Wednesday, February 3, 2010

Barney Swings the Other Way

Someday, but perhaps not soon enough, it will be common knowledge that the mortgage mess started when Barney and Co. decided that “everyone should own their home”. For most people, this meant they had to get a mortgage and Fannie and Freddie were the prime sources. Avoiding the debate over whether these agencies should exist at all, they did work well when there were guidelines regarding who was eligible for a mortgage. Things like 20% down, no more than 1/3 of income (which you had to prove) going to the debt, and a good credit history were requirements to get a loan. Barney and crew saw this as an impediment to “everyone” owning their own home. So, he and his friends got the agencies to change (read as eliminate) the guidelines and it became 105% LTV, any credit history, and, no income checks. The Banks made loans on this basis and sold them to the agencies who packaged them into securities (MBS). Remember, loans made according to agency guidelines are backed by the full faith and credit of the US Treasury. So, the banks made these loans and were strongly encouraged to do so by the various regulators. Banks are supposed to make prudent loans and what is (was?) more prudent than a loan guaranteed by the Treasury.

While all this was going on, those Treasury backed Mortgage Backed Securities (MBS) backed by loans guaranteed by the Treasury were being traded and carved into various subsidiary investment instruments. Then the bubble bursts, the value of the (now “toxic”) securities plummets and banks are on the brink. Missed that part where the Treasury covered their guarantee and bought back the securities dollar for dollar.

Now Barney wants to eliminate the agencies that he been cheerleading for years. Two weeks before they blew up he is on record as saying that there was no problem. The checks that they sent to him last month must have bounced.

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