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Fannie's Cry For Help

Last month, Fannie Mae reacted angrily to borrowers' surging strategic defaults by announcing that if it ever found out that people had the ability to pay their mortgage but defaulted anyway, Fannie would shut them off from mortgage financing for seven years.

Properly understood, this is a cry for help that should not be answered.

How did we get here? For many years, housing was a favored asset class.

Over the last dozen years, credit requirements were loosened, interest rates and capital gains taxes were slashed, and home values soared, creating a buying panic.

In a rising market, securitization was easy. At the end of the rainbow stood Fannie, ready to buy most mortgages with little due diligence.

Playing with someone else's money, Fannie lost track. By 2004, it had many mortgages that did not reflect true value, ultimately confessing to $6 billion in accounting fraud.

Looking past all that, Congressman Barney Frank said we should roll the dice by keeping Fannie alive and effectively deregulated. Fannie's CEO was barely slapped on his wrist, keeping most of his $ 90 million of total compensation.

Word got out that all you had to do to get a mortgage was be able to fog a mirror, and many people could do that but only that. Many brokers coached applicants to fudge their numbers to get bigger loans than they could handle. Looking the other way, banks, their auditors and Fannie completely whiffed.

With credit now contracting, many Americans can't afford the loans they did get based on exaggeration while the government winked. As a result, housing prices have fallen and they can't get up. The government wants to help, but the more it does the more it hurts.

That's because contracts work best when everyone is thinking about long-term relationships. If you have to look at your documents to figure out what your rights are, you are in trouble. When there is no market but the government, people will lie to get their money.

The more short-term fixes are used, the more everyone looks for the exit. Mortgage supports intended to help induce many to deliberately fall behind to see what better deal they might get. Foreclosure spirals continue to take prices down and overwhelm the courts. If you're in California and facing foreclosure, you stand a pretty good chance that officials won't get to you for a year.

A year is now a lifetime for many Americans; 25% of those with mortgages are upside down. In California it's more than a third, and in Nevada it's over 70%. What if you could pocket a year of mortgage payments, pay off some credit cards and put the rest under the mattress? And your worst case was to rent? You'd be tempted.

Fannie, having engaged in accounting fraud itself, with its CEO making out like a bandit, is in no position to complain. It broke the social contract first. There's a bank run happening. Savers are not running to the banks to get their money out, but borrowers are running away, saying "catch me if you can."

Housing is going down more for a reason. Being told you can't borrow again to lose again is not exactly punishment. And Fannie gets no value from its customer relationships.

If we're going to extend and pretend, it should be on the bank's balance sheets. Right now banks are captive buyers of Treasuries, earning a risk-free spread instead of lending. Let's liquidate Fannie's mortgage holdings, give them back to the banks over time and give banks regulatory capital relief instead of taking it away.

In the hands of banks, customers are valuable. Banks could rebuild relations.

Perhaps some borrowers could bid to buy mortgages to redeem their own along lines that George Soros suggested years ago.

It would be scary at first, having banks compete on the cost of credit, but they need a real role, not make-work. A few bankers may remember how that worked. Besides, we need to know what we have even if it's less than we hoped.

What about that roll of the dice? Despite its losses, Fannie escaped unscathed in 2,300 pages of "financial reform." Having strategically defaulted in providing responsible legislation, Congress should not now be surprised the public has decided to follow its example.

We are in the middle of a terrible fall from "In God We Trust" to the devil take the hindmost. Even if painful, for the sake of the country, we should give banks a real job instead of carrying bags for Fannie, and let Fannie's cry for help go unanswered.




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