11.30.2009 0

The Blight Before Christmas

  • On: 12/30/2009 09:27:46
  • In: Fiscal Responsibility
  • By Bill Wilson

    ‘Twas the blight before Christmas, when all through the house, not a creature was stirring… except for the U.S. Department of Treasury, which was busy removing any limitations on the amount of taxpayer cash bankrupt mortgage giants Fannie Mae and Freddie Mac are allowed to tap.

    As reported by the Washington Post, “The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.”

    You read that right: “unlimited financial assistance” to the de facto government agencies that did so much to cause the financial crisis still washing over the world entire. Recall that Fannie Mae and Freddie Mac are responsible for funding some three-quarters of all mortgages.

    How did Fannie and Freddie help cause the crisis? In 1990, outstanding mortgage debt held was $3.805 trillion. Then, Fannie and Freddie weakened lending standards by handing out unsecured loans to unqualified borrowers. And, by the end of 2007 as the crisis was reaching its peak, total mortgage holdings had risen to $14.568 trillion, a staggering 383 percent jump.

    During this same period, much of those mortgages were sold on the secondary market in the bogus securities trade. In turn, money trickled back into the banks. Then more loans were given.

    All told, Government Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac securitized trillions of dollars of mortgage-backed securities (MBS) and related debt—some $4.7 trillion as reported by Bloomberg News by November 2007 rising to over $5 trillion by the time of TARP according to the Wall Street Journal. Those securities were sold all over the world. And with the cash on hand from the sale of securities, Fannie and Freddie kept on buying more mortgages from the loan originators.

    When the system finally collapsed, Fannie and Freddie went bankrupt and taxpayers were left holding the bag. These “companies” were fully nationalized in 2008, giving the federal government responsibility for the entire mortgage industry.

    How much does that leave taxpayers on the hook for potentially if anything else goes wrong in the housing market? Today, total mortgage holdings stand at $14.418 trillion. A full 75 percent of that—roughly the amount Fannie and Freddie are responsible for financing—is $10.8 trillion!

    Add to that the securities which were sold by the GSE’s, and it’s larger than the Gross Domestic Product.

    Taxpayers could never, ever possibly cover losses on that scale. And yet the U.S. Treasury in a surprise Christmas “present” to the nation has said that they will, as necessary, keep pumping “unlimited financial assistance” into Fannie and Freddie. At least, until 2012, when the Post reports that “the administration’s open-ended commitment will expire.”

    Of course, the Treasury says it is merely assuring markets that taxpayers will indeed cover any potential losses. In a statement, the department states that the decision “should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.”

    Or, put another, more forthright manner: there are actually more losses on the way. Reported Business Week yesterday, “Foreclosure filings in 2009 will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc., the Irvine, California- based company said Dec. 10. This year’s filings will surpass 2008’s total of 3.2 million.”

    Which, at an average home price of about $293 thousand (see: S&P/Case Schiller and U.S. Census), could put taxpayers on the hook for another $860 billion in losses from Fannie and Freddie should (as is likely) all 3.9 million homes be repossessed. And that does not even include the securities tied to those mortgages.

    A belated Merry Christmas, America, brought to you by Timothy Geithner and Barack Obama. Expect the coal in your stocking to soon go up in smoke.

    Bill Wilson is the President of Americans for Limited Government.

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