This has been bugging me for over a week now, and nobody I respect has said anything much about it at all . . . so here are MY comments on the topic, based on probably-incomplete knowledge of the dirty details. I wrote this last week, and I have been sitting on the posting, but nobody seems to care much about this story, so…
The President is saying he wants to unwind Fannie Mae and Freddy Mac. Unwind in the business sense of the word means, get rid of assets and stop doing business as we know it. FNMA and FMC are the federal agencies that buy mortgages from banks, and something like 94% of ALL mortgages are underwritten by them. Mortgage rates are so low, it is impossible for a private bank to make a profit on the types of borrowers to whom they have to lend under Federal law
Hold on there.
This can’t be covered in a 30-second sound byte which may be why it is not being covered at all. Grab a drink, this post is a little longer than most.
Banks have to lend to people who can be plainly seen as BAD risks for loans. The Democrats in Congress have put pressure on banks to lend to un-creditworthy borrowers because “every American deserves a home.” Well, a Capitalist knows every American who can *afford* a home deserves one. The rest deserve to RENT because they are unable to maintain a mortgage due to the financial circumstances they create for themselves. If they don’t lend to these people who are GUARANTEED to not be able to pay the banks back, the banks are branded as raaaaaacist because people with horrible credit and bad financial habits tend to be disproportionately black or hispanic – but let’s not mention that minority cultures in the USA are broken because of Federal policy ostensibly designed to help them.
To be clear, these banks would be happy to lend to the worst credit risk in history, but they’d want huge interest payments to make up for the fact that they will take a hit when the borrower eventually defaults. But they can’t charge 17% on a mortgage because that’s *racist*, you see. You have to write non-racist, low-interest mortgage notes these days. So they write a mortgage they know the feds will buy from them, and sell the mortgage to the feds. Then FNMA and FMC are the ones left holding the bag when the buyer defaults. This means nothing to the banker who has made his profit, and morally there is no reason they *should* care in a free Capitalist system. The problem is, those of us who pay taxes are the ones paying for these bad loans when they go bad. You and I, John Q. Taxpayer, are the ones who lose. If a house was valued at $800,000, and the price fell to $400,000, the loan will be abandoned by the borrower. When an $800,000 loan goes into default and the only asset involved is a $400,000 house that we can sell, we get back $400,000, and lose $400,000. But it’s free money from the government’s stash so who cares, right?
Hold on there.
How does this get to where Obama is destroying the economy?
He wants to unwind FNMA and FMC. That means, in English, that he wants to get the federal government out of the mortgage lending business. This is, in itself, a Positive Good. Uncle Sam should never be the one lending you money to buy a house. Also, the more bad loans he writes, the more money you and I the taxpayer will lose. Ceasing to write these notes means we will lose less as Taxpayers. Sounds good, right?
Hold on there.
Who writes mortgage notes? Banks do. Then they sell them. After FNMA and FMC are out of the business, unlike now, the banks will have to HOLD the notes and do the servicing and foreclosing and reselling of foreclosed properties. They, not we, will be the ones with their cash on the line if they have to hold their own notes. If they bundle the mortgages and sell them as Mortgage Backed Securities, then investors in MBS are the ones holding the risk. These PRIVATE organizations have