It is past time to end the conspiracy of silence about Fannie Mae and Freddie Mac, government-sponsored companies that buy and sell mortgages and related securities. Both were taken over by the Treasury Department in 2008. So far Washington has shelled out $140 billion to keep them afloat. A Congressional Budget Office study says their losses could reach $400 billion. Other estimates put them at $500 billion.
In contrast, the net cost to date of TARP, after loan repayments and other government income, is $172.5 billion, nearly half of which is owed by the auto industry.
While optimists foresee the repayment of most TARP funds, the same cannot be said of Fannie and Freddie, which own well over a trillion dollars in risky mortgages and mortgage-backed securities.
Unlike TARP funds, the subsidies to Fannie and Freddie do not show up in the government’s budget. If they did, it would be even further out of balance.
“While optimists foresee the repayment of most TARP funds, the same cannot be said of Fannie and Freddie, which own well over a trillion dollars in risky mortgages and mortgage-backed securities.”
A “risky” or even worse a ‘bad’ mortgage has a low, often a very very low, probability of a successful outcome.
To pour more government money in to bolster “poor” and ‘bad’ mortgages, is to take the taxpayers’ money and to ‘pour it down the drain.’
If the motive for ‘pouring’ this money out of taxpayers’ pockets is based on compassion, then, it is the misguided compassion of a ‘government elite’ charitably assuaging its conscience through the reckless spending of other people’s money. There must be more effective ways of showing this compassion towards those with “risky” and just plain ‘bad’ mortgages.
If the motive for ‘pouring this money’ is based upon the ideology of a small ‘political elite’ that has its hands on the reins of government, its time for the voters to send them a message that will ‘send them packing.’
Any financial reform which does not include a restructuring of Fannie and Freddie, and the repeal of the Community Redevelopment Act, is just a political show. The CRA, a classic example of good intentions, literally mandates a periodic mortgage crisis by requiring the sale of homes to a significant number of people who cannot possibly afford them. Of course the actions of others can amplify or mitigate the problem, but it will reoccur.
What about the ongoing, secret bailout of the banks? Every day they are borrowing from the Fed at zero % and investing in US Treasuries at 3-5%; in essence we are paying banks to borrow from us. It is the same ashoveling money into their vaults.
I have more sympathy for Fannie/Freddie. They were more victims of the market bubble and collapse that was caused primarily by subprime and Option ARMs, neither of which were Fannie/Freddie categories of loans.
“They were more victims of the market bubble and collapse that was caused primarily by subprime and Option ARMs, neither of which were Fannie/Freddie categories of loans.”
No.
Fannie and Freddie became the tools of an ideological fringe-left-wing elite in Congress that is trying to provide home ownership to those who are not ‘ready’ and may never be ‘ready; for the ‘realities of home ownership.’
This “elite” managed to prevail in its ideological quest despite the misgivings of and warnings of others in Congress and in the Executive Branch of the severe risks presented by this ideological quest.
Fannie/Freddie hold $4.3 trilllion in subprime, deficient downpayment (5% or less) and Alt-A loans. They hold another $2.7 trillion in CRA loans. http://www.realclearmarkets.com/articles/2009/11/10/how_did_paul_krugman_get_it_so_wrong_97499.html
The CRA forced banks to make trillions of dollars in bad mortgage loans. The government forcing the financial sector to make bad mortgage loans is what caused the economic collapse and we will suffer the consequences for decades. Bank of America alone was committed under the CRA to $1.5 trillion in mortage loans to people who would not meet the qualifications for a prudent market loan. http://newsroom.bankofamerica.com/index.php?s=63&item=202
And it is still going on.
Sorry, Jim, the article has major errors. 1st, subprime has nothing to do with % down (e.g. VA is 0% down, but it it is not subprime; FHA is 3% down, but it’s not suprime; USDA is 0% down, not subprime either). Pinto is wrong about credit score also; the divide was either 620 or 580. He is also dishonest, as he conflates different categories (subprime, alt-A, low down) in his totals. Krugman (with who I frequently disagree) was correct; the GSEs never did subprime, although they bought a batch as investments.
The CRA contribution is overstated. CRA affected commercial more. The effect on residential was much less. E.g. B of A would offer a $250 discount on a $100,000 loan if it was in a “targeted census tract”. Having seen this all firsthand for 20 years, I would have recommended that Pinto actually go out into the neighborhoods and seen what was actually going on, not what he thought in his cushy Washington office. Of course, he may be engaging in a little self-excusing, given the GSE accounting scandals.
The history of Fannie and Freddie has yet to be written. Undoubtedly it is imperfect, but it did help build the foundations of our current middle class.
Secondly, as African Americans have not benefitted, generally, from the accumulation of income over generations that many whites have (in part because of white flight and redlining), government backed mortgages were a market driven way to help responsible African Americans accumulate wealth.
Fannie and Freddie were more responsibly run than many of the other private banks. Surely it is right that information should be shared and open. But neither are the captains of capitalism so forthcoming or eager to have their own houses placed on the open market. The article makes some salient points, but predictably blames an organization designed to help honest people enter the middle class rather than excoriate the titans of finance who gamble the money of pensioners and taxpayers, and expect us to foot the same bill, their personal entitlements, when they lose their bets with hour money.
Rather Fannie and Freddie than Bank of America, Washington Mutual, or Lehman.