Saturday, September 06, 2008

Freddie / Fannie

A decent tutorial on Freddie / Fannie and the current mess they're in (in layman's terms, which I'm grateful for as I've been wading through all the various news reports).

I know it's a little nostalgic to remember that Freddie-Fannie once served a good purpose in this country to the great benefit of the emerging middle class. The perversion that occurred when they became a pair of half privatized/half government beasts saddens me.

Anyway, here's a bit more from Forbes, tying the timing of this conservatorship action to the grumbling of overseas banks, including Bank of China.

And finally, I think I found this article from the WSJ the most interesting... not so much for the article itself but for the spirited debate taking place in comments. A sample:

From "do your research"...

"This is exactly the type of ignorant ill-advised banter that I would expect to read after such a poorly researched article. A few [true] comments to consider: 1) Thank FRE and FNMA for stability of mortgage rates across the country. Before them, rates varied area by area by over 2% in many cases. 2) Blame the GVT for imposing regulations on FRE and FNMA to mandate the purchase of low-income, underserved, otherwise unattractive borrowers (subprime and alt-a). 3) FRE enforced the strictest underwriting guidelines in the business 3 years ago, in a market that would be even more cavalier if they had not. Ask yourself how bad the bubble bursting would be if it had occurred in an economy without a regulated “quasi-govt” secondary market, where its only wall-street making the plays… much worse is the answer. And the fact of the matter is, FRE and FNMA are more necessary in these times than ever before–to provide liquidity, stability, and affordability to the market even when its not the most profitable business decision on the table. Its easy to point fingers at the two giants in a time where everyone is searching for the scapegoat, but reality is that the roots of the current financial situation are deep and spread across multiple industries, and we’ve been watering them for a decade. Listen to Paulson rather than a presidential candidate, there’s a reason he’s in that chair, and there’s a reason they’re not.

and NO, they would not be profitable if privatized… as monoline companies with capital doubts? The business model is predicated on the basis that the GSEs’ debt is considered to be backed by the full faith and credit of the US gov, therefor they are able to borrow cheaper and charge a reasonable G-fee on their guarantee business. Hope youre not betting on that outcome, because it would be potentially the worst."

From "Keith"...
People please do your research. FNM and FRM did not cause this. Please allow me to remind you of a State of the Union in which President Bush’s first term in which he declared that everyone should own their own home. It was at this time the administration’s friends on Wall Street lobbied heavy to break up FNM and FRM so that they could get into the market. As a result, both FNM and FRM had their ability to buy MBS capped and this allowed B of A, Wachovia, Washington Mutual, etc. to create exotic products such as interest only loans.

The unregulated banks and investment firms started this. FNM and FRM were mandated by the administration a few months back to prop up the market and buy up that bad debt. I have no dog in this hunt, but we must get the facts right.

From "One Big Credit Card"...
I can’t help but comment. Every single person in the United States has benefited from the GSEs. The run up in home prices in the past couple of years, fueled by the low costs of borrowing, have pumped in billions of foreign dollars to the economy. That influx of capital has created the lowest unemployment rates in a century as money flowed from housing to the rest of the economy. In essence, through these GSEs, we have managed to create one giant credit card that tapped into the capital from the rest of the world. People from all over have invested in us and as a result have increased our standards of living. Now, as the rest of world is starting to realize and as most owners of credit cards may encounter, we can’t pay off that debt. If you look on the balance sheets of banks from around the world, you would see that they’ve had to write down billions of dollars in mortgage backed securities. The GSEs have allowed the us to screw over the rest of the world. What’s wrong with that?


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