Now to the bigger picture… As of today, the U.S. government is the largest mortgage lender in the country. And that means, if things continue to go badly in the housing market, you and I as taxpayers get to pay for bad mortgages! Hurray!
How did we get into this mess? On Monday’s PBS Marketplace public radio show, economist Gregory Ip had some interesting commentary. I think sums it up nicely, as well as asks some good questions.
Americans woke up today to learn the federal government had basically taken over Fannie Mae and Freddie Mac. It’s one of the biggest government takeovers in history.
This moment, though, has been years in the making. We knew these companies were a potentially dangerous hybrid. They are chartered by Congress to promote home ownership. But they are owned by shareholders who want the maximum possible profit. This means that they could take big risks with the knowledge that if they got into trouble, they’d be too important for the government to allow to fail. The Bush administration tried to constrain Fannie and Freddie, just as its predecessor did. But with the support of many in Congress the companies always fought off these efforts.
And then the housing crisis hit. Far from shrinking them, the Bush administration was now forced to ask the companies to expand their role of buying and guaranteeing mortgages, because, quite simply, private investors no longer wanted to. Unfortunately, just when the economy needed Fannie and Freddie the most, they couldn’t do the job, because they had lost so much money on the mortgages they already owned.
Treasury says it acted this past weekend to keep the housing and financial markets stable. But it still hasn’t answered the question: What role should the government play in home ownership, and do these companies have a part to play? Yes, common stock holders have been punished. They’ve lost almost their entire investment. And over time, the companies will have to shrink under the terms of the deal with Treasury. But Fannie and Freddie will continue to exist unless and until Congress revokes their charters. And the final decision of the companies’ fate will rest with the next president and the next Congress.
Then there’s the question we as a country must answer: How much should we promote home ownership? If we conclude taxpayers should back most mortgages, we must find a transparent and accountable way to do it. It’s not at all clear that these companies can accomplish that.
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so we can either pay our mortgages, or pay our taxes, which will pay our mortgages.
why cant people just live within their means?
I’m wondering if all of this madness will actually bring us joys tenfold?! I mean, i have to think that if thousands and thousands of people have just F’d themselves over by overpsending, that when everything is settled and back to “normal”, all these thousands (and us watching them) will have learned from it all. Ya know?
So in this perfect world i just made up in my head, this means that in 5 years everything will be moving along swimmingly, and everyone will be saving 10-20% of their income. Just call me Nostradamus…or an idiot.
I would liken it to emptying your bank account and then being really excited because you have a lot more money in your hand than you usually do.
It may not be exactly like that, but still, we are robbing the country’s ability to maintain a stable economy in the future to fund the present.
I like Mr Ip’s comments, they make sense to me. But we still have some questions to be answered. Just like SS, Medicare and other entitlements.
The big problem with this is the precedent it sets. Now the big 3 automakers are clamoring for low interest government loans to the tune of billions so they can restructure themselves to compete against Japanese companies that do so well in small car sales. These publically owned companies were so short sighted on the profit margins of big trucks and suvs that they didn’t invest in small cars. Now those profits are gone and they’re hemorraging money. So they want the government to bail them out.
I’m so sick of companies (especially CEOs) making millions and then going bankrupt, ruining peoples’ 401ks, IRAs, etc. When will the madness stop??!?!
The American dream is upward mobility, not home ownership; it just happens that owning your own home is traditionally a good way to start the path to a better lifestyle.
Great article, thanks for highlighting that segment from marketplace. That has been floating in my head for quite some time. At 25 and unsettled, I do not feel ready to purchase a house yet. At the same time, I feel the government is pushing me to buy in an expensive market. Of course, I know it isn’t best for me, so I won’t, but why does the government care??
Did you hear the segment on the guy out in Seattle or Oregon who has been shopping for a home mortgage (he, his wife, and baby are living in an apartment), has excellent credit, and can’t find a loan at an interest rate that will set him up with payments he can actually afford? He says he’s prepared to raid his retirement savings to get into a house. It’s madness. I was not reassured by Paulson’s comments, who wants to see these companies move from this disastrous hybrid model to fully private companies.
There should have been better regulations against these risky mortgages in the first place. Only fixed low rates should be allowed. No interest-only, no interest-first balloons, and no floating rates (well maybe if it’s capped reasonably). Then buyers should only qualify with W2 income, period. No-doc loans look very suspicious in a lot of ways. And enforce that 35% of monthly income going to the mortgage and tada — no bad mortgages. All other types should be made impossible, if not illegal.
