Odd Ducks Freddie and Fannie: Example No. 17 of Government Intervention Run Amuck

"...[T]he vast majority of mortgage securities sold in the last six months" were offered by Fannie Mae and Freddie Mac, semi-public enterprises that are neither ducks nor geese, human nor animal; i.e. neither totally public nor private corporate entities. (Source.)


[Image thanks to Patricia Piccinini, an Australian sculptress, through About.com]

The Legislature created them in the 1930s and 1970s in order to help people of modest means acquire their own home; but--and this is typical of government well-meaning ventures of this type--the latest mortgage crisis has revealed that many of the people who obtained loans over the last four or five years should never have passed through the financial screening process from a banking point of view.

Yet still the impractical goal holds the minds and wills of our legislators today:

"'I want these companies to help with affordable housing, to help low-income families get loans and to help clean up this subprime mess,' said Representative Barney Frank, a Massachusetts Democrat and the chairman of the House Financial Services Committee. 'Otherwise, why should they exist?'" (Source.)

Excellent question, especially when one realizes that Freddie and Fannie were two of the originators of "this subprime mess" (among others).

Both organisms get most of their funding from the public sale of shares, but the line to the government purse is in place, "just in case." This dual line of financing is at once their saving grace and their Achilles Heel, because management has to please two benefactors.

Unfortunately, however, there is a golden rule that says, “No one can serve two masters, because either he will hate one and love the other, or be loyal to one and despise the other." (Luke 16:13).

In trying to please both, Freddie and Fannie have take on a precarious amount of leverage (i.e. they have borrowed way over their credit limit). The market allowed them to do this because of their seeming immunity to the effects of negative market forces, which immunity springs from their position as semi-governmental agencies. The government allowed them to do this because of their above-mentioned goal.

Both companies are about to face a crisis based upon this double role they have been trying to play. They may surmount it; but to do so they may have to dip into our tax money if their regular private sources of capital dry up.

I would hate to be in their CEOs' shoes over the next few months.

Here are two easy-to-read links that will inform you of the situation:

This Wall Street Journal article from today's paper; and

This nice graphic from an earlier New York Times piece.

There's another golden rule that we the voting public may learn in due course: When governments intervene in the marketplace, unintended forces will evolve, and they often run amuck of even the best of intentions.

Blog Commentators Make More Sense than Our Politicians

Every now and then, I'm reminded that your average citizen is not as dumb as some would take him/her for.

A government committee is now proposing to have holders of subprime mortgages compromise with their mortgagors, in order to get our housing boom/bust situation solved and avoid painful foreclosures.


[This illustration is called "Select committee" for some reason. Buy this poster and other beautiful ones from allposters. com.]

All this political posturing is nothing more than grandstanding. First of all, a mortgage is a contract, just in case no one is noticing. You cannot simply wave a wand and renegotiate the terms of a contract because you find it convenient.

Second of all, the mortgagees who are sitting around a table with Treasury Secretary Paulson, going "Yes of course, good idea," have got their fingers crossed behind their back. They are going along with the show but probably have no intention of making any great effort to see that the government's wishes are carried out. In other words, they know that this is grandstanding.

I've read a lot of commentary about this latest federal plan to solve the crisis, among them today's post at the LAland blog at the LA Times website. The suggestion is, in a nutshell, to freeze the introductory rate of the ARMs so that they don't reset higher for several more years.

I had to go no further than the seventh out of 57 comments to find Tim K., Nov. 30, 8:02 a.m., making great sense and explaining in clear English why you can't just change the terms of these contracts--a problem that very few experts (other than gadfly me) have mentioned to date, to my great chagrin. Here is Tim K's simple explanation:

"This will not have any appreciable effect, because the number of loans that will be allowed to [freeze] at introductory rates will be astonishingly small.

"The reason is this - most of the volume of the loans which were made are no longer held by the banks themselves. They have been bundled into SIVs that are held in retirement accounts and pension funds. An example:

"Suppose you bought into Tim's Super Fund, which yields 7% interest over 10 years. This fund was made up of loans which were purchased from hundreds of banks. You, as an investor, bought $5000 of this, expecting to get your $5000 back plus interest after a few years. Now, imagine, that someone from the government orders that these homeowners don't have to pay the expected rate. What happens to your 7% rate? Right, it goes WAY DOWN. Maybe even NEGATIVE. Who would buy into that fund in the future? What value does it have now?

"That's precisely why this will not happen. The naive folks putting together this bill will come to this realization, and like Arnold S, will find out that in fact, this affects less than a few percentage of the total distressed homeowners. But [these few have] already made waves, so for political reasons, [the politicians] will announce it anyway showing 'we care, we're doing something' when in fact, this will have almost no effect at all."

Must I say more?

It's so gratifying to see that the "common mortal" is still out in that misleadingly silent void we sometimes mistake for a black hole of common sense. Thanks, Tim K. You make me realize I'm not spouting off in a vacuum.

And another thing: Why is no one trying to round up those mortgage brokers who filled out all those fraudulent applications? And don't tell me we have to pass a law saying it is illegal to fill out fraudulent mortgage applications. It may not be illegal to sell too much house to someone who can't afford it, and maybe we can't prove that these people lied outright; but it's surely gross negligence not to verify someone's credit and income. (Is anyone out there a legal expert who can comment on this?)

Come on, all you ambulance chasers. Stop chasing ambulances and start hunting for mortgage hucksters and those who hired them. Let's clean up the mortgage business from the ground up, instead of asking the government to do everything for us.

The Real Face of This American Tragedy

Once again, I had to go to France to get a fabulous video about the U.S. mortgage crisis.

You must watch this piece. You will not see it anywhere else. It was made by a Frenchman, but the dialogue is in English.


[Thanks to Philippe Grangereau, libelabo.fr for this image from his video.]

He is a blogger with the Liberation newspaper in France. Here's his blog post. The story takes place in Cleveland.

Folks, this is 1929 with a difference. This time, the damages are being wreaked to specific targets and not to the general population--at least not yet.

I know there is blame all around, that people shouldn't be so stupid as to get themselves into these mortgages and debt overload. That is definitely true.

But the main point I take from this video is that we all knew this was coming. It's just like Katrina, and almost as violent. The BIS (Bank of International Settlements) knew it, the Federal Reserve Board knew it, the government knew it, the semi-government lenders like Freddie Mac and Fannie Mae knew it, the financial companies knew it (or should have, although they were blinded by the inebriation of speculative excess), all the mortgage companies and banks knew it, the mortgage brokers knew it ... and no one did anything.

An American disgrace. I am ashamed. I'm not laughing tonight.

The most pointed comment on this video/blog post says this (my translation):

"Slowly but surely the world population gets poorer, with more precarious employment and reduced purchasing power, while a minute part lives in increasingly showy opulence. The damned of this earth will end up rebelling sooner or later; and then, watch out for the damages !!"

Even though this commentator sounds like a "bleeding-heart liberal" (liberal in the American leftist sense), I can't help but note the truth of his sentiment. Whether or not the world population is really getting poorer is immaterial. The majority of onlookers to this fiasco believe it to be true. And just as the terrorists use fear to achieve their goals, so the leftists will use our empathy about this outrageous moment in history to win the battle between freedom and centralism, just as Franklin Roosevelt did back in the 1930s.

Federal Reserve Governors: Watch this video, and then find the courage to tell us that you've been doing your job. Where have you been for the last six to eight years? You go to those BIS meetings where you have been discussing these problems. And what about the loose monetary policy that has certainly encouraged this housing bubble in the first place? Shame on you.