Results 1 to 9 of 9

Thread: The "Nationalization" of Fannie Mae and Freddie Mac

  1. #1
    Defense Moderator
    Defense Professional
    Lei Feng Protege
    xinhui's Avatar
    Join Date
    17 May 06
    Posts
    7,980

    The "Nationalization" of Fannie Mae and Freddie Mac

    Emerging Lessons on Fighting the Financial Crisis
    Emerging Lessons on Fighting the Financial Crisis - WSJ.com
    *
    By DAVID WESSEL


    Although few realized it at the time, the devastating financial crisis began when money markets seized up in August 2007, prompting the first responders at the Federal Reserve and European Central Bank to act. With the modicum of hindsight that three years offer, what do we know now that we didn't know then?

    A few lessons are widely accepted: Unfettered, poorly supervised finance can be dangerous to economic growth. Bankers and financial engineers do what rules encourage and permit, even if it means trouble later. Regulation was less than optimal, if not negligent. And borrowing heavily in good times in the hope they'll last forever is as imprudent as it sounds for homeowners and big bank CEOs.

    A few other conclusions, though, are in dispute or are underappreciated. Here are three:

    Government, which did fail to head off the crisis, saved us from an even worse outcome.

    Hostility to the Bush-Paulson-Geithner-Bernanke (and largely Obama-blessed) bank bailouts, Obama fiscal stimulus and Fed meddling in markets is proof the public doubts this. (Full disclosure: My book, "In Fed We Trust," credits the Fed with a major role in averting another Depression.) Experts debate whether the Treasury and Fed were too soft on the banks and the bankers when they rescued them, about how much the Obama stimulus accomplished, and whether it was the right size and shape.

    Those important arguments obscure the really big question: If the government hadn't done what it did, would unemployment be higher and the recession have been deeper and longer?

    No one can answer a what-if question with certainty, and those skeptical of the potency of government spending won't be persuaded by economic models that assume government spending is potent.

    But we know now that the economy was imploding in late 2008. We know now with detail how paralyzed financial markets were, and how rotten were the foundations of some big banks. We know now that even after all the Fed has done, we still risk devastating deflation.

    So the short answer has to be: Yes, it would have been far worse had the government failed to act.

    The biggest single bill to taxpayers will come not from a bank bailout, but from mortgage giants Fannie Mae and Freddie Mac.

    Most people believe big Wall Street banks got bailed out and continue to profit from low interest rates. That's true, but many banks have paid back taxpayers with interest. Fannie and Freddie, though, burdened by huge mortgage portfolios, have taken $145 billion so far. In a new analysis, Alan Blinder of Princeton University and Mark Zandi of Moody's Analytics put the ultimate price for saving them at $305 billion.

    That compares with $71 billion in estimated costs to the Federal Deposit Insurance Corp. for closing failing banks, $38 billion for American International Group, $29 billion for General Motors and its finance arm, GMAC, and somewhere between zero and a profit for banks in which taxpayers invested directly, according to the Blinder-Zandi calculations.

    The government didn't nationalize the banks. Someday, it will sell its stake in GM. But it nationalized the mortgage market and hasn't found a way out. So taxpayers keep pumping money into Fannie and Freddie at a rate of greater than $1 billion a week.

    The overall cost to Americans as taxpayers looks less than feared initially; the human and economic toll greater.

    In narrow budget terms, the rescue of the financial system won't cost as much an initially estimated. The Congressional Budget Office has cut its estimate of the ultimate cost of the Troubled Asset Relief Program (which doesn't include Fannie or Freddie) to $109 billion from $350 billion and probably will reduce it further later this month. Bank losses are simply less than initially thought. In October 2009, the International Monetary Fund estimated U.S. banks would take write-downs of $1.085 trillion. By April 2010, it had reduced that by almost 20% to $885 billion. Officials at the Fed whisper that they may not lose a nickel on all their extraordinary lending.

    But only the profoundly pessimistic in August 2007 imagined how deep and prolonged the recession would be, how much federal tax revenues would fall and thus how much the government would borrow, and how many would be out of work for so long. "The most pressing danger we now face is unacceptably weak growth and persistent unemployment rather than outright economic collapse," Peter Orszag said in his last speech as White House budget director.

