Tuesday, August 17, 2010

Gov't starts talks about new mortgage system—what could go wrong?

Remember that sweeping financial regulation reform bill that Democrats rammed through Congress earlier this summer?  Remember the elephant in the room that was left ignored?

Well, it’s kinda sorta starting to be not ignored anymore, and the prospects for addressing the real underlying cause of the banking crisis of 2008 don’t inspire a lot of enthusiasm:

Talk of shrinking the government's involvement in the mortgage market is growing. Just don't expect action any time soon.

A conference Tuesday at the Treasury Department is the first of many steps toward restructuring the nearly $11 trillion mortgage market. So far, rescuing mortgage giants Fannie Mae and Freddie Mac has cost the government more than $148 billion. That number is expected to grow.

Treasury Secretary Timothy Geithner will address the conference but is not expected to offer an exit strategy Tuesday. The administration has said it won't offer its plan until next year.

Officials are pledging dramatic changes to the structure of Fannie and Freddie, which profited tremendously during good times but burdened taxpayers with losses when the housing market went bust.

"We will not support a return to the system where private gains are subsidized by taxpayer losses," Geithner said in remarks prepared for the conference.

With Republicans likely to pick up seats in Congress in November, however, the Obama administration will need support from both political parties for the changes it proposes.

Reflecting this reality, Geithner will say Tuesday that "the failures that produced the system we have today were bipartisan. The solution must be as well."

Executives and mortgage experts are prepared to tell Obama officials that that the government must stay in the business of backing U.S. mortgages even if Fannie and Freddie disappear someday.

"At the end of the day, the government will still have a very large role to play," said Mark Zandi, chief economist at Moody's Analytics and a panelist at the event. Others include mortgage executives from Bank of America Corp. and Wells Fargo & Co, plus Bill Gross, managing director of bond giant Pimco and Lewis Ranieri, one of the creators of mortgage bonds.

Geithner is either being intellectually dishonest, or he’s as clueless as the rest of this kindergarten crowd running the country.  The failures that produced the 2008 meltdown were far from being bipartisan.  The environment that allowed people with insufficient income or credit strength to finance homes they had no business purchasing was a whole-cloth manufacture of liberal Democrats, starting with the Community Reinvestment Act of 1977.  The act was originally intended to address a progressive feel-good objective of insuring that banks weren’t using a then-controversial process known as red-lining, where some banks would draw red lines on maps depicting areas that they would avoid lending in.  Banks’ loan-creation and community investment metrics were used to gauge banks’ processes in supporting all of the credit needs of the communities they served.  Sounds innocuous enough.

But the Clinton era changes to the bill, begun almost immediately upon inauguration in 1993, changed the consequences for banks that were considered “underperforming.” Essentially, banks were told in not-so-unclear terms that they would make loans to low-income groups, or their performance evaluations would suffer.  It went from being process-oriented to results-oriented, and the end game was completely predictable.  Picking winners and using government power to reshape markets is never, ever a good idea.

Here we are in 2010, with the consequences of credit market-meddling still being felt, and instead of walking back the CRA and the results-oriented process of forcing banks to load to bad (i.e., subprime) borrowers, they’re talking about more bailouts of Freddie Mac and Fannie Mae.  I haven’t even touched on the rank corruption found within those two organizations, but you can see why I’m not very confident that meaningful reform is in the cards.

What needs to happen is a gradual pullback of Freddie Mac and Fannie Mae’s participation in private sector loan creation.  Let banks make credit decisions based on the perceived risk of default, and make people learn to work, save and earn the American Dream.  Home ownership is a privilege not a right, and its a privilege that’s earned.  It does not come as a benefit of government largesse.  The proposals being floated for retooling the mortgage market system do nothing to restore the natural order, and simply kick an $11 trillion can down the road.

Gimme some feedback in the comments.


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