Is it time to kill off Fannie and Fred?

Here’s a list, in reverse order, of WSJ articles on the poorly run Fannie Mae--back to February 2002, early in the Bush administration, the earliest one in Feb. 2002 comparing the risk to Enron. Was anyone listening?

"As for interest-rate risk, Fan and Fred hedge with a giant and complex program using all manner of derivatives. At the end of 2000, their combined derivative position was valued at $780 billion. Even scarier, these hedges are only as good as the counterparties' ability to pay up. But Fan and Fred don't disclose the identity of their parties, so investors have no idea how much risk comes from possible counterparty failure. (By the way, last year Fan's derivative strategy went, um, somewhat amiss and she had to write down shareholder equity by $7.4 billion.)

Fan and Fred also pool mortgages and then sell those securities -- that is, they retain the credit risk since they guarantee the soundness of the mortgages and buyers assume the interest-rate risk. But Fan and Fred have recently been buying back their own securities; each now holds 30% of all mortgage-backed securities outstanding. Simply put, they are re-assuming interest-rate risk. Not necessarily a terminal practice when interest rates are stable, but dangerous if rates turn volatile."

We know Fan and Fred and their federal co-conspirators in Congress (called committee "oversite", or fox guarding the hen house) are in part to blame for the current meltdown and housing crisis. The like to blame a corporate "greed", but it's bad loans chasing even worse risks. Then there is today’s alarming editorial in WSJ that points out that in addition to our $6.6 trillion debt held by the public (up from $5.3 trillion a year ago), you and I are guaranteeing $5.3 trillion in Fannie and Fred liabilities!

So I ask you, what if there had never been a Fannie Mae or Freddie Mac?

“In 1938, the Federal government established Fannie Mae to expand the flow of mortgage money by creating a secondary market. Fannie Mae was authorized to buy Federal Housing Administration-insured mortgages, thereby replenishing the supply of money to lend to future homeowners.

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders to ensure that there was funding available for future homeowners. Freddie Mac purchases single-family and multifamily residential mortgages. They help homeowners and renter get lower housing costs and better access to home financing.” from Singing Blog

So Fannie is a holdover from the Depression era and Fred from the 70s. Maybe they should have been killed off when WWII and not FDR's socialist programs restored the economy? In theory, the interest rate is supposed to be 1/4 percent lower, but considering how mortgage loans have fluctuated from 4.5% (about 5 years ago) to 10.5% (about 22 years ago) during my own mortgage commitment years (we've owned 5 homes since 1961), how really has that 1/4 percent made a difference to home owners, who seem to find the means no matter what the rate, other than to encourage bad behavior and poor credit? Plus, it's one more playground of regulation for the likes of the Barney Franks of Congress. In truth, I can't blame all this on the old Barn--he hasn't been in charge long enough to have created all the mess, but I'd like to see every chair of that committee still alive and not in a nursing home testify before the American people about why we the people need Fannie and Fred and to hear a few mea culpas.

More of what got us to our financial meltdown in housing

Have you noticed that the GSEs Fannie and Freddie are front and center of the stimulus?

"Before Wall Street screamed bloody murder at the opening of 2008, President Bush was resisting pressure to lift the financial limit on the mortgages Fannie Mae and Freddie Mac purchase and securitize. The Office of Federal Housing Enterprise Oversight (OFHEO), the GSEs’ wimpy watchdog, also objected to lifting the limit and continues to do so post stimulus agreement. The present GSE limit is $417,000. The stimulus would snap the cap to $625,500, and to $729,750 in extra pricey housing markets. Allowing Fannie and Freddie to purchase and securitize jumbo mortgages, the oversize loans MBS investors now shun as too risky. Link

How we got here--a quick review



HT Taxmanblog

Foreclosure counseling

Yesterday I was listening to 700 am in Cincinnati and heard an ad for Hope Now Alliance which was all warm and fuzzy about helping people facing foreclosure. "Betcha they put them there," was my response to the radio. So today I looked them up. Yessiree, same old gang that put people into homes with "gift" downpayments, and balooning mortgages and probably did no credit checks or background sifting are part of this group, thrown together to get more government money for foreclosure counseling when they were about to loose their sorry as- jobs in the mortgage industry.

So how does a floundering GSE with ties to Congress and in the tank lobbyists for Obama (if no party is mentioned, assume Democrat, because Republicans are usually noted) put on a Santa Claus face?

"Freddie Mac** has instructed its national network of mortgage servicers and foreclosure attorneys to stop all planned foreclosure sales and evictions involving Freddie Mac-owned mortgages during the holiday season.

The move is designed to give more homeowners facing foreclosure or eviction additional time to take advantage of the newly announced streamlined mortgage modification program, says Freddie Mac CEO David M. Moffett.

This should allow homeowners to work out agreements with mortgage services to avoid foreclosure. All foreclosure sales slated from Nov. 26, 2008, to Jan. 9, 2009, will be temporarily stopped. The program applies to single-family and 2-4 unit properties.

Not all these apples are bad, but I wouldn't want to be in the same basket with ACORN and La Raza, one a communist agitation group spoiling many elections with illegal voters, the other wants the SW to return to Mexico.

Members:

ACORN Housing Corporation
Catholic Charities USA
Citizens’ Housing and Planning Association, Inc.
Consumer Credit Counseling Service of Atlanta
HomeFree- USA
Homeownership Preservation Foundation
Housing Partnership Network
Mission of Peace
Mississippi Homebuyer Education Center- Initiative
Mon Valley Initiative
Money Management International, Inc.
National Association of Real Estate Brokers- Investment Division, Inc.
National Community Reinvestment Coalition
National Council of La Raza
National Credit Union Foundation
National Foundation for Credit Counseling, Inc.
National Urban League
NeighborWorks America
Neighborhood Assistance Corporation of America
Rural Community Assistance Co.
Structured Employment Economic Development Co.
West Tennessee Legal Services, Inc.

