Fannie and Freddie and You

Economist and policy-shaper Jared Bernstein for The New Republic:

Once again, the GSEs are ostensibly just protecting the taxpayer, but these protections are blocking a critical exit ramp from the recession. One mechanism that’s supposed to be helping the economy right now works through the Federal Reserve getting interest rates down—which they’ve done—and homebuyers responding with refinancing and new purchases. But the policies of the GSEs, motivated by the FHFA’s mandate to avoid losses and protect taxpayers, are blocking refinancing and therefore jamming the machine.

But is the FHFA really protecting the rest of us? Like I said, I understand and respect their rationale, but I think they’re wrong. Without shaving off principal from a number of these loans, they will default, and who foots the bill when that happens? That’s right—Fannie and Freddie themselves, because they either own or insure the loans. In this respect, they’re doing the same “extend and pretend” shuffle that private banks are doing, hoping that home prices reverse course and what’s now underwater will eventually be sailing on the surface. For a lot of borrowers, however, that’s just not going to happen. Granted, there are loans that would be okay without reductions, and I’m not suggesting it’s a cakewalk to figure out the best ones to bet on. But as discussed here, some private banks are already finding promising ways to do just that.

The article and analysis calls for, amongst other things but principally, a restructuring of those mortgages still underwater from the 2008 housing collapse so that the extent of the debt on the homeowners is lowered and more accurately reflects what their homes are now worth.

The typical cries of socialism and culpability will invariably accompany this suggestion, but that belies the responsibility that the Fannies and Freddies had in creating this situation. The speculative bubble and its subsequent burst are not just the result of Americans getting in over their heads, but also the unwatched and unmitigated speculation and things like NINA (No Income No Assett) loans that were so wild in concept and reckless in execution that they were, in many cases, criminal acts that went unprosecuted in the wake of the disaster.

Fannie and Freddie and their ilk got bailouts. They’re still kicking around because they were “too big to fail.” Yet those people whose mortgages are underwater were not and will not be given the benefit of such extensive government intervention to save their financial lives, credit, and livelihoods. I’m rolling my eyes at even the suggestion asking where the bailout is for the American people, because it seems like such trite pandering.

But is it?

No small amount of fault lies at the feet of those who got themselves into this situation. But that’s not just homeowners. What things like NINA loans did was allow scoundrels to feed a flawed system of speculation and smokescreens, in some cases using fantasy numbers to convince recipients of mortgages they could afford monthly payments while turning to lending institutions and exaggerating or in some cases wholly fabricating income and assets. And those institutions gladly accepted them on the knowledge and pretense that they were likely bunk. Why the Hell else would you even invoke a loan that requires “No Income and No Assett” verification?

So while Fannie and Freddier were given a break, that same charity is not extended to those who were less accomplice and more victim of a broken, out of control system.

How is that just?