Originally published September 14 2008
Fannie Mae and Freddie Mac: Bailout for the Wealthy Leaves Taxpayers Holding the Bag
by Barbara L. Minton
(NaturalNews) The decision by the U.S. Treasury Secretary to bail out mortgage guarantors Fannie Mae and Freddie Mac effectively doubles the national debt. Last week the amount of indebtedness of the American public was a staggering $10 trillion. This week that amount has effectively increased to $20 trillion, as the government underwrites the entire loans portfolios of the two mortgage giants.
Home buyers who were sold mortgages they couldn't afford have been hung out to dry. There is no bailout or assistance being provided to them. If the lenders who financed these mortgages reduced the ballooning interest payments owned to them, many of those skirting the edge of foreclosure would be able to continue making their payments and remain in their homes. The housing market would be more quickly stabilized and fewer families would be facing financial armageddon.
That this is not happening is blatant acknowledgement that the government bailout is not about assisting Fannie Mae or Freddie Mac so they can continue to support mortgages made to those who would be otherwise unable to obtain them without the guarantees of Fannie or Freddie standing behind them. The government is simply using Fannie and Freddie to pass through a huge new taxpayer bailout to the international bankers who hold Fannie and Freddie and other mortgage securities.
"These banks are being aided by the Treasury in postponing the inevitable write-offs in worthless securities, which would expose their [current state of] bankruptcy," said economist and statesman Lyndon LaRouche in a resent publication. LaRouche calls the bailout "tantamount to treason" against the United States and its Constitution. He believes that the bailout will fail to work and ultimately worsen the ongoing financial collapse.
Investment guru Jim Rogers, who predicted the collapse of Fannie and Freddie as far back as the year 2000, says the nationalization of Fannie and Freddie shows the U.S. is "more communist than China right now", but he sees its brand of socialism as meant only for the rich.
"You can see that this is welfare of the rich, it is socialism for the rich... it's just bailing out financial institutions," Rogers said in a recent interview for CNBC Europe. "This is madness, this is insanity. They have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not sure why I or anybody else should be paying for this."
Financial markets around the world rallied sharply on the news of the bailout. Bank debt instruments in particular soared at the news that salve would be applied to their balance sheets. However, the shares of common stock of Fannie Mae and Freddie Mac lost almost 90% of their value on the news. The bailout will only affect the more sophisticated investments of these institutions, the debt instruments preferred by the financially savvy, wealthy investors. It is shares of the common stock that are most often found in the mutual funds bought by much less knowledgeable investors through retirement plans.
Common shares of Fannie Mae so revered by mutual fund managers for the past several years now trade for $0.88, down from a 52 week high of $68.60. Shares of Freddie Mac now trade from $0.82 down from their 52 week high of $65.88.
Fannie and Freddie are quasi-government institutions set up to guarantee mortgages. Critics have pointed out that all the profits from the underwritten loan portfolios have gone to their investors, while all the risk endemic to such an operation has been laid off on the taxpayers. Without the backing of these institutions Americans would have been unable to achieve the levels of home ownership seen in the U.S. Because the quality of loans being made has declined so considerably during this housing bubble, the two enterprises now have very poor quality loans on their books. Other non-government backed lenders have taken the high quality loans while passing on the low quality loans to Fannie and Freddie.
Under the treasury plan, Fannie and Freddie will have to shrink their portfolios by about 10 percent a year, until they reach a level that can be managed by the already overburdened taxpayers. This shrinking of the loan portfolios of Fannie and Freddie will ensure that the downward price pressure on houses continues for the foreseeable future.
Although Treasury Secretary Paulson has refused to name a figure for the bailout over any time period, the new capital being put into Fannie and Freddie by the Treasury is open-ended and unlimited, and may approach the full $10 trillion or more. Paulson has also announced that the Treasury is mandating the two enterprises to buy more low quality mortgage-backed securities, and more sub-prime and undocumented mortgages through the end of 2009.
And to top it off, Paulson's plan also calls for the Treasury itself to start buying mortgage backed securities from Fannie and Freddie.
The rescue of Fannie and Freddie does not mean the bottom of the housing crisis is near. In many places there are signs that the crisis continues to worsen. Some areas report foreclosures up as much as 300 percent from one year ago, with prices falling by as much as half and still few or no bidders appearing. If the bulk of the defaults were already in the pipeline, they would be expected to clear within the next year. But experts say that there are still many people holding on who will eventually lose their grip and enter the foreclosure process.
Homes in markets where foreclosure rates are high often exhibit the desperation of the times. In some homes the walls have been stripped bare, with all the outlets torn out and the copper wiring removed. Houses like these are on the market for 10 percent of the value they sold for just a few years ago. Still, there are few buyers.
Home builders have cut their staffs by as much as two-thirds and are selling their remaining inventories at a loss just to be able to raise some capital. It's hard for them to compete with the foreclosures.
Banks are overwhelmed by the amount of foreclosed homes on their hands, and they often do not have the staff to process all the paperwork. This makes it difficult for the few buyers there are to move forward with their purchases. Some banks have even been putting off foreclosures because they don't have the staff to go after everyone who is behind in their mortgage. This lends credence to the conclusion that the crisis is far from over.
About the author
Barbara is a school psychologist, a published author in the area of personal finance, a breast cancer survivor using "alternative" treatments, a born existentialist, and a student of nature and all things natural.
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