The Obama administration is working on a plan to liquidate Fannie Mae and Freddie Mac so that future profits from housing sales and secondary market activity flow exclusively to privately-owned banks and financial institutions. President Obama made the announcement last week in a speech in Phoenix saying that he wanted to “wind down” the two Depression-era Government Sponsored Enterprises (GSEs) and put “private capital” at the center of his housing finance reform strategy. He reassured investors and bondholders that the government would still underwrite the pools of loans that are bundled into bonds and sold to investors as mortgage-backed securities (MBS) despite the fact that US taxpayers will receive zero compensation for the explicit guarantee. Obama has abandoned the pretense that economic policies have a public purpose. What matters is profits, Wall Street’s profits. Here’s an excerpt from Obama’s speech:
“The thing I’m here to talk about today: laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again. That begins with winding down the companies known as Fannie Mae and Freddie Mac.”
Obama is being disingenuous. Fannie and Freddie were not responsible for the financial crisis, although the claim is frequently made by right-wing extremists. Private capital caused the Crash of ’08 as this clip from Forbes points out:
“It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending institutions. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations. The nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations.” (“Lest We Forget: Why We Had A Financial Crisis”, Forbes)
Repeat: “More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending institutions.” It was private-label subprime mortgages that triggered the panic in the secondary market that crashed the financial system. This has all been well documented.
Fannie and Freddie only got into the subprime business at the very end to shore up market share, but –as Forbes notes, “The vast majority of subprime mortgages — the loans at the heart of the global crisis — were underwritten by unregulated private firms. These were lenders who sold the bulk of their mortgages to Wall Street, not to Fannie or Freddie.” It was private capital that eased lending standards and produced the ALT As, the piggybacks, the liar’s loans, the ARMs and the other financial abominations that blew up the repo market, collapsed the shadow banking system, and sent global stock markets tumbling. This is the same private capital that Obama wants to use to replace the two GSEs who saved the home finance market from complete collapse following the Lehman default in 2008. Here’s Obama again:
“For too long, these companies (F&F) were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong.
The good news is that there’s a bipartisan group of Senators working to end Fannie and Freddie as we know them. I support these kinds of efforts, and today I want to lay out four core principles for what I believe this reform should look like.
First, private capital should take a bigger role in the mortgage market…. I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market.”
Again; private capital precipitated the crisis. This is not an arguable point. Fannie and Freddie were not engaged in predatory lending, nor were they selling toxic securities to gullible investors around the world, nor were they issuing mortgages to applicants who clearly had no ability to repay the debt. It was the banks and shadow banks. Privately-owned financial institutions are 100 percent to blame for the meltdown; not FDR, not The National Housing Act, (which gave us Fannie and Freddie) not well-meaning but meddlesome liberal politicians, and not Alec Baldwin. Check this out from the Washington Post:
“Private label loans “defaulted at over 6x the rate of GSE loans, as well as the fact that private label securitization is responsible for 42 percent of all delinquencies despite accounting for only 13 percent of all outstanding loans (as compared to the GSEs being responsible for 22 percent of all delinquencies despite accounting for 57 percent of all outstanding loans).” (“No, Marco Rubio, government did not cause the housing crisis”, Washington Post)
Repeat: Private label mortgages defaulted at 6-times the rate of mortgages that were issued by Fannie or Freddie. Obama is propagating a myth in order to hand-over the lucrative housing finance industry to the same people who drove it into the ground. His public relations team has created a narrative that supports his overall goals, which are to terminate the two progressive institutions that made homeownership affordable for millions of working Americans, and to provide government support for a new regime of toxic MBS that the banks intend to generate as soon as the legislation is passed by the US Congress. Here’s Obama again at his Orwellian best:
“No more leaving taxpayers on the hook for irresponsibility or bad decisions. We encourage the pursuit of profit – but the era of expecting a bailout after your pursuit of profit puts the whole country at risk is over.”
Wrong again. There will be defaults, and plenty of them, and taxpayers will be on the hook for the losses, you can bet on it. Mortgage originators who comply with the Consumer Financial Protection Bureau (CFPB) shockingly lax underwriting standards for a “Qualified Mortgage”, will not be forced to refund the money they lend to borrowers who fail to repay their mortgages. So the banks will get off Scott-free for mortgages that default while Uncle Sam will wind up taking the hit. The USG will also stump up 90 percent of the losses on government-backed mortgage-backed securities (MBS) that end up in default, while bondholders will face haircuts of just 10 percent. Check this out from Bloomberg:
“The Corker-Warner bill, sponsored by five Democrats and five Republicans, would replace Fannie Mae (FNMA) and Freddie Mac with a federal reinsurer that would step in only after private capital had taken least 10 percent of the first losses on mortgage securities. The government would step in with more aid during a financial catastrophe. The measure was written with technical input from the Obama administration.”
