Market absolutists' complaints notwithstanding, the U.S. Treasury's plan to shore-up Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will stabilize the bond and credit markets, but it's unlikely to sidetrack a mortgage system revision by the U.S. Congress, in one economist's interpretation."[U.S. Treasury Secretary Paulson has acted, now is the time for [U.S. Rep.] Barney Frank to react," economist David H. Wang told BloggingStocks Monday.
At issue: who pays for mortgage risk?
At issue is what constitutes acceptable mortgage risk by banks and mortgage lenders whose loans or asset-backed securities are insured by the U.S. Government or government service enterprises, Wang said.
"The way the system was configured, if banks and mortgage lenders made high-risk loans and won, they collected huge profits. If they made high-risk loans and lost, the government, or the taxpayer, bore the cost," Wang said. "This system is untenable."
What's one likely revision? Wang said he believes a "two-tier mortgage system will emerge." The first group will include loans/mortgages offered by banks "for specialized clients/situations." This batch of mortgages and assets tied to them would not be backed by the government or by GSE insurance, he said.
The second patch or tier of mortgages and assets tied to them would be backed by the government or by GSE insurance, but they will serve the public interest: the loans/mortgages "will be restricted to first-time homeowners and those with lower-middle / moderate incomes who will occupy their homes," Wang said. Wang added that he expects U.S. Rep. Frank, D-Massachusetts and chairman of House Financial Services Committee, and others on Capitol Hill, to push for such new regulations, among other reforms.
The goal of the reforms, Wang said, "would be the continuance of private sector flexibility to create new products to serve a dynamic market" while restricting government insurance provisions to owner-occupied, first-time home buyers.
"The government should not be the backstop for creative mortgages made by banks and lenders to finance speculative, luxury condominiums in Las Vegas. Frankly, it's a ridiculous situation where you or I as taxpayer have to bail out luxury developments and vacation home mortgages gone bad. That's not what Fannie Mae and Freddie Mac were designed for," Wang said. "If the banks and mortgage lenders want to speculate on creative, upscale residential mortgages or other non-conventional mortgages, they can, just so long as they bare 100% of the cost for loan failure, not the taxpayer."
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Reader Comments (Page 1 of 1)
7-14-2008 @ 9:25PM
GoBoilers said...
With the credit market recovery predicated on the precarious balance derived from Federal Reserve liquidity injections, capital infusions by sovereign wealth funds and investment managers, and bailouts of major financial institutions, one must wonder if this period of stability has legs. Prior fits of turbulence in late summer 2007 and March 2008 led to dramatic market seizures that froze access to capital, eroded confidence in counterparties, and led to the demise of two dominant financial institutions. The current credit market predicament is the result of years of overabundant liquidity and exorbitant hubris among Wall Street bankers that led to an inexplicable decoupling of risk and return. Begrudgingly, market participants are revaluing deflated assets as the extent of credit impairment in the financial system continues to be exposed.
http://www.beyondthemargin.net/2008/07/will-fannie-and-freddie-cause-more.html
7-14-2008 @ 8:33PM
william lindblad said...
Joe, I agree with what Mr. Wang says, but we don't need any reform. If Mr. Wang will take the time to look up the Office of Federal Housing and Enterprise Oversight he will find that what he is suggesting is pretty much their mission statement. Tow tiers already exist - prime and sub prime. The sub prime portion is what is generated by HUD and should be a small portion of holdings. This office is the supposed watchdog for Fannie and Freddie and it's director is Mr. Lockhart. They have mortgage caps and they are not supposed to be into luxury development. Obviously, Mr. Lockhart and the executives of the two F's can't read. There should be NO SIV's and CDO's on their books and they should NOT be in any financial trouble. Of course, that's fairyland when there is a lot of quick money and the reality is that they HAVE a lot of no-no's.
Paulson and Bernanke both know this and they also know this one is going to be a hot potato. On Friday Bernanke hinted at a Fed bail out to keep Wall St. from going deep South. If this ruse did not work the market would be in the 10,000 territory and still sinking. The best in Washington put their heads together over the W/end and came up with a plan to soothe investors which at least kept everyone confused, a least through Monday. IndyMac was no help and probably not expected, along with the attention it is creating on other institutions.
Although Paulson had little choice I would not hold out too much immediate hope from a staunch partisan Congress. There is going to be a lot of finger pointing and accusations before anything gets accomplished. I would like to point out that my choice for blame remains Barney Franks and committee. I can't believe that out of all that are seated, not one saw any cause for alarm. I can't believe that members of a finance committee can think that "0" down, 100% financing and no income or credit check is sound policy. That's how people making 35,000 per year qualify for 750,000 notes.
You really expect help from a government committee that thinks this is OK????????
They were the only ones with the authority to put the brakes on, but I bet they are all heavy into the banking lobby.
So goes U.S. politics - you get what you pay for.