Suzanne Sangree Chief Solicitor, Adm. Division

City of Baltimore Dept. of Law

* * *

Sub-Prime Lending Revisited:

Local Costs, Local Action

Systemically significant financial crisis

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Negative Equity – Scale

4.9 million in PLS

• US residential negative home equity: approx. $630 billion

• Comparison: Resolution Trust Corporation total assets approx. $395 billion (inflation adjusted approx. $695 billion)

• Comparison: European sovereign and banking crises

• Greek bailout: approx. €245 billion• Spanish bailout : approx. €100 billion• Cyprus bailout : approx. €10 billion

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Negative Equity – Local Costs

4.9 million in PLS

* Negative equity: a costly problem even without default• Approx. $90 billion per year excess interest expense (windfall to hedged

lenders)• Reduced local spending including lower property maintenance• Increased social welfare costs including health care

• Additional costs from foreclosures and short sales• Cost to city, neighbors and borrower up to $43,000 per foreclosure• Costs of foreclosures to neighbors: approx. $2 trillion to date, over half in

minority neighborhoods• Indefinite reduction in property tax revenues from lower assessments • Absentee investor purchases and transient rental neighborhoods• Increased police, fire, and code enforcement costs

• Insert here a slide on negative equity in Baltimore City

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UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MARYLAND BALTIMORE DIVISION

____________________________________

)MAYOR AND CITY COUNCIL )OF BALTIMORE, )

)Plaintiff, )

)v. ) No. 1:08-cv-00062-JFM

)WELLS FARGO BANK, N.A. )

)and )

)WELLS FARGO FINANCIAL )LEASING, INC., )

)Defendants. )

____________________________________)

COMPLAINT John P. Relman George Nilson, City SolicitorGlen Schlactus Suzanne Sangree, Chief SolicitorRELMAN, DANE & COLFAX, PLLC City Hall, 100 N. Holliday Street1225 19th Street NW, Suite 600 Baltimore, Maryland 21202Washington, DC 20036(202) 728-1888 (410) 396-3297

Attorneys for Plaintiff

Predatory Lending Targeted Baltimore’s African-American Neighborhoods

Wells Fargo’s sub-prime loans are disproportionately concentrated in African-American neighborhoods. • 43% of its African-American mortgage

customers put in subprime loans in Baltimore in 2007, but only to 9% of white customers.

• In 2006, the respective rates were 65% and 15%; in 2005, they were 54% and 14%; in 2004, they were 31% and 10%.

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Foreclosures Also Disproportionately in African-American Neighborhoods

Over 50% Wells Fargo’s Baltimore’s foreclosures from 2005 to 2009 in census tracts that are more than 80% African-American

• 62% were in tracts that are over 60% African-American

• 12% were in tracts that are 20% or less African-American

• The figures were virtually identical for Wells Fargo’s foreclosures from 2000 to 2004

• Most of Wells Fargo’s mortgage lending in Baltimore was in white neighborhoods

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COMPLAINT

Wells Fargo Settlements

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Baltimore’s case:

• Down payment Grants to Home Purchasers $4.5 million

• City Foreclosure Fund $3 million

• Wells Fargo Investment Commitment to Qualified Borrowers in City$425 million home purchase financing over 5 years$125 million committed to low and moderate income borrowers.

Justice Dept. case:

• Compensation to Wells Fargo borrowers steered to subprime when they qualified for prime loans--$250 million to compensate borrowers nationwide- $15,000 per household. For loans originated between 2004 and 2009.

Both: New standards and staff training to prevent racial steering in lending

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Foreclosure Filing Rates: Baltimore City 2005 - 2013

Calendar Year

Unduplicated Foreclosure

Filings

Total Residential Parcels in

City

Unduplicated Filings as a Percentage

of Residential Lots

2005 3,007 194,825 1.54%

2006 3,020 195,403 1.55%

2007 3,801 195,615 1.94%

2008 3,592 195,911 1.83%

2009 5,902 196,290 3.01%

2010 4,360 195,803 2.23%

2011 1,890 196,491 0.96%

2012 2,726 196,719 1.39%

2013* 5,000 193,099 2.59%

Predatory Loans in PLS Trusts

• All subprime mortgages securitized in PLS

• Private Label Mortgage Backed Securities (PLS)– Not issued by a GSE (Fannie, Freddie)– Not guaranteed by Ginnie Mae