    So the good news is that we're not in a Great Depression. The bad news is that an army bigger than the entire population of Los Angeles has been out of work for a year4.3 million peopleand that just counts those still looking for work.

    No wonder there's so much skepticism about the efficacy of fiscal stimulus, and such strong resistance to even think about doing more.

    Write to David Wessel at capital@wsj.com
    the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all -- Joan Robinson

  2. #2
    Defense Moderator
    Defense Professional
    Lei Feng Protege
    xinhui's Avatar
    Join Date
    17 May 06
    Posts
    7,980
    U.S. Treasury, Morgage-Lenders Seek to Keep Government Role in Housing Fix
    By Lorraine Woellert - Aug 17, 2010 9:00 PM PT

    U.S. Treasury, Morgage-Lenders Seek to Keep Government Role in Housing Fix - Bloomberg

    8/17 Berman Says Mortgage Market Needs Private Capital

    Play Video

    Aug. 17 (Bloomberg) -- Michael Berman, chairman-elect of the Mortgage Bankers Association, talks with Bloomberg's Peter Cook about today's Treasury Department summit on housing finance and the outlook for the mortgage-finance industry. (Source: Bloomberg)

    The Obama administration, looking to overhaul the U.S. mortgage-finance system, gathered support from lenders and the real estate industry for reducing, without ending, the government’s role in insuring loans.

    A limited government backstop “has a lot of traction,” said Michael Berman, chairman-elect of the Mortgage Bankers Association, in a Bloomberg Television interview after a Treasury Department conference in Washington to discuss proposals. “At either of the extremes -- either a full nationalization or a full privatization -- we’re not in the mainstream.”

    The Obama administration is seeking advice on how to rebuild a system at the center of the 2008 credit crisis. Some Republicans have sought to abolish Fannie Mae and Freddie Mac, the main sources of U.S. mortgage financing. Yesterday, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the system.

    “To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said at the meeting. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

    Fannie Mae, based in Washington, and Freddie Mac of McLean, Virginia, have drawn almost $150 billion in Treasury aid since September 2008, when they were seized by the government amid soaring losses on mortgage investments. The U.S. has promised unlimited support for the two companies. Including Ginnie Mae, the government insured almost 97 percent of U.S. mortgages in 2009, according to Inside Mortgage Finance.

    ‘Carefully Designed Guarantee’

    “There is a strong case to be made for a carefully designed guarantee in a reformed system,” aimed at providing access to mortgages, even during economic slumps, Treasury Secretary Timothy Geithner said. “The challenge is to make sure that any government guarantee is priced to cover the risk of losses and structured to minimize taxpayer exposure.”

    Some government involvement is needed to ensure that markets traditionally underserved by lenders have access to credit, mortgage lenders and housing advocates said. The Federal Housing Administration, created in 1934, insures loans to borrowers with little cash.

    Private lenders provide “virtually no mortgage finance in lower income and communities of color,” said Ellen Seidman, an executive vice president at Chicago-based ShoreBank Corp. “We’ve got to pay better attention to access to credit.”

    Congressional Overhaul

    Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, has begun work on overhaul legislation and will hold hearings in September. Geithner has promised to deliver a “comprehensive” plan for the housing-finance system by January. Yesterday’s meeting was also hosted by the Department of Housing and Urban Development.

    During debate over the financial-regulation overhaul signed by President Barack Obama last month, Republicans were rebuffed in efforts to abolish Fannie Mae and Freddie Mac. Led by Senator John McCain of Arizona and Representative Jeb Hensarling of Texas, Republicans say the firms were driven to ruin by their competing missions -- serving shareholders as publicly traded companies and promoting homeownership among lower-income borrowers as government-sponsored entities.

    The question remains how a new guarantee would work. Ideas at the meeting included a government backstop of last resort for some mortgage-backed securities.

