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Michael Gracie

From the “We’ll Keep This Mortgage Mess Unrealistically Propped Up Until It Kills Us” Files

President Barack Obama on fixing the home mortgage crisis (emphasis mine):

Right now, Fannie Mae and Freddie Mac — the institutions that guarantee home loans for millions of middle-class families — are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater — or close to being underwater — cannot turn to these lending institutions for help.

My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee. This will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.

Cutting to the chase:

1) Fannie Mae and Freddie Mac are not just ‘the institutions that guarantee home loans for millions of middle-class families’, they are the the institutions that guarantee home loans for millions of middle-class families, and are wholly-owned by the US Government (i.e. the taxpayers);

2) Given #1, any losses on guarantees must be absorbed by taxpayers, which means the ‘guarantee’ must now be getting extended to an assurance there will be no losses. Further, anyone wishing to sell their home after receiving assistance (many can’t right now – they’re underwater) would create a loss on someone’s balance sheet (i.e. the government’s) against the original mortgage amount. If some restriction is place on post-assistance transactions, the ‘flexibility’ this government action portends to create is dissipated on receipt;

3) Assuming #1 and #2 are totally off base, the lackey of last resort would be Fannie Mae and Freddie Mac bondholders. That group consists of institutions, foreign investors, as well as a bunch of little ol’ grandmas living on fixed incomes. Most of the final category don’t pay any taxes, so I guess the statement ‘And the estimated cost to taxpayers would be roughly zero’ has some merit regardless of outcome;

And finally…

4) The entire idea hinges on the premise that reductions in cash flow will ‘be balanced out by a reduction in defaults and foreclosures’. It’s a balancing act with emphasis on the acting – the first $200 billion pumped into Fannie and Freddie was followed by an increase in defaults and foreclosures.

While the last statement isn’t directly causal, what is would be that as long as housing prices are allowed to remain artificially propped up, qualified buyers who can actually afford the mortgages (that the unqualified cannot) remain on the sidelines.

Wave bye bye to another $200 billion.

Comments

DSflyman says:

I was walking in the alley by my place, and I swear to God, I saw a Unicorn.

Catch it – the government will surely accept a unicorn as collateral. You should get at least 110 cents on the dollar.

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