Archive for Thursday, December 31, 2009

Rescuing giants proving costly

December 31, 2009

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These file photos from July 2008 show the Freddie Mac headquarters in McLean, Va., and the Fannie Mae headquarters in Washington. The Obama administration’s latest lifeline to Fannie and Freddie will cover unlimited losses through 2012, lifting an earlier cap of $400 billion.

These file photos from July 2008 show the Freddie Mac headquarters in McLean, Va., and the Fannie Mae headquarters in Washington. The Obama administration’s latest lifeline to Fannie and Freddie will cover unlimited losses through 2012, lifting an earlier cap of $400 billion.

— The government’s Christmas Eve pledge of unlimited financial aid to mortgage giants Fannie Mae and Freddie Mac is aimed at making sure the housing market doesn’t take another turn for the worse and cause the economic recovery to unravel.

This insurance policy taken out by the Treasury Department will help keep mortgage rates low, and may wind up being a gift of sorts to struggling homeowners and banks. But there’s a catch: The housing crisis is now likely to cost taxpayers much more.

The Obama administration’s latest lifeline to Fannie and Freddie will cover unlimited losses through 2012, lifting an earlier cap of $400 billion. It also eases restrictions on the size of the companies’ investment portfolios. That’s a reversal of the Bush administration’s September 2008 plan to shrink the size of the companies’ holdings of mortgage-backed securities.

The action, which didn’t need the approval of Congress, could position Fannie and Freddie to get more aggressive in dealing with the housing crisis, perhaps taking troubled mortgage investments off banks’ books.

“They’ve cleared the decks to use Fannie and Freddie as a vessel for whatever they want,” says Edward Pinto, a housing consultant who served as Fannie’s chief credit officer in the late 1980s.

Treasury could also lean harder on Fannie and Freddie to help troubled homeowners avoid foreclosures — and by extension the banks and other investors who own their mortgages. Many economists and housing experts say an existing $75 billion government program to prevent foreclosures isn’t working fast enough, threatening the emerging signs of home price stability in many cities across the nation.

Boosting the firepower of Fannie and Freddie, which finance three-quarters of all new mortgages, also should help keep rates on home loans low just as the Federal Reserve starts dialing back its separate $1.25 trillion program aimed at doing just that.

That’s good news for the banking industry, which has benefited this year from homeowners refinancing their mortgages, says Jason O’Donnell, senior research analyst at Boenning & Scattergood Inc. “This is an initiative that spreads far beyond just Fannie Mae and Freddie Mac,” he says.

But the trade-off is that the Treasury will have to cover much more than the $111 billion in losses at Fannie and Freddie it already has funded. Barclays Capital predicts the losses will range from $230 billion to $300 billion.

Both companies provide vital funding for home loans, buying mortgages from lenders, pooling them into bonds and selling them to investors with a guarantee against default. While they traditionally backed loans to relatively safe buyers, they dramatically lowered their standards during the housing boom, and those loans are now defaulting in higher numbers.

If the administration does lean on Fannie and Freddie to expand its foreclosure-prevention program, it would be pricey. If Fannie and Freddie were, hypothetically, to start forgiving a quarter of borrowers’ mortgage debt, that would cost another $125 billion to help around 2.5 to 3 million borrowers, estimates Barclays analyst Ajay Rajadhyaksha.

Comments

jmadison 5 years, 7 months ago

This is similar to calling upon the arsonists to put out the fire. A Wall Street Journal piece on the same topic http://online.wsj.com/article/SB10001424052748703278604574624681873427574.html

By the way, what are the salaries of the execs at Fannie Mae and Freddie Mac? Does Obama's pay czar have any purview over their compensation, which is coming from the taxpayers not the shareholders?

Richard Heckler 5 years, 7 months ago

"Our money has been used to make the system worse -- what if we used it to make the system better?"

http://www.alternet.org/story/144882/take_your_money_out_of_the_hands_of_the_banking_oligarchs

Meanwhile, America's Main Street community banks -- the vast majority of which avoided the banquet of greed and corruption that created the toxic economic swamp we are still fighting to get ourselves out of -- are struggling. Many of them have closed down (or been taken over by the FDIC) over the last 12 months. The government policy of protecting the Too Big and Politically Connected to Fail is badly hurting the small banks, which are having a much harder time competing in the financial marketplace. As a result, a system which was already dangerously concentrated at the top has only become more so.

We talked about the outrage of big, bailed-out banks turning around and spending millions of dollars on lobbying to gut or kill financial reform -- including "too big to fail" legislation and regulation of the derivatives that played such a huge part in the meltdown. And as we contrasted that with the efforts of local banks to show that you can both be profitable and have a positive impact on the community, an idea took hold:

why don't we take our money out of these big banks and put them into community banks? And what, we asked ourselves, would happen if lots of people around America decided to do the same thing?

Our money has been used to make the system worse -- what if we used it to make the system better? The idea is simple: If enough people who have money in one of the big four banks move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it becomes again the productive, stable engine for growth it's meant to be. It's neither Left nor Right -- it's populism at its best. Consider it a withdrawal tax on the big banks for the negative service they provide by consistently ignoring the public interest. It's time for Americans to move their money out of these reckless behemoths. And you don't have to worry, there is zero risk: deposit insurance is just as good at small banks -- and unlike the big banks they don't provide the toxic dividend of derivatives trading in a heads-they-win, tails-we-lose fashion.

Think of the message it will send to Wall Street -- and to the White House. We simply can't count on Congress to fix things. We have to do it ourselves -- and the big banks are the core of the problem. We need to return to the stable, reliable, people-oriented approach of America's community banks. ...

Find a Bank

http://www.alternet.org/story/144882/take_your_money_out_of_the_hands_of_the_banking_oligarchs

ASBESTOS 5 years, 7 months ago

Sorry Merrill but your cut and paste is icorrect:

"Meanwhile, America's Main Street community banks — *the vast majority of which avoided the banquet of greed and corruption that created the toxic economic swamp we are still fighting to get ourselves out of — are struggling. Many of them have closed down (or been taken over by the FDIC) over the last 12 months."

In between the asterisks is the odditity of this post. IF they did not take part in the "greed" then they do not have exposure to "risks" associated with MSBs and CDSs, so their balance sheet would be OK. In fact many banks are just fine. The ones that are being "taken over by the FDIC" are insolvent because they overleveraged, or worked in tthe MSB's and CDSs, or they were the ones writing large overleveraged mortgages, and those would be the ones that are failing, and tooke "part in the greed", and derserve to fail.

The problem is not the propaganda trash that yuou posted, but it is the big banks that have federal cash are "buying up all the littles".

"Too little to survive" is what is going on as the big banks are buying up all the small banks because they have assets and are not overleveraged, ...til the big banks get them.

"We simply can't count on Congress to fix things."

FInally figured that out did you????

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