    The challenge is to encourage private investment and contain taxpayer exposure, said Ingrid Gould Ellen, director of the Furman Center for Real Estate & Urban Policy at New York University, during a panel discussion.

    “A government guarantee is critical,” she said. Still, “you want to limit the scope of the guarantee.”

    To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.
    the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all -- Joan Robinson

  3. #3
    Global Moderator
    Dirty Kiwi
    Parihaka's Avatar
    Join Date
    10 Nov 04
    Location
    Wellington, Te Ika a Maui, Aotearoa
    Posts
    18,146

    Some government involvement is needed to ensure that markets traditionally underserved by lenders have access to credit, mortgage lenders and housing advocates said. The Federal Housing Administration, created in 1934, insures loans to borrowers with little cash.



    Ummm, isn't that a key factor in causing the current problems?
    In the realm of spirit, seek clarity; in the material world, seek utility

    Gottfried Leibniz

  4. #4
    Global Moderator Defense Professional JAD_333's Avatar
    Join Date
    15 Apr 07
    Location
    Virginia
    Posts
    9,945
    Quote Originally Posted by Parihaka View Post
    Ummm, isn't that a key factor in causing the current problems?
    I believe he was speaking relative to how the gov't had been doing it before Fannie Mae and Freddie Mac imploded. Both were odd creatures. Congress made them public corporations so they could issue stock to raise money, but then they did a couple of stupid things. First, they exempted their common stock from Securities Exchange Commission (SEC) oversight. Then they gave them the power to draw funds directly from the US Treasury. So, here we had a corporation whose shares were traded like any other public company, but unlike other public companies had an unlimited source of capital (taxpayer money). It's was an investor's dream. You could buy stock in a company and never worry about it running out of cash. And what's more, their having an unlimited source of capital effectively killed off the competition. The trouble started when investment banks invented a new derivative, the mortgage backed security (bundling mortgages). This paper became so much in demand that the investment banks were buying mortgages that Fannie Mae and Freddie Mac had depended on to generate interest income. Now they had competition. Prior to say about 2004 Fannie Mae set pretty high standards for the mortgages they would buy, but by 2005 they were struggling to find quality mortgages. To compete they lowered their standards and began to buy sub-prime and no-doc mortgages. When the housing bubble burst, they had billions in crappy mortgages. The rest you know.

    Interestingly, a few years before Fannie's nosedive, the Bush administration sent two mid-level bureaucrats to testify before the House Finance Committee (Rep Barney Frank's turf) to ask for more oversight authority over Fannie Mae, as it was buying too many low-quality loans. The committee members took their testimony as a veiled criticism of liberal lending to low-income minorities and pretty much showed them the door.

    Fannie Mae's stock sells today for around 38 cents. Just 2 years ago it was $65.
    To be Truly ignorant, Man requires an Education - Plato

  5. #5
    Defense Moderator
    Defense Professional
    Lei Feng Protege
    xinhui's Avatar
    Join Date
    17 May 06
    Posts
    7,980
    Quote Originally Posted by Parihaka View Post

    .


    Ummm, isn't that a key factor in causing the current problems?
    a major factor but not the key. The key factor is the repackaging of those loans as security for the foundation of the house of cards.
    the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all -- Joan Robinson

  6. #6
    Global Moderator Defense Professional JAD_333's Avatar
    Join Date
    15 Apr 07
    Location
    Virginia
    Posts
    9,945
    Quote Originally Posted by xinhui View Post
    a major factor but not the key. The key factor is the repackaging of those loans as security for the foundation of the house of cards.
    Xinhui:

    Yes and no. Derivatives made of mortgages isn't in itself a bad thing. The problem was the demand for them was so great, the supply of sound ones could not keep up. The mortgage lenders seeing that the investment banks were hard up for mortgage, began giving them to people who were in no position to repay them. When the investment banks noticed that their later derivatives were not performing well as earlier ones were, they stopped buying mortgages altogether. This left mortgage companies holding billions in mortgages and no new cash to make more. That was the first salvo in the crises which developed. Then the defaults began. Some people liken the whole thing to a house of cards. But it was more like a computer mother board; once one circuit melted down, all the others were bound to stop functioning.
    To be Truly ignorant, Man requires an Education - Plato

  7. #7
    Staff Emeritus
    Military Professional
    Contrary by Nature.
    zraver's Avatar
    Join Date
    22 Oct 06
    Location
    Arkansas
    Posts
    13,255
    Quote Originally Posted by Parihaka View Post

    Some government involvement is needed to ensure that markets traditionally underserved by lenders have access to credit, mortgage lenders and housing advocates said. The Federal Housing Administration, created in 1934, insures loans to borrowers with little cash.