I hate to sound like a broken record but…….
Yet another step up the ladder to socialism???
Heck, maybe the next president can seal the deal, eh?
Next up……..full blown communism!!! (a very sarcastic thumbs up)
I’m not against this move by the government, but i do think its sad for those of us who don’t own a home, and had hoped to get into one at a decent price that we could actually afford….this will no doubt help prop up the inflated house prices.
No doubt we are being punished for being prudent with our money.
If Fannie and Freddie’s mission is to provide affordable home ownership….they fail miserably!
When you think about buying a car, you think about the price. Is $20k, $30k, or $40k the right price? What is affordable? Obviously, the $20k is the most affordable.
The CHEAPER it is, the more affordable it is. So, Fannie and Freddie should be making homes cheaper, not more expensive.
The government has never been good at averting a recession. Some Great Depression historians link government actions to avert the crisis as a cause of the crisis. Great Depression 2.0 historians will be looking at the repeal of the Glass-Stegle Act, Bear Sterns bailout, and the Fannie and Freddie fiasco for this one.
I don’t know why people let these things happen but really we already have a lot of these type of companies in the US. electricity, natural gas, etc, all things we actually can’t live w/o and things that the government really needs to have a hand in. But nope, we let them have their own private companies, stockholders make money when they’re doing well, and then we bail them out when they’re not.
mimi…
What about better educated borrowers? The market should determine what loan types are acceptable and the borrower should be responsible for deciding which one they choose.
W2 income only? Self employed people with their own business should not qualify?
SP…how is the government pushing you to buy?
This is so frustrating to me. The government never does anything well. And here we have them taking over a huge section of the economy. Not only that, some people would have them take over everything and run our lives. I wish the American people would wake up and look ahead to what America will be like with the government in charge of everything… it’ll be one disaster after another, and you and I will have to pay for them all. Sounds super exciting!
chedv,
Okay, any legitimate verifiable income. I’m not a business owner, so I don’t know how they report their income, but it should be somewhere in their tax return.
I’m all for educated borrowers, and protecting the consumer, but making restrictions is also about protecting the banks themselves. Banks should protect their shareholders before giving out these loans that could send them into bankruptcty. Not to mention loosening restrictions caused some of the overinflated home prices to begin with.
If the restrictions had been tighter 5 years ago, then the same people who are now losing their homes would have never been given the chance to hang themselves. And the banks wouldn’t be asking the government to bail them out.
Home “ownership” is an excellent goal. The problem is that too many people don’t actually attempt to become owners. Instead, they sign on to no-money down or interest only loans and have no real chance at equity. They would be better off renting.
DaveD: Fannie and Freddie are very different from GM and Ford, you simply cannot make this comparison. The US government basically had to bail out the mortgage cos. They’re under no such obligation with GM and Ford.
Multiple Posters: Do we need to reference the cartoon posted here several months ago? This is about more than just regulations. People lied, they found loopholes, they used creative accounting techniques. (And don’t get me started on how the GAAP is self-regulated)
Lots of different people got a little too greedy in lots of different ways: buyers, mortgage sellers, investors, banks and the government.
mimi proposes a solution: Only fixed low rates should be allowed. No interest-only, no interest-first balloons, and no floating rates…enforce that 35% of monthly income going to the mortgage and tada — no bad mortgages.
But she’s now basically asking the government to moderate allowable lender risk. It’s one thing to limit lending rates (i.e. usury rates), but it’s a very different thing to limit lending amounts.
You see, the problem here is that Fannie and Freddie are both publicly traded and government chartered. This causes some definite conflicts of interest. And the morass spreads beyond just Fannie and Freddie. Some of these loans were packaged up, insured and then resold to private lenders.
Which then bears the question of do you legislate mortgages just for Fannie and Freddie or do you legislate all mortgage loans? There isn’t a silver bullet solution here: Banks should protect their shareholders before giving out these loans that could send them into bankruptcy. Something like this still doesn’t stop lenders from lying and it doesn’t stop investing firms from “re-packaging” the loans as they did.
These are all bigger problems than that.
ChrisMR: why cant people just live within their means? Why can’t the government?
“Mo” Money: But we still have some questions to be answered. Just like SS, Medicare and other entitlements.
My big question is why are we not discussing these in the presidential debates? (likely because very few people understand them) In a similar fashion, shouldn’t we have answered these questions before we got into this financial mess in the first place?
This may be a move for an actual government takeover rather than the facade of a public company that they have been. By taking them over, we can only hope that the plan is to shut them down and sell off the mortgages to the highest bidder.
