What do Haiti, Indonesia, Chili, and subprime mortgages have in common?
You Remember FNMAE and Freddie Mac; they were established to protect us, to attract mortgage capital, and to provide securitization. So what do Haiti, Indonesia, Chili, and subprime have in common? The ground quaked, homes were left in ruin, the cleanup will take decades, thousands of casualties resulted, and the scars will be there for generations.
What do 1912, 1938, and 1970 have in common? Those were the years that Titanic One, Two, and Three were launched. I know, you’re thinking that there was only one Titanic, right? Well Fannie Mae was launched as a part of the New Deal to create stability in and to prevent the collapse of the real estate market that we experienced in the Great Depression. That was a titanic mission. LBJ privatized Fannie in 1968 creating a (GSE) or Government Sponsored Enterprise. No taxes, a monopolistic grip on the mortgage market, and no SEC scrutiny. Are the capitalists in the audience drooling yet? In 1970 Freddie Mac, a second GSE was launched. Their combined assets (a large portion of which are poisoned) exceed 1.6 trillion dollars. I have no idea how much that is, but I know it is a titanic number. Let’s hope that 1938, 1968, and 1970 do not become dates that also “will go down in Infamy.” A glance at their combined balance sheets reflects that they have an identical sum for liabilities and stockholder’s equity. The liabilities are real and growing with the foreclosure rate; the stockholder’s equity, well we might as well move that up into the liabilities. In essence, they are under water.
If you follow the debate and the logic (assuming that the new logic is any better than the old logic), Barney Frank and others want to dissolve them both and reassemble the parts. I’m beginning to wonder, “Who’s on first?” There is no question that FNMAE and Freddie were leaders and helped pave the way for a broader and more diverse home ownership in America - that was their role. They have done many good things for the economy and for the individual mortgage holder by helping to create and securitize a secondary market for mortgages and for providing liquidity in the mortgage market. Too bad that their stake in a calamity that they were established to prevent has caused them to outlive their usefulness.
Fannie’s mission appears to be undergoing an internal change from “… ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates” to “… enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers.” This is a subtle or not so subtle shift in philosophy depending on your viewpoint. After tapping the treasury ultimately for $380 billion to cover the losses and clean up, they have little confidence left to inspire and from the indicators it won’t be enough to right the ship. It is most unfortunate that the collective hubris of those who laid the shaky foundation for subprime lending will go largely unpunished. They will be permitted to enjoy their millions in luxury while millions of families toil in the aftermath.
It may be impossible to make the conflicting goals of a GSE and a government takeover work. Fannie and Freddie are not able to attract new capital and the confidence they were to provide has drained as rapidly as has the Treasury. They can only tread water and act as a conduit for federal money. That party is over. With 1) what mechanism do we replace Fannie, and 2) what can be done with their “poisoned assets”? There are potentially several million more seriously delinquent or troubled mortgages in the shadow inventory of foreclosures that will work their way through the system? A social issue requires money, creative thinking, and solutions that don’t come off the shelf.
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