    Ummm, isn't that a key factor in causing the current problems?
    No the undeserved communities represent little risk, even in aggregate. Poor people don't buy overvalued McMansions in bubble markets. They buy trailers and older homes as places to live not as investments. The default rate is low and easily covered by the higher interest rates charged to subprime borrowers. This was Fannie/Freddies primary mission. If they had stopped there all would be good. An example of this is Berkshire Hathaways Manufactured home business. They own the factories and dealerships (Clayton Homes) and the bank (Century 21) in a vertical relationship. Most of their buyers are subprime in the 550-580 range. They lend to people looking for homes, not people looking for an investment. While some people have defaulted during the crisis due to job loss, there haven not been many strategic defaulters.

    The problem is/was middle income buyers buying upper income homes intending to flip the homes. Since they never intended to set down roots they bought using ARM's and only made interest payments. When people stopped buying these homes and the market imploded along with a whole slew of ARM's maturing with an interest rate spike and no equity in the homes people simply walked away from them. This eant even more homes on the market drivign values down more and more people walked away in a deadly circle of defaulting.

    This fed into the mark to market crisis. Even though the initial foreclosure rate was low, mark to market rules forced the banks to show a loss even though most of the mortgages were still performing. This sank public confidence and the value of the mortgage backed securities. no one wanted them so their value fell. As they fell they pulled down banks with them even though most of the securities were still showing a positive cash flow.

  8. #8
    New Member
    Join Date
    26 Nov 13
    Posts
    1
    Fannie Mae, the government-backed home loan insurance company, has achieved a landmark. After receiving enormous amounts in taxpayer funds to stay afloat, Fannie Mae has posted a substantial profit and promises to not take one more dime in federal resources. Lately, there have been a growing number of calls from the public and some lawmakers for Freddie Mac and Fannie Mae principal reductions to be done, as a large number of homeowners are underwater, owing more than their homes are worth. However, it isnt likely to happen.

  9. #9
    Global Moderator Defense Professional JAD_333's Avatar
    Join Date
    15 Apr 07
    Location
    Virginia
    Posts
    9,945
    Quote Originally Posted by joeR View Post
    Fannie Mae, the government-backed home loan insurance company, has achieved a landmark. After receiving enormous amounts in taxpayer funds to stay afloat, Fannie Mae has posted a substantial profit and promises to not take one more dime in federal resources. Lately, there have been a growing number of calls from the public and some lawmakers for Freddie Mac and Fannie Mae principal reductions to be done, as a large number of homeowners are underwater, owing more than their homes are worth. However, it isn’t likely to happen.
    Joe, that is indeed good news, if not new news.

    Welcome to the WAB. Please pop over the intro thread and introduce yourself before you share any more good news with us. Introduction Thread for All New Members
    To be Truly ignorant, Man requires an Education - Plato

Thread Information

Users Browsing this Thread

There are currently 1 users browsing this thread. (0 members and 1 guests)

Similar Threads

  1. Replies: 20
    Last Post: 16 Jul 08,, 21:16
  2. Russian tank "Black Eagle" ("object 640")
    By foxhound_nn in forum Ground Warfare
    Replies: 11
    Last Post: 27 Dec 07,, 05:53
  3. Replies: 44
    Last Post: 16 Jun 07,, 06:11
  4. "Standard sources" get their a$$es kicked again by "substandard media"
    By Leader in forum The Middle East and North Africa
    Replies: 1
    Last Post: 01 Jul 05,, 20:09

Share this thread with friends:

Share this thread with friends:

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •