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BORROWING POWER AND BAILOUTS – REPRISE? (PART II)

April 10, 2014

BORROWING POWER AND BAILOUTS – REPRISE? (PART II)
Mike Crapo, R-Idaho, is a co-sponsor of the bill I discussed in Part I. He is to the right of right wing and I think his real reason for co-sponsoring this bill is that he wants to kill Fannie Mae and Freddie Mac and replace the services they render with Wall Street’s “private capital.” So what do Fannie Mae and Freddie Mac provide in housing financing? They buy loans and package them into securities with guaranteed payments of principal and interest. In other words, they do not offer mortgages; that is the business of banks and others. They buy the loans made by banks and others in the secondary market, package them and sell securities based on such collateral on the open market. The system has worked well up until the Bush disaster of 2007-2008 when the bubble burst and the world nearly fell into depression. This bill is said to be remedial in that it is supposedly designed to see that our recent brush with catastrophe does not recur. Private enterprise in the secondary market would be more efficient, you know. (Perhaps like the private enterprise that recently led the world to the brink with its derivatives?) I think the motives of Republicans are more sinister; like out with gummint and in with Wall Street (and bailout country). I am of the opinion (when emptied of the political blather) that the proposed legislation is actually a continuation of the “blame game” being played out in the legislative halls of Congress. In a nutshell, here is the reality undergirding this proposed legislation. Republicans say that the government was to blame for the housing collapse. Some of their “free-market” advocates even say that the real-estate bubble was caused by Fannie Mae and Freddie Mac in attempting to provide housing to borrowers in underserved communities. That is a stretch, given that neither Freddie Mac nor Fannie Mae sells housing financing on the primary market (though they may influence guidelines for subsequent acquisition of such paper). Others (and I am one of them) say that the bubble and crash were caused by unscrupulous subprime lenders who are to blame for the deteriorating lending standards that brought us bailouts and near world-wide depression.
The out-front argument for and against the bill (per my research) goes like this: (1) Kill Freddie Mac and Fannie Mae and replace the system with one in which MORTGAGES ARE MOSTLY BACKED BY PRIVATE CAPITAL. The government would play a smaller role in the market BY TAKING A BACKSTOP POSITION ON MORTGAGE SECURITIES, STEPPING IN ONLY IF PRIVATE INTERESTS WERE WIPED OUT BY CATASTROPHIC LOSSES (read: bailouts by law), or (2) Require Freddie Mac, Fannie Mae and any Wall Street interests via mandate to serve first-time buyers, minorities and other underserved communities. Republicans for the bill would leave that to Wall Street and whatever loan qualifications it brings to the table. Consumer and civil-rights groups correctly say that in such an event private securitizers will focus only on wealthy borrowers and that first-time and minority borrowers will continue to be underserved. The bill as presently written would thus continue the evil to which it is ostensibly designed to correct. Proponents of the bill talk in vague terms of “incentivizing” private lenders (Wall Street) in order to get them to take on such (perhaps shaky) loans. The incentives are not spelled out, but it will inevitably amount to a taxpayer subsidy to Wall Street in order to get them to buy first-time and minority mortgages.
Statistically, only 131,000 black families obtained mortgages in 2012, compared with nearly 600,000 in 2006 (shortly before the Bush crash of 2007). Hispanic borrowers dropped from 13.3 percent of purchases in the market to 8.6 percent while white borrowers increased from 65 percent to 71.2 percent as measured in years 2006 and 2012.
We therefore do have a serious housing financing problem, but though we may have correctly diagnosed the condition to be treated, I think the bill as now written is the wrong prescription and I am opposed to it unless it is radically amended to reflect remediation of the problem and not just a thinly disguised Republican attempt to kill Freddie Mac and Fannie Mae while hoisting their friends on Wall Street into the void so that the Street can take over America’s secondary housing finance system (but with enough government involvement to rescue them if they overshoot – again).
I see no purpose in institutionalizing bailouts for Wall Street. Why are we once again to become legally liable for their antics? Whatever happened to the idea that capitalism involves risk and that undertaking such risk is a prime rationale for reward, i.e., profit. Why should America be involved in risk in which it cannot profit?
Freddie Mac and Fannie Mae are federal corporations which are interested in facilitating and furthering the acquisition of housing by providing a secondary market to primary lenders, thus releasing capital back to the primary lenders for further lending. Such agencies necessarily take market risks, but unlike Wall Street, they are not created primarily to make profits. I see no reason to bring in Wall Street to supplant these agencies, especially since it was Wall Street that created the housing market disaster which brought about all this brouhaha in the first place. Such irony! GERALD E

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