By Michael Olenick, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data
While researching a HUD database for clues on Thomas Lawler, the frequently-cited foreclosure and heavy-metal loving “housing economist” often cited by the business media, and a favorite of Calculated Risk, I came across background information that raises more questions than it answers.
In the spirit of CR’s former housing writer, Doris “Tanta” Dungey, who did not seem to hesitate to present puzzling information and ask her readers what they thought it meant, I thought I’d do the same. Tanta passed away of cancer at the age of 47 in late 2008 and it’s a shame CR has discontinued the practice.
Starting in 1998 Thomas Lawler held the job of SVP Portfolio Management, SVP Financial Strategy, and SVP of Risk Strategy at Fannie Mae until he unceremoniously left in January, 2006, following an $8 billion financial fraud that occurred under his watch. Lawler, along with the rest of Fannie’s executive team, cooked the books spectacularly. That was back in the early 2000s, when a billion dollars was still real money.
Lawler’s Project Libra
It’d be impossible to summarize Lawler’s ethical mosh-pit better than OFHEO, Fannie’s former regulator which morphed into the FHFA, already did so I’ll just cut-and-paste from their 2006 “Report of the Special Examination of Fannie Mae” (emphasis mine):
According to Thomas Lawler, Senior Vice President for Portfolio Management, when Fannie Mae entered the income-shifting REMIC transactions, the Enterprise was concerned that the steep decline in interest rates in 2001 would cause higher near-term and lower long-term recognition of income under GAAP. Mr. Lawler explained that in the context of developing strategies to address that concern, Peter Niculescu, Senior Vice President for Portfolio Strategy, may have suggested the income-shifting REMIC idea. He was not aware of anyone senior to Mr. Niculescu playing a role in initiating the transactions.
Andrew McCormick, Senior Vice President for Portfolio Management (then reporting to Mr. Lawler), indicated he believed Goldman Sachs (Mr. Niculescu’s former employer and the underwriter of the transactions) was the source of the idea.209 In fact Goldman Sachs described the proposed transaction in a November 19, 2001, presentation to Fannie Mae. David Rosenblum, a Goldman Sachs managing director, attached PowerPoint slides for the presentation to a December 3, 2001, e-mail to Mr. Niculescu. Mr. Rosenblum referred to the project as ‘Project Libra.’
Mr. Lawler acknowledged that a motive for creating the REMICs was to effect ‘a change in the expected [pattern of] recognition [of income].’ He also emphasized that without the income-shifting REMICs he did not believe the GAAP earnings that the company would have realized would have accurately reflected the underlying economics. Although he referred to economics, Mr. Lawler was actually talking about the GAAP accounting mismatch Goldman Sachs cited. In an e-mail to a colleague, Jeff Juliane, who, as a member of the Office of the Controller had operational responsibilities for accounting for premiums and discounts on the tranches Fannie Mae retained, ‘these (REMICs) were structured to transfer income from 2002 to out-years.’
Is it just me or, in much the same way every fairy tale starts with “Once upon a time,” every government report on a major scam seems to include the line “Goldman Sachs described the proposed transaction.”
Back to the point, the report makes it clear that Thomas Lawler’s Fannie Mae didn’t play well with Patrick Lawler’s (no relation) OFHEO. At one point when OFHEO provided Congress with Fannie executive compensation Fannie “suggest[ed] that members of Congress might face criminal sanctions if they made the information public,” according to the OFHEO report.
A few months before that scathing report was released Thomas Lawler unsurprisingly left Fannie Mae, moving to a rural farm and into semi-retirement. But Thomas Lawler’s version of “retirement” was to join the Board of Directors of one of John Paulson’s hedge funds as Paulson was famously buying CDS short positions.
Unsurprisingly once Lawler jumped to Paulson he quickly became bearish on real-estate prices. “Poison Said It All in 1990 in a Song Reportedly Inspired by a Mortgage Lender After Housing Crashed that Year, and Low/No Doc (“Liar”) Loan Defaults Skyrocketed,” Lawler wrote in his presentation, going on to spell out the lyrics. That presentation ends with a cute graphic of “Franklin, the Fair Housing Fox,” a likely reference to Lawler’s former boss Fannie Mae CEO Franklin Raines.
Somehow between the heavy-metal lyrics and kitschy graphic I can’t find a disclosure anywhere that Lawler’s new boss was massively shorting the housing market. An oversight, I’m sure, as Lawler was focused on remaking himself from an executive at the center of a massive scam to a “housing economist” in the public image.
