Second Anniversary: Fannie & Freddie Government Protection Program
Tuesday, September 7, 2010 at 10:15AM It's hard to believe, given the incompatible realities of the anemic economy and the stalwart insistence of the Federal Reserve, Treasury Department and Andrew Ross Sorkin that things would have been so much worse without the bailout, that it was exactly two years ago that the government first moved to subsidize the ailing government sponsored entities (GSE's), Fannie Mae and Freddie Mac, whose stock prices now hover at around 30 cents.
Yet, today marks the second anniversary of that first step in what became a multi-trillion dollar bailout and subsidization of the entire financial sector. On Sunday, September 7, 2008, the government announced it would buy $200 in preferred stock in Fannie and Freddie (their stock prices subsequently plunged as trading opened on September 8, 2008), followed by another $200 billion round of purchasing in February, 2009. As a quiet Christmas Present last year, Treasury Secretary, Tim Geithner, raised the cap on how much stock the government could purchase to keep the entities afloat - from $200 billion a pop, to - ready for it? - an unlimited amount.
In the past two years, the Treasury Department has explicitly purchased $220 billion of mortgage-backed securities (MBS). It has increased guarantees for the Government National Mortgage Association (GNMA) to $398.4 billion and for the Federal Housing Authority to $365.9 billion. The Fed has bought another $1.4 trillion of GSE mortgage backed securities. And, according to the July Sigtarp report, the government is providing an implicit guarantee of $5.5 trillion for Fannie/Freddie and $1.3 trillion for the Federal Home Loan Bank (FHLB).
Considering that the balance of sub-prime loans at these agencies was only about half a trillion dollars worth, it would seem that this method of excessive, strategy-devoid subsidizing remains - well - haphazard, expensive, and reckless. Far more efficient and economical would be extracting the non-performing loans from their securitized container and forcing their restructuring to benefit the borrower and thus, the related security in which that loan lives, rather than throwing a whole pile of money at the general entity without pinpointing and separating of the worst loans, and thus, providing a more cost-effective remedy to the problem.
Since almost everyone's mortgage lives somewhere within the GSE framework, it's in all of our best-interests to find a solution. This kind of bottom up approach to bailing out and subsidizing has always made more financial sense - to me, anyway.
Andrew Ross Sorkin, Bailout, FHLB, Fannie Mae, Fed, Freddie Mac, GNMA, Second Anniversary, Tim Geithner 
Reader Comments (5)
My daughter has a $200,000 loan on her house. Market value today is $145,000. Would it be the end of the world if Loan holder went to her and said we will restucture your loan, so the loan would now reflect market, and be $145,000. Loan holder has the same payment macking occupant and not someone who would walk away. Is this way to simplistic a thinking?
My daughter has a $200,000 loan on her house. Market value today is $145,000. Would it be the end of the world if Loan holder went to her and said we will restucture your loan, so the loan would now reflect market, and be $145,000. Loan holder has the same payment macking occupant and not someone who would walk away. Is this way to simplistic a thinking?
But wouldn't that interfere with the derivative involvement of JP Morgan Chase, Goldman Sachs and Morgan Stanley with the two GSEs?
Alas, it appears the US dollar is based upon mortgage loans....
Tom,
It wouldn't be the end of the world for your daughter to negotiate to reduce her loan principal, if she is in a position where the alternative is foreclosure, nor is the thinking too simplistic. Banks require more information to consider approving a restructuring or a voluntary foreclosure, than they do to provide a mortgage to begin with, so she would have to prove both financial hardship / change in status while simultaneously proving she is in a position to pay the newly negotiated payments, she would have to gather all her financial statements, tax returns, deed of sale, etc before initiating the process. Chances are it would be a long haul
And Sgt Doom,
As for the derivative involvement of the big banks - technically, it is better for the value of securitized assets to have the loans within them written down to a level higher than what the market would pay in the event of a foreclosure and thereby retain a steady, uninterrupted flow of payments into that asset. The reason this isn't happening in general, is because banks got bailouts and subsidies for those assets, so they have no reason to care about the restructuring of the loans inside them. In other words, if you own a car with a faulty engine and someone offers to buy the car without you having to fix it, would you rather do that, or have to go about the effort of trying to fix the engine?