Tuesday, July 26, 2016

More Fun With Fannie & Freddie

After the housing bubble fiasco near the end of
the last decade, one would think that Fannie Mae
and Freddie Mac would have been sufficiently
chastised and taken to the woodshed, so to speak.
That little episode begat the biggest recession in
many a year in these United States; it knocked your
beloved Peasant to the curb along with many other

But Washington has found a way to help these two
mischief makers continue to dominate the mortgage
market for a long time to come. First, a little back-
ground information:

Before the aforementioned financial crisis, the Bevis
and Butthead of mortgage finance owned or guaranteed
over $5 trillion (!) in mortgage debt. When the housing
boom popped with the housing bubble, a $188 billion
bailout was forced upon the taxpayers. Then, the
Federal Housing and Finance Agency that supervises
these troublesome twins has decided to become the
preserver, and enabler, of their market share. What
this means is that the FHFA has been encouraging
the use of further complex financial instruments to
keep Fannie and Freddie in a prominent position
within this huge market.

The dubious duo then began using collateralized debt
obligations (CDOs) to dump much of the mortgage risk
that they are holding. The CDOs are a means of purchasing
insurance to protect against the risk that more than a few
mortgagees default on their mortgages. It seems that it
never occurred to them that they should not hold these
risks to begin with, so as to negate the need for taxpayers
to have insurance. Fannie and Freddie are selling the CDOS
to investors in the private sector, who in turn receive
generous yields for their assuming much of the default risk
in the bundle of mortgages held by the Fs (Gee, what a handy
and fitting way to refer to these wayward organizations!).

As the two companies are backed by Uncle Sam and can
therefore borrow money at incredibly low rates, there is only
political motivation to create this instrument --- but that
seems to be reason enough in Washington. It certainly is a
means of thwarting reform-minded members of Congress
to either overhaul Fannie and Freddie, or shut them down.
Private investors find the deals most tempting, and a
guarantee to taxpayers is included in the blend, that being
having the taxpayers made to pay for the redemption of these
instruments if anything were to go wrong, custom-made for the
juiciness of it all to investors. Fannie Mae executives swore
up and down that this would not happen, but guess what?
It happened!

That is another item for the next Republican president and
for Congress to write on their to-do list, should a GOP candidate
be elected this November and Congress kept in that party's
hands as well. Either seriously reform this gruesome twosome,
or close them for good! No more "too big to fail" scam jobs
to ensnare the taxpayers with!


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