“privatize the profits, socialize the losses”
that sums it up
The government has been subsidizing this housing crisis by allowing homeowners to deduct their mortgage insurance and not assessing capital gains on home sale profits. Taxpayers were already paying for the right to pay inflated home values so it should be no surprise that this tacit agreement is now written in stone.
“SP…how is the government pushing you to buy?”
Tax breaks, low interest gov’t backed loans, programs to get everyone who possible could get a home (whether or not they should) into one. Why should I have pay more taxes just because home ownership is a poor choice for my situation? Why should my tax dollars help EVERYONE get in a home?
They definitely encorage/promote home ownership, and it is frustrating.
It isn’t just the government, it’s the whole culture of this country. Home ownership is this big goal everyone strives for, sometimes without careful consideration.
“privatize the profits, socialize the losses”
Also, this is similar to student loans. Private banks and lenders loan out stafford loans (maybe other types too, but this is all I’m certain of), and reap the profits on these loans.
Yet the government backs the stafford loans, and there is NO RISK to the bank that the (federal) student loan will not be paid back. Why isn’t the government getting the profits of these loans?
chedv:
The current fallout we’re living through makes clear the problem with letting the marketplace decide what loans are appropriate.
The marketplace concieved of CDOs, tranches, etc. Without a transparent set of regulations, (in other words, a validated mechanism for assessing risk), it’s very easy to make bad loans look good.
As soon as the profit incentive shifted from writing *good* loans to just writing as many loans as possible, a big boom and a bigger bust became inevitable.
The boom/bust cycle is inherent in market capitalism. The point of government regulation is to soften the peaks. What’s worse: government intervention on the front end (i.e. regulations that keep WaMu, Countrywide, National City, et al from making huge profits on bad loans), or government intervention on the backend to prevent a collapse of the entire system?
I may be a growth investor now, but I will always be a taxpayer.
The takeover of Fannie/Freddie was probably necessary. However, I think what Ip is asking is – why was Fannie/Freddie created in the first place? And now, should they stick around?
And yes, what about the beloved mortgage interest tax deduction and capital gains exemptions? Existing homeowners would cry “bait and switch”, but would home prices be lower in general if these went away?
I guess the question is, were the people who took on the extra risk, adequately punished. I think shareholders in Bear Stearns, Fannie and Freddie along with numerous banks would say they have been punished. Certainly based on their share prices they were. The lenders who made the bad loans are probably out of jobs now, so I’d say they are eating their own cooking.
Were homeowners who took on too much risk punished? Those that walk away from their homes will have a hard time getting credit in the future. Those whose houses dropped and are still making the payments are experiencing the same thing that anyone who buys a stock that tanks does. So for the most part, they have taken a hit too.
So who HASN’T been adequately punished.
1. CEOs who may have misled shareholders. (Although, I’m sure many of them were major shareholders themselves…)
2. The people who couldn’t afford their homes when rates adjust who are now going to have their rates “locked” for a few years by the government.
I’m okay with the bailout for the most part just because it would have been a bigger mess otherwise. The government will eat these losses and pass many of them on to taxpayers, but the government should have never been in this business in the first place. The good thing is, these loans will likely be sold off and the government will hopefully scale back on being in the mortgage biz.
What’s worrisome, is the debt incurred from this housing crisis is a drop in the ocean compared to Social Security and Medicare. That is the asteroid slowly heading toward earth that nobody wants to think about.
SP, I definitely see what your saying.
Can anyone tell me the fate of stock owners of Freddie like me who have lost a lot of money that was invested in them. Doesn’t the government have any responsibility towards the stock owners? Can I take any legal action of any sort to recover my investment?
SP Said:
“Tax breaks, low interest gov’t backed loans, programs to get everyone who possible could get a home (whether or not they should) into one. Why should I have pay more taxes just because home ownership is a poor choice for my situation? Why should my tax dollars help EVERYONE get in a home?
They definitely encorage/promote home ownership, and it is frustrating.
It isn’t just the government, it’s the whole culture of this country. Home ownership is this big goal everyone strives for, sometimes without careful consideration.”
—
All those supposed ways to promote and make home ownership more affordable actually acts to INFLATE housing prices. We shouldn’t have those government subsidies “helping” to push home ownership. It does not help at all.
If government were to stay out of distorting the housing market in those ways, and also by forcing interest rates to be artificially low, prices for housing would have never skyrocketed into bubble territory to begin with.
Government should just butt out and let free markets work on its own.
