Saturday, August 14, 2010

Will it work this time?

The Obama administration continues to pour money into Fannie Mae and Freddie Mac. With the recent $1.8 billion, the total is now $148.1 billion and Freddie alone lost $6 billion in the 2nd quarter of 2010. The reasons for lending them more money are vague. They both talk about continued focus on the quality of new business. Their new business means continuing to purchase mortgage loans with no down payment and limited (no) income. This is what caused the problem in the first palace and they are still doing it and tax dollars are going to support this insanity.

A recent Newsday article [Freddie wants another $1.8B] said; “During the housing boom, Freddie and Fannie faced political pressure to expand home ownership and competitive pressure from Wall Street to back ever riskier loans.” Well, that is half right. There certainly was documented political pressure from Dodd, Frank and Andrew Cuomo to expand home ownership. Their plan was to let everyone buy any house they wanted. Just give everyone a 105% mortgage loan (to even cover the closing costs) and don’t require any sort of income verification. These wizards were on record as proclaiming the safety and soundness of such loans up to two weeks before the bottom dropped out. But the plan as usual, is to shift the blame to Wall Street – the evil bankers. But read that part again. It says “competitive pressure from Wall Street”. So, Wall Street was competing with the US Treasury to make bad loans? Huh? Even if that made any sense (which it does not), by what economic theory does it make sense for agencies of the Federal Government to compete with private industry to do something as stupid as to make mortgage loans that everyone knew were bad investments? The custodians of the public treasury could easily have said “No”. They have no “competitive pressure”; they have no risk of going out of business.

The whole episode was caused by the Government and they are still at it.

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