Soon after it became clear that the payout to Paulson looked inevitable Lawler switched his position again, arguing the now well-known Big Lie that increased foreclosures also increases home prices. As early as June 13, 2008, while Bear Stearns was barely dead and Lehman Brothers still barely alive, the Wall Street Journal quotes Lawler opining about the economic benefits of “bargain hunters scooping up foreclosed homes from banks,” no matter that these same “bargain hunters,” likely ended up massively upside-down soon after.
Lawler also went after the jugular of real economists who disagreed with him, most notably Yale University economist Robert Shiller, co-inventor of the famous Case-Shiller home price index, which Lawler called “bogus,” in an April 24, 2009 WSJ article announcing that Thomas Lawler has created his own index: “Mr. Lawler has created an adjusted version of the Shiller chart, backing up [Thomas Lawler's] view that house prices already are nearing a bottom in much of the country.” Shiller responded in the article that Lawler was making “wild allegations.”
I suppose “wild allegations” is a toned down version of what most people would have said, which would be something along the lines of “WTF – Lawler’s a known housing fraudster who cooked the books in an $8 billion scam: why are you listening to him?” though academics rarely talk like that, unfortunately.
Needless to say, Lawler’s 2008 housing bottom didn’t quite work out that way, nor did his view that Shiller’s index was incorrect, but most pundits pass over those small issues the same way that prosecutors passed over indictments in the Fannie accounting fiasco.
The Surprise In the Desert
Back to that primary research based on the HUD data during and after the time that Lawler was managing Fannie’s portfolio, financials, and risk. It turns out that Fannie had an appetite for financing homes in some ZIP codes at rates wildly higher than others. I compiled about 26 million loan-level records that Fannie and Freddie acquired between 2004-2007. Fannie and Freddie don’t lend directly — they buy loans from banks — so this data-set would be from the time Lawler was at the height of influence setting policy there.
Fannie and Freddie’s loans use MSA rather than ZIP codes but I cross-referenced them to ZIP codes using tables provided by the Census Bureau. MSA codes sometimes span a small number of ZIP codes, so when there were multiple ZIP code possibilities I’d choose the ZIP code with the highest proportion of residential properties. This could result in slight overconcentration, though the error rate doesn’t matter given the extremes I found in the data.
Certain communities were much more likely to receive loans from the GSE’s than others. Surprise, AZ, in ZIP code 85374, is #1 with 24,788 loans, a 14.7 standard-deviations above the other 20,821 ZIP codes which have a mean loan volume of 532 loans each. The Census Bureau reports Surprise, AZ grew 281% from 2000 to 2010, to the current population of 117,517. As Yves would say, Quelle Surprise, though this time literally.
There are 52,586 housing units in Surprise so it’s safe to say the town is akin to some sort of modern Hoover Dam project, a large scale building project, in the middle of nowhere, built with government money. Except the spending occurred during an economic boom, and is now curtailed thanks to a corresponding economic bust. Actually, the government didn’t really mean to spend the money — during that time Fannie and Freddie were private — so it was GSE executives, especially Lawler, who decided to build a town in the middle of nowhere.
One statistic that comes through clearly is Lawler’s preference for fast foreclosures. All top ten ZIP codes by loan volume are in non-judicial foreclosure states: five in CA, two in AZ, and one each in NV, NC, and TX. We have to drill down to the seventeenth position until we find a judicial ZIP code.
It isn’t clear how Fannie and Freddie decided to hyper-concentrate their loans in a few distinct areas since majority of ZIP codes received less than 1,000 loans. Almost all the high volume ZIP codes are exurban construction boom-towns: environmentally irresponsible far-flung bedroom communities that externalize the cost of construction to everybody except the builders who disappear even faster than the demand for shiny new properties to flip.
Other stats also pop out. For example, the average age of the primary borrower in this large sample is 44 1/2, so they’ll pay off their 30-year mortgages when they’re a spry 74.5 years-old. That obviously doesn’t bother Fannie and Freddie who wrote at least 9,821 loans to people 90 years and older. Fifteen loans went to people one hundred years and older. I understand that age discrimination is illegal but given all the other exemptions Fannie and Freddie received — which includes virtually everything — you’d think they’d lobby for the ability to question the ability of centenarians to repay their 30-year loans.
Many people question the role Fannie and Freddie played in the subprime meltdown. Gretchen Morgenson and Josh Rosner convincingly argue in their book on the subject, Reckless Endangerment, that the GSE’s created an anything-goes culture which private lenders picked up to compete. This data supports that theory: Fannie and Freddie led the way while private money followed.
It’s not clear why CR and so many mainstream media outlets blindly quote Fannie Mae’s former economist, allowing him to “move on” from some spectacularly poor decisions that led to painful costs borne by everybody else. We continue watching the bailout money quietly flow and I wonder when “personal responsibility” for one’s prior decisions became an exclusive obligation only for those neither wealthy nor well connected.