Maury said:
“The government will eat these losses and pass many of them on to taxpayers”.
That is EXACTLY the problem. Right there – you summed it up. So, we have this huge monumental mess made by either a) borrowers who borrowed more than they could afford or b) lenders who commited mortgage fraud.
Either way, at the end of the day, the people who did the financial research, determined what they could afford and bought a house WITHIN THEIR MEANS are going to get punished by paying higher taxes. We’re going to be left holding the bag even though we were responsible, maintained good credit, qualified for a fixed interest loan, etc.
Infuriating.
While I agree that Medicare and Social Security will make this mess pale in comparison, I think this mess gets priority since it’s clearly going to impacting American pocketbooks in the next 12 to 18 months (if not sooner than that).
Fannie and Freddie didn’t get into subprime mortgages per se so why should their mortgages be in trouble. I just don’t understand unless their executives spent the money on themselves and influence peddlers.
Bush (backed by home builders lobbying) wanted every American to own a home. That’s irresponsible when you know neg am mortgages were being pushed (yes pushed) by mortgage companies like Washington Mutual.
The average mortgage seeker is just happy a lender will lend to him or her. They’re stunned at the closing when the loan has been sold to 3 companies. They certainly were no match for the intricacies of ARM’s.
Gates VP…
because government isnt some crazy isolated place.
its made up of people and its influenced by people (voters).
we dont know how to spend our own money well, and we dont know how to handle pools of money well (taxes).
my comment was really aimed at both consumers and government, realizing that both are essentially the same in this regard.
Gates VP: I understand that Fannie/Freddie are different from the Big 3, but the precedent this sets isn’t good. Obama has already agreed to $50 billion in loans and McCain has agreed to $25 billion.
http://www.autoblog.com/2008/09/08/ralph-nader-opposes-50-billion-loan-from-feds/
The first poster asks why can’t we live within our means?
Because we are brainwashed not to by mainstream media and everything we see. We are constantly taught to want this or that and if we already have this and that, we are tempted to get a better this and an even better that. I’m not giving everybody a get out of jail free card by blaming it on government, media, etc. because some people are mature enough to avoid it but there are larger factors at work in terms of why people are living outside of their means.
Yeah.
I’m not exactly suggesting getting rid of the mortgage tax deduction (probably much too complicated, way too late). But if you look into it, it doesn’t help that quintessential blue collar middle class family as much as you’d think, and often helps the very wealthy most. And it stems from a tax write off for business anyway.
It is frustrating, it probably does inflate home prices, but I offer no solutions, just complaints. 🙂
DaveD: Obama has already agreed to $50 billion in loans and McCain has agreed to $25 billion.
Hey Dave, I just live here, I’m still a Canadian citizen, you guys can keep your crazy politicians 🙂
What the media conveniently hides is that Fannie Mae and Freddie Mac are creations of the Democratic party, following the nanny state-welfare-everyone is a victim populist demagoguery to get votes from the impressionable populace. This failure program is at par with their other welfare concept, in which taxpayers with no children have to pay high property taxes to subsidize public schools for parents with children. Why should I, a single person, be responsible for the schooling of someone else’s kids? Let the parents pay for the education of their own children! Don’t have money to pay for your kid’s education? Simple, don’t have children. Why is it that everyone has to be always responsible for someone else’s kids? Not only that, why should we be subsidizing public education for children of illegals who, irresponsibly, have several kids per low income household? Enough already with this Democratic party welfare programs at taxpayer’s expense! Since when buying a home is a right that all taxpayers should subsidize? Vote all those incumbents in Congress out; no matter which party affiliation, but especially Chris Dodd, Schummer, Charles Rangel, and Barney Frank.
/rant off
Home ownership is not a constitutional function of the federal government nor is it a legitimate function of any government.
In combination with a corrupt fiat money system, home prices were bid to ridiculous levels by those that had no business buying a home.
Maybe in a perverse sort of way with all the overbuilding encouraged by the low interest rates, home ownership will be more obtainable by those in the future.
Why renting makes better financial sense than home ownership by a writer for Smartmoney.com; this makes sense and we plan to sell our homes and start moving toward this goal. I’m curious about your response to this.
http://realestate.yahoo.com/promo/renting-makes-more-financial-sense-than-homeownership.html;_ylc=X3oDMTFta3Jqcjk3BF9TAzI3MTYxNDkEX3MDOTc2MjA0NjUEc2VjA2ZwLXRvZGF5BHNsawNyZW50aW5nLWJldHRlcg
Well, buying is more of a status purchase than a logic financial action