Rethinking Fannie, Freddie and Mortgages 11 comments
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For what it is worth, I am the proud owner of a “Fannie Fraud Patrol” T-shirt. The fraud patrol was a loose mix of investors who felt that Fannie Mae’s (FNM) finances were misstated back in 2003. My small contribution to the effort was showing that the fair value balance sheet was not compatible with the standard balance sheet. That was a pretty basic finding for an actuary used to doing cash flow testing.
I did not post much on Fannie and Freddie after the partial takeover by the US Government last week, because there wasn’t all that much that I could add. I had gotten my calls right, most notably:
If you followed those calls, you made good money, particularly the first one.
But with all of the fuss over the actions of the Treasury, I must note several items:
- Congress has the power to reverse or modify what the Treasury has done. (Not that I ever expect much out of Congress…)
- Even if the Treasury succeeds in lowering mortgage rates, that does not mean much when borrowers aren’t capable of scraping together the proper down payment. Lower interest rates do not stimulate economic sectors under stress, but do stimulate healthy sectors, as housing did in 2001-3, while industry suffered.
- I don’t like being a wet blanket, but aside from preventing systemic risk from letting senior debt and agency MBS suffer credit risk (these are big things), there isn’t a lot to boast about in the takeover. At best, this leads to the wind-off of two entities that never should have been created. Housing should not be subsidized by US taxpayers.
To the free market purists, who I sympathize with, I say let the hybrids die. Our government has meddled too much in lending markets, but it is egregious when they do so where there is a private profit motive. This bailout delivered real pain to those that were equity holders, while protecting against systemic risk. The moral hazard issue to equity and preferred holders is dead. They can lose it all, or close to it. This is real improvement.
To liberals I say the public interest has been protected. Systemic risk is avoided. It is better that those without the wherewithal to own homes rent, than that they strain to own.
To all of Congress I say, if the Administration comes to you asking for a rise in the debt ceiling, ask them to sell their mortgage-backed securities first. Why should those with mortgages be favored over renters and freeholders?
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This article has 11 comments:
We need to rid ourselves of the Greenspans, Bernankes and Paulsons. We need to restore sanity to our monetary and banking systems by throwing out the Federal Reserve and by reasonably regulating the banks.
Most importantly, perpetrators of financial fraud should be harshly punished by asset confiscations and long prison terms. There should be laws passed for crimes against the public interest. There is no excuse to give these criminals a pass or a slap on the wrist when they are harming millions and millions of people.
It may be painful, but we are a resiliant people who have often risen in the face of adversity and we have triumphed.
cheap credit and debt supports this entire country....it's citizens and it's government. the "cure" these bastards are using for this doomed model of overleverage...more cheap credit, more borrowing, taxpayer bailouts and printing of money.... is a disgrace.
Allowing the GSEs to fail would cause immense pain to the economy and our financial system. Short term pain would turn into long term gain and result in a much more rapid return to prosperity and overall financial health. This society could never be courageous enough to cause any pain for itself. The GSEs, the government, and the economy, all being one in the same, are destined to die a very slow agonizing death.
Free markets are not always the best solution of every problem of the distribution of goods and services (often, of course, they ARE,) so it is not a foregone conclusion that the government should not regulate the buying and selling of homes as it does so many other important things in life.
Note that I am not saying the government SHOULD regulate the housing industry only that that the government DOES regulate so many other industries that it is not helpful to sing the national anthem of free enterprise over the (possible) recent demise of the free market mortgage industry.
During the 19th century, the American economy was built on tariffs or government interference in free markets, as most of you will remember from your economic history classes. During the 20th century the Korean and Japanese economies were built the same way.
Just saying ....
I am a somewhat dense "old guy", but I "get" the article and agree.
As I look at the FRE & FNM June 30 balance sheets it is striking how much better FNMs financial condition looks than FRE. If I were a FNM shareholder I would be irate, and screaming at my Congressman, about the takeover at a time the company had a 4.7% capital ratio and a primary regulator that said 1 month ago that the company's need for a capital infusion was overstated.
Was this a case of the Treasury Secretary just reacting to the foreign sovereign wealth funds demands for an explicit guaranty and beating up on the regulator to get an insolvency verdict?