Obama Endorsement Builds Momentum for Housing-Finance Overhaul”, Bloomberg)
So why should taxpayers pay for the losses of private investors? Investors know the risks of investing, but they accept those risks to earn a higher return on their money. That’s how the game is played, everyone knows this. The taxpayer accepts no such risk nor does he stand to profit if the investment pans out, so he shouldn’t be penalized when speculators’ bets go south. Also, a blanket-guarantee on MBS is a direct subsidy to Wall Street because prospective buyers of MBS will know these complex bonds are as safe as US Treasuries. (which will boost sales.) Why do the banks and mortgage originators get perks that no other industry gets? Obama’s lamebrain idea creates an unfair competition for other investment vehicles. (that don’t have gov-backing.) It’s obvious that the policy was crafted by Wall Street and that Obama is merely acting as pitchman.
Keep in mind, that Fannie Mae and Freddie Mac are currently reporting record profits thanks to tougher lending standards and rising home prices. To date, they have repaid $130 billion of the $190 billion they borrowed from the Treasury during the crisis. It is the profitability of the GSEs that has made them a target of the big banks. Obama is not interested in the homeownership rate, affordable housing, credit availability or even the America dream. What drives the policy is profits, that is, enhancing the profits of Obama’s primary constituents, the big banks. Wall Street has failed to kick-start the shadow banking system (where MBS are traded) because investors no longer trust the securities that banks’ produce. That’s why they need government backing; it’s the only way they can entice investors into purchasing their toxic bonds.
Here’s Shahien Nasiripour and Arthur Delany at Huffington Post with more on Obama’s latest Wall Street giveaway:
“Under Obama’s plan….The private sector would have to shoulder some of the initial losses if defaults were to rise, a condition usually triggered by falling home prices. After that, taxpayers would absorb the remainder of losses stemming from an extreme downturn in the nation’s property market…..The cost of a taxpayer guarantee could be high….. A senior administration official said that the cost of the current system, which helped lead to the financial crisis, was “trillions and trillions of dollars in lost equity that we are still rebuilding.” (“Obama’s Housing Plan: Government To Maintain Significant Role In Mortgages”, Huffington Post)
So all the profits go to the banks, while 90 percent of the losses–which will surely amount to trillions of dollars–will be shrugged off onto working people. This is Obama’s housing finance reform plan in a nutshell. And don’t expect the Consumer Financial Protection Bureau’s new rule on “Qualified Mortgage” to prevent another catastrophe. The QM rule does not require a down payment or high credit scores. It also allows loans “to be deemed qualified mortgages if borrowers are spending up to 43% of their pretax income on monthly debt payments” which is way too high. In other words, the loopholes in the CFPB’s qualified mortgage rule are big enough to drive a truck through. The banks would never issue a mortgage using these absurd underwriting standards, but their lawyers and lobbyists fought tooth and nail to make sure the standards were adopted by the CFPB. The reason for this is obvious; the QM rule creates vast opportunities for abuse and fraud. Expect more predatory lending, more mass defaults, and another housing bubble.
Here’s more from the Dissembler in Chief:
“Let’s make it easier for qualified buyers to buy homes they can. We should simplify overlapping regulations and cut red tape for responsible families who want to get a mortgage, but who keep getting rejected by banks.”
Obama’s animus for regulation is typical of right wingers everywhere. What he means when he says we need to “cut red tape” is that we should provide gov-insured loans to people with credit scores between 620 to 680, in other words, subprime. Now it is possible to provide credit to people with poor credit scores if the are properly screened, but we already know from experience that the exploitative banks cannot be trusted in this matter, so allowing them to issue gov-backed subprime loans is the fasttrack to disaster. But this is what Obama wants, because it beefs up Wall Street’s bottom line.
Obama also wants to expand existing government-sponsored mortgage modification programs (HAMP, HARP) to allow private label loans to be refinanced. The banks are currently sitting on over $1 trillion in non performing mortgages that they want to offload on Uncle Sam to clear their books. Most of these loans are worthless and, in many cases, the occupants of the homes have not made a mortgage payment in 2 or 3 years. Obama wants to shift responsibility for these private-label turkeys onto the government. This is not an attempt to “save homeowners thousands of dollars a year by refinancing at today’s low rates” as the president opines. It’s another bailout.
Dismantling Fannie and Freddie is a uniquely bad idea, just as government guarantees on pools of mortgages issued by proven fraudsters is a bad idea. Do we really need to reiterate that private capital–precipitated the crisis to begin with, or that Fannie and Freddie played a critical role in keeping the credit channel open after the banks had blown up the financial system and reduced the non agency residential securitization market to a smoldering pile of rubble?
What do you think is going to happen next time, Mr Obama, when the next wave of crappy MBS start to default, but no one is there to break the fall because you had the two GSEs dragged to the glue factory?
It’s worth mulling over, don’t you think?
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on declining wages for working class Americans appears in the June issue of CounterPunch magazine. He can be reached at firstname.lastname@example.org.