**Who is Fred? The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), commonly known as Freddie Mac, is an insolvent government sponsored enterprise (GSE) of the United States federal government.

The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. The U.S. government seized control of the mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), called GSEs, in September 2008, placing the liabilities of more than $5 trillion of mortgages onto the backs of the U.S. taxpayer.

Change we can count on

I don't know about the rest of you, but I'm feeling much better about Obama's change these days. All those Clinton retreads. It's like a family reunion, although they never really left the beltway, just opened "think tanks." Not that the Bush people will be any different. It's what keeps that place going. Also nice to see that they'll probably opt for private school for their daughters. God forbid a wealthy politician who owes the NEA big time should ever support private education for the poor or middle class with vouchers. Nope. The only change I see is the value of my 403-b and my stock portfolio. Just a dab of change left. And he's promising to take even what little's there by taxing more businesses to give me itsy-bitsy perksies. Thank you Democrats for all you've done for us to make our investments worthless while you sat on your fannies.

Setting the Record Straight on GSE's role in the economy

Since we're in for another round of FDR type "fixer-uppers" to weigh down the economy, the response to who's at fault is up at the White House Web page. Even if you're an avid Bush basher, you really ought to take a look, because your 401-k or 403-b has been just as damaged as mine, but for some reason, you just might think that by raising taxes, you'll get some back. Don't think it works that way--at least it didn't in the 1930s.

The chronology starts in April 2001 with the FY 2002 budget, "the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity." (2002 Budget Analytic Perspectives, pg. 142)" Democrats forget Bush inherited a recession and was probably trying to figure out how to fix it. Having poor people borrow both the mortgage and the down payment from the government was not a healthy way to go. Foreclosures were already showing that.

Read all the way through to August 2007 (chronology ends in September 2008), the last time I think this steam roller could have been halted and around the time I started blogging about it: "August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options." (President George W. Bush, Press Conference, the White House, 8/9/07)" I even wrote a poem about it in September 2007--not only were Barney and Chris not listening to the President, they weren't listening to Norma! Once the Democrats controlled Congress, there was no turning this thing around. Now they get the whole sticky wad.

Obama's team was much faster at taking advantage of this problem (by lying) than was the disorganized, flabby McCain team, so most of you bought into the, "it's the President/Republicans fault" meme and that action was needed immediately. I've spent more time deciding what to have for Thanksgiving Dinner than these Porkers did figuring this one out. We'll stay in this mess until someone smart about not raising taxes figures it out. I'm already retired, so please hurry up!

We own Fannie and Fred, let's investigate

"Now that Fannie Mae and Freddie Mac’s failures have forced the federal government to put both into conservatorship — costing taxpayers some $200 billion — Americans, who now own the two entities, are entitled to know what role the government-sponsored enterprises (GSEs) played in creating this mess." Here.

Will Nancy, Frank and Chris ever allow this? Barney Frank claims he didn't know his partner 20 years ago was running a gay sex ring out of Frank's home, and 2 years ago he stonewalled an investigation of Fannie. He's not going to get smarter, folks. Throw him out.

"So why didn’t Congress do anything about these taxpayer-financed “bastions of privilege” sooner? Lest anyone ask questions about what they were up to, Fannie and Freddie also showered elected officials on Capitol Hill with campaign cash to keep their mouths shut and vociferously defend their accounting practices."

The bad news, the good news

Burning down the house.



The bad news is that Obama will probably be our next president; the good news is the Democrats have screwed him with the subprime crisis. He probably won't have any money to spend--but then, neither will we!

Dear George, Henry and Ben

Your bailout stinks. In a few months you'll be gone and you are handing the Democrats a federalized economy while you're still in office, what they planned for later on in the Obama years. You're not even going to make them work for it! I don't want to blame this all on President Clinton, because he had a Republican Congress to work with, but getting a home loan used to be very different before the mid-90s. It took 20% down, and our housing cost couldn't exceed 35% of our monthly after tax income. It's possible that since you guys are all rich, you've forgotten how we ordinary folks scrimped and saved and did without to pay our mortgages. Then someone brilliant decided we needed to move everyone into "the American dream," without considering who could or would pay. Then we got the NINJA loans, and even wealthy people took advantage of your lax no interest, no assets loans during the housing bubble. Yes, some minorities and poor people got into homes, most of which they couldn't afford. Again, I don't blame just the Democrats--I seem to remember something laudatory about this in the last State of the Union address.

You, President Bush, proposed in 2001 and 2003 the overhaul in the housing finance industry. It was blocked by liberal Democrats. That's a failure of leadership; we can't blame only the Democrats. Then Senator McCain with three other Senate Republicans tried to reform the government’s involvement in lending in 2005 and again that was blocked by Democrats. So he's not the "can't we all get along guy" that he thinks he is. And Obama? He was missing in action or not on board. (Why is this guy always out of the room when an important vote is taken? He's actually getting points for his absenteeism!)

Maybe you think I’m excusing you, but I’m not. You are the leaders. Why did you let the Democrats bamboozle us, and why put them in charge again when they've made such a mess? Now you are going to make the tax paying, honest, bill paying American pay for the mistake the two parties made together? Barney Frank and Chris Dodd are the reigning Democrats in banking and finance, and the rules were changed during the Clinton administration and it was former members of his administration who drove these GSEs into the ground and walked away with Golden Parachutes.

Tell me why, George W. Bush, should we bail out these bad, bad decisions made at the federal level by the Democrats in Congress and your administration?