RESTORING AMERICAN FINANCIAL STABILITY ACT

Financial stability will not be restored until the economic fundamentals which caused the mortgage crash are addressed, analyzed and reformed.  Unfortunately, the Restoring American Financial Stability Act (RAFA) in Congress does not address two of the largest culprits to the economic melt down Fannie Mae and Freddie Mac.  These two government debt machines were bailed out and created a trillion dollars of taxpayer debt at the medaling hands of congress whose priorities tend to look after government’s interests ahead of the taxpayers as their bottom line.

Fannie and Freddie hold or guarantee more than $5 trillion worth of mortgages. That is approximately one-third of U.S. GDP. Because of their federal backing, Fannie and Freddie provide capital and guarantees to the mortgage market at lower prices than private financial institutions can offer, which ultimately transfers risk from the two entities to taxpayers.

VOLKER RULE

Public policies were enacted by congress to promote home ownership to those who could not afford to purchase a home but due to relaxation of the Fannie and Freddie guidelines the fox was let into the henhouse. Now this massive reform bill is trying to remodel the hen house and they know it will work if, when the fox gets kicked out, he makes less of a profit from lending.  This will be done by reducing and eliminating the financial market manipulation from banks and financial institutions from derivatives trading, purchasing and selling stocks, bonds, options, commodities, termed the Volker rule in the new legislation.

MORTGAGE QUALIFICATION ADDRESSED

This bill will also get mortgages back to an affordability realm such that the loan qualification by both equity and credit are adequately addressed as was the case before government pushed the market into making bad loans under the illusion that everyone should own a house so government via Freddie and Fannie reduced the guidelines for qualification of what they would buy from lenders.  The qualification aspect of the mortgage crisis has been addressed but in many cases the new mortgage guidelines are so restrictive that only those with golden credit are able to qualify.

This converts to less mortgage financing than in the past and consequently less new development especially when factoring in the growth in unemployment and the shadow inventory of homes still on the balance sheets of banks and financial institutions still left to be sold over the next two years.  All indicators are bad signs for the real estate market.  Don’t believe the indexes on the real estate recovery there is a distortion to the data.  The homes being sold are at lower prices in the worst neighborhoods which pulls the median prices down which distorts the pricing being used in touting a home sale recovery.  Half of the homes sold have been foreclosed upon verses in 2005 when that was one-percent of the market sales.

CONGRESSIONAL IRONY

How ironic to have the august body of congressmen who authorized relaxation of loan rules to take place, by Fannie and Freddie’s underwriting policies, which in turn led to the financial melt down.  Now these same congressmen are reforming the system which they were in charge of and due to their  short sightedness were responsible for the mortgage debt crisis in the first place.  Congress did not enhance protections to regulations in the mortgage system but allowed Fannie and Freddie to take steroids and looked the other way when indicators of a melt down were starring them in the face.

Under the new reforms, loans will not be sold to Fannie and Freddie in the same old way but banks will be required to retain at least five percent of the mortgage liability and if there is a bad loan that five percent is the first amount that goes to pay the default such that the bank shares the risk. Not a bad concept but the big question is the unfunded Fannie and Freddie liability from the other 95 percent that they hold. How are they protecting the taxpayers risk? Why is congress doing nothing about that?

INTERNATIONAL CONSPIRACY CAUSES MORTGAGE MELTDOWN

Let us consider the implications of this Fannie and Freddie problem from not being addressed in the bill by our elected officials in congress. At the time of the fiscal crisis, as reported by then Treasury Secretary Paulsen, in mid 2008 Russian officials approached the Chinese government and suggested that both dump the securities of the Fannie and Freddie to put pressure on the U.S. to fully back them. The Chinese apparently demurred but, according to the federal register, they still sold nearly $50 billion during 2008 while the Russians liquidated their entire holdings of over $170 billion. This episode put enormous pressure on Fannie and Freddie, increasing the spread between Treasuries and Fannie-Freddie debt enormously and practically killing the repo market. In the end the U.S. was forced to put Fannie and Freddie into conservatorship.

As indicated in this example government participation in the debt market having packaged Freddie and Fannie debt to international buyers without adequate checks and balances provided a conduit for fiscal disaster.  Let us just consider the trillions of US debt that is now being sold on the open market to finance the Keynesian economic model of government stimulus to promote private sector growth, an issue now being discussed at the G20 summit in Toronto Canada.  The American $860 billion in combined stimulus spending is not reducing unemployment as it was promised to do, on the contrary unemployment is headed back up and the President is calling for more stimulus spending to keep the phantom economic recovery from dematerializing.

Considering it is not in the realm of impossibility for nations that view America’s fiscal situation as a means to their own distorted ends with unmerciful intentions, how is congress protecting taxpayers from the type of economic terrorism that occurred two years ago?  An America not protecting itself from the onset of an international monetary crisis will lead to another fiscal disaster given the amount and ownership of debt by countries that are hostile to America’s prosperity while the Keynesian ponzi scheme by government officials continues unabated.

ALTERNATE SOLUTION

To protect itself from the future bursting debt bubble, followed by an impending depression, government should privatize the Fannie and Freddie debt slowly over time and take government out of the mortgage business.  If the Keynesian economic model, Obamanomics, cannot stimulate private sector growth without continued government subsidies and stimulus then government should be taken out of the capitalist operating model.  Simply put, if the private sector cannot function without government guarantees and subsidies then these should be made explicit and priced accordingly and removed from the economy over time.  Make government the referee not participating in the ring as a player where it has always shown its ineptitude and take the tax payer off the hook as a backstop for the too big to fail bailouts.

Let us quickly look at the Obama administration’s flagship effort to help people in danger of losing their homes in the Home Affordable Modification Program (HAMP).  This program was to assist those close to foreclosure by participating in a government run program designed to lower borrower’s monthly payments from mortgage companies which would get government incentives to reduce borrowers monthly payments.

As of today, more than a third of the 1.24 million borrowers who enrolled in the $75 billion HAMP have dropped out because they cannot make the payments.  The Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.  Requiring homeowners already financially underwater to provide documentation of income has turned people away from enrolling in a program because  they know they cannot qualify for funding.

HAMP AND RAFS BOTH BAILOUT PROGRAMS

HAMP has worked so well that a similar and modified provision is included in the new RAFS act where failing corporations can go to the Fed and be bailed out.  Only under the RAFS act the debtor can remain anonymous and the Fed can make these loans under guidelines that they deem appropriate for the circumstances which they encounter and deem feasible.  To accomplish more bailouts, a $50 billion fund was provided in the Senate Bill, and a $4 trillion in “secured loans” bailout fund in the house bill.  This bailout provision has been termed crony capitalism because the Fed is directly responsible for financially rewarding firms that fail while the taxpayer remains on the hook for the bailout.

House Financial Services Committee hearing, Sept. 10, 2003:

Rep. Barney Frank (D., Mass.): I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .