, given the chance.

SwingForce's picture



Epic statements, please pay attention.

knukles's picture

Heck of a job, Barney.

RockyRacoon's picture

If, in theory, one guy caused it, one guy could fix it.

Not so.  I guess that makes your comment stupid.

Lazy people pick out one villain and point their bony little finger at them.

Anarchist's picture

What did Barney have to do with the massive losses in the sub-prime market, jumbo loans and commercial loans? Again deflecting blame from the real crooks and onto one guy. What a crock.

Anarchist's picture

Yep blame Freddie and Fannie when the much larger fraud envolving the big sub-prime players, jumbo loans and the entities pushing commercial loans is swept under the rug.

RingToneDeaf's picture


You gotta start at the top and work down.

Cut the head off and look for the next one.

Plenty of work to do cleaning up this one.

Anarchist's picture

Blaming the GSEs is a way of deflecting blame from the crooks who orchestrated this flim flam. Next thing we will hear is the Democraps are to blame for most of the mess.

tahoe69's picture

You know the deal blaming the GSE's feels good to those that

want to turn the financial mess into a political issue. The volume

of private issue mortgage backed securities exploded. The private

sector was behind soaring subprime loaning. Fannie& Freddie lost

market share because the private sector offered more attractive loans.

They should have stayed in the traditional loan market. They

didn't because they were trying to compete. Blaming the GSE's

feels good and takes some of the heat off the corrupt private sector.

TheRealDeal7's picture

Perhaps, we should come together and fight the fraud by getting the 24-7 cable news involved....... the USA must know what's going ,behind closed doors..........the crooks Geithner, Bernanke and the Plauson crew... crooks!!

Oh yeah! of course the pimp daddy WALL STREET!!

SwingForce's picture

Why does Ben want to give them MORE money (QE)?

I'm juss' askin', that's all.

NorthenSoul's picture

If he doesn't, it'll be only a matter of (short) time before they are declared insolvent.

i-dog's picture

... because they're short?

lynnybee's picture

when are the "good guys" just going to take charge of this mess ?   The "good guys" being Chris Whalen, Karl Denninger, William K. Black, Dylan R.      WHEN !!??

SwingForce's picture

Unfortunately, those smart guys are not elected officials.......

anonnn's picture

"The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good."

Contradiction, no? It cannot be socialism if it excludes the greater public good

Perhaps oligharchic? tyranny? class-war?  hard-miserly-misanthropic ala Scrooge?

Neo-Darwinic, as in the vicious misunderstanding of "survival of the fittest"?

C'mon. You do not recognize criminal fraud?

sumo's picture

As Nixon would say, it's not fraud when the Oligarchy does it.


Jake3463's picture

As someone who investigated fraud on a much smaller scale in the financial services arena (mostly registered reps) and medicaid/medicare arena (service providers) covering up a fraud encourages more fraud.  There is no way to "grow" out of the fraud that happened in the mortgage mess.  For 2 simple reasons.

1) The people that perpetuated the fraud are still in their positions of power and got incentives to commit fraud.

2) The hole created by the fraud still exist.

If you have someone with a criminal mentality that has the choice of taking their medicine or creating more fraud to fill the hole from the last fraud you are faced with a situation where a new larger fraud has to occur.

It is only a matter of time before this goes Boom bigger than 2008.


IQ 145's picture

 Correct, of course. Corresponds to "human nature".

RockyRacoon's picture

I believe you are describing the current actions by the Fed.

MGA_1's picture

Fraud is fraud.  The only way to return to a semi-normal system is for the authorities to pursue criminal as such and for the banks to take write downs as needs.... and go broke as needed.

Problem Is's picture

"for the authorities to pursue criminal(s)..."

They Are...
They will bust a couple of Robo-signers and a couple of sub-prime brokers in Florida and San Diego and claim the fraud is all cleaned up...

Without going any where near Wall Street...

DOJ: "Wall Street? Never heard of the place..."
 FBI: "Wall Street? Never heard of the place..."

partimer1's picture

every word is true.  They want to grow out of this mess, in 5 years or 10 years or 20 years.  

Rainman's picture

The lame duck Congress knows this baby's gonna blow. Now the game is about pushing Big Fail into next year and blaming the GOP-led Congress for the gargantuan mess.

Government's become a big game of dodgeball while Rome burns to the ground. 

Milestones's picture

Bingo! I was told by the Boulder D.A. that if you can allege fraud the STATE (Colorado) could freeze all assets of the bank that can be shown to be involved. Why not TBTF Banks.?

Ironically, this was during the early 70's when the silver scam (paper note) was going on in western states. My how time flys when you're having fun!!.   Milestones

nmewn's picture

"The fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason."

Yes it does...and it always has.

If they could have shot Armando Falcon in that committee hearing and got away with it they would have, but it was streaming live ;-)

cdskiller's picture

Trillions. That's why I laugh whenever some yahoo talks about TARP being paid back.

NorthenSoul's picture

Reading his testimony before the FCIC:

I'm surprised he's still standing.

CitizenZeus's picture

What is clear from reading the testimony (thanks for posting the link) is that there are not heroes, except those civil servants striving for some integrity and accountability:

1) Bush admin + repub congress wanted to crony-ize the entire country to the benefit of a greedy powerful few. (They are the cancer.) 

2) Obama, et. al. are covering for this, under God knows what rationalization (national security-- we must keep the Ponzi Scheme going?) (They are the cancer enablers.)  

3) House ownership for poor people never has been a cause of this crisis, as many wing-nutters and tea-partiers like to claim, but rampant greed and perverse incentives with temporary ownership by the poor (before foreclosure) a merely incidental by-product.

Does anyone have statistics on just how many poor and working class families have lost their homes through fraudclosure and the many predatory re-financers that also used Fannie and Freddie as sub-prime guarantors/rainmakers?  There are tons of stories that suggest the system that Freddie and Fannie fanned, actually did the opposite of its supposed mission: create a net loss of homeownership among the poor and working class, by refinancing perfectly sustainable mortgages or even paid-off houses so the owners had to be foreclosed upon.  

Citizen Zeus

nmewn's picture

"Does anyone have statistics on just how many poor and working class families have lost their homes through fraudclosure and the many predatory re-financers that also used Fannie and Freddie as sub-prime guarantors/rainmakers?"

Maybe Franklin Raines, Jamie Gorelick, Barney Fwank, Angelo Mozzilo, Chuck Schumer, Chris Dodd, Jim Johnson...and most of all...Robert Rubin & Robert Reich would know.

Have you tried them?

cdskiller's picture

+1 You got it, my friend. Republicans and bankers are alcoholics. And they like to drink and drive their hummers down Main Street, and they don't care how many people they kill. And Democrats gave them all the liquor they wanted with Gramm-Leach-Bliley and the keys to the car with the Commodities Futures Modernization Act of 2000, and then turned their backs.

gwar5's picture

They were the center of gravity for the whole fraud. Were they not the money launderers?