Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The most likely answer to the above question if you ask the general populace is "the American citizen." Unfortunately, it is not quite that simple. In fact, one can make a wonderful argument that such actions, gaining in popularity among a certain political set, would be neutral to "the American citizen." One group benefits, and another one would pay for it – there is no net winner from moving obligations from one hand to another. Someone is owed that money, and with Fannie, Freddie, et al being run as large subsidization schemes guaranteed by the U.S. taxpayer – that is who loses. That said, per this excellent story by the NYT's Gretchen Morgenson, ,there would be one clear winner – our oligarchy of mega banks. Which makes me wonder why this proposal has not been approved long ago? Oh yes, it is not something Congres can be paid off to do.
- ED DeMARCO is a marked man. The acting director of the Federal Housing Finance Agency and overseer of Fannie Mae and Freddie Mac, Mr. DeMarco is a soft-spoken, career public servant — and under fire. In the thankless job of conservator for the loss-ridden mortgagefinance giants, he has a duty to ensure that the companies operate in the best interests of the taxpayers who own them. That means working to keep a lid on the companies’ losses, which now total $183 billion.
- But in recent weeks, Mr. DeMarco has come under increasing pressure to chuck his obligation to taxpayers and make Fannie and Freddie write down principal on mortgages held by troubled borrowers. He says, with reason, that such a program would run counter to his legal obligation to pursue only those activities that pose the least cost to taxpayers.
- But what the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. The fact is, principal reductions by Fannie and Freddie are not the panacea that they may seem.
- As of last September, only 2.5 percent of Fannie and Freddie mortgages were seriously delinquent, versus 7.2 percent for banks’ mortgages.
- Still, the crowd clamors for widespread Fannie and Freddie write-downs, even though they would constitute a direct and sizable gift from taxpayers to the largest banks. Here’s how: Many banks hold second liens on the same properties for which Fannie and Freddie either own the first mortgage or have guaranteed. If principal amounts on these first mortgages are reduced while leaving the second liens intact, those seconds become much more likely to be paid off over time. With no principal reduction, the banks would have to write off many of those second liens. As such, principal write-downs are another backdoor bailout for the banks that brought you the mortgage crisis.
- Answering his critics, Mr. DeMarco has agreed to approve principal reductions at Fannie and Freddie, but only when Congress passes legislation enabling it. (oooh, very nice move Mr. DeMarco) Writing a law to force taxpayers to bail out the banks in this way, however, might anger constituents. (i.e. look for it to happen after November 2012 once those annoying re-election campaigns are over with and Congress can go back to serving their true constituents) So it’s far easier for members of Congress to rail against the one supposedly intransigent man who is preventing the great American housing recovery. As the election approaches, of course, the cries are bound to become even more strident.
- Throughout the crisis and its aftermath, banks have been very good at ensuring that others — whether taxpayers, Fannie and Freddie, or private investors who hold loans in mortgage securities — do more to help troubled borrowers than banks have been willing to do themselves. This refusal to share the sacrifice is a major flaw in the recent foreclosure-abuses settlement that regulators have crowed about.
- So the next time you hear someone advocating vast principal reductions on Fannie and Freddie loans, remind them that it would be another stealth bank bailout, courtesy of taxpayers. Banks’ unwillingness to share the pain has been a central feature of this crisis. It’s time to put an end to this dysfunctional dynamic.
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