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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2013

Commission File No.: 0-50231

Federal National Mortgage Association(Exact name of registrant as specified in its charter)

Fannie MaeFederally chartered corporation 52-0883107

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Fannie Mae 10Q Loss Projection

• 61.8% of the loans in PLS Trusts will default

• 68.9% of the value of those loans will be lost

• Fannie Mae will lose $12 billion because it is invested in PLS Trusts

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PLS Loans Baltimore

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Zip CodeTotal PLS 1st loans

21201 11021202 20121205 27821206 128421209 25421210 11021211 33121212 51321213 84121214 52921215 120521216 81721217 61721218 100221223 55621224 113021229 112721230 92421231 32921235 221239 684Total 12844

PLS Loans in Baltimore City

Total 12,844

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Disaster in the Works

Hard hit neighborhoods – majority African-American16

PLS Foreclosures To Mirror Predatory Lending

21206 Cedmont, Cedonia, > 60% African –American1,284

21213 Belair-Edison >80% African-American 814

21215 Park Heights >80% African-American1,205

21218 Waverly >60% African-American 1,002

21224 Patterson Park 27% African- American1,130

21229 Uplands, Irvington >70% African-American 1,127

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Problem Mortgage Loans In Private Label Securitizations

4.9 million in PLS

• Nationally, millions of loans in securitizations not guaranteed by federal government

• Toxic loans not conforming to Fannie Mae, Freddie Mac or FHA standards (option ARMs, interest only, subprime, etc.)

• Not effectively eligible for federal programs created since the housing crash

• Much more likely to be deeply underwater and to default than other loans • Securitizations forbid loan sales and significantly limit or prohibit

principal reduction

Practical and necessary policy for local recovery: principal reduction

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Required Response – Principal Write Downs

4.9 million in PLS

• Federal Housing Finance Agency: PLS loans are the “crux . . . of the problem we face in foreclosure prevention. If we are going to stabilize the housing market, we have to address” PLS loans.

• Martin Feldstein: “To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110% of the home value.”

• American Action Forum:“Ultimately, America has a choice: Do we continue to insist that the people who made bad bets in the housing market get punished . . . or do we focus on creating policies that have the best chance of ending our economic malaise?”

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Need for Government Response

4.9 million in PLS

• American Securitization Forum • seismic economic challenges in housing market too great for private sector

loan modification solutions . . . expanded government programs may be effective in addressing potential foreclosures that commercial and contractual arrangements cannot prevent . . . ASF supports TARP purchasing distressed loans from securitization trusts to give government the unlimited discretion to modify the loans

• Securities Industry and Financial Markets Association• disappointed that Treasury is de-emphasizing the asset purchase portion of

TARP . . . based on Resolution Trust experience, a key ingredient of a strong recovery is price discovery through a transparent purchase program . . . hope government will comprehensively revisit this important program

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Lack of Federal Response – Different Interests

4.9 million in PLS

• 2008-09: Not in my district, Tea Party, TARP diversion to national banking system

• Excellent programs but left to industry to implement-- do not fit PLS loans (FHA short refinance, Hardest Hit Funds, HAMP)

• Local solutions can be more focused and politically practical• Lawrence Summers: “Surely there is a strong case for

experimentation, with principal-reduction strategies at the local level.”

• Hal Varian (Google economist): “it makes sense to write down mortgages differently based on local default conditions.”

Local costs demand local action

Buy the loans – not the homes – and fix them yourself

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Emerging State/Local ResponsesBuy and Fix Underwater Loans

4.9 million in PLS

• Illinois: • Mortgage Resolution Fund to use federal Hardest Hit funding to buy local underwater

loans at discounted market values and modify them• Partnering with not for profit groups

• Nevada:• Proposed Nevada Home Retention Program with same goals• Will use Hardest Hit funds and multistate AG settlement funds

• Boston: Boston Community Capital

• Richmond, California:• Use municipal condemnation power to acquire PLS loans

Solutions for Baltimore?

7,825

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61% of 12,844 PLS mortgages in the City are going to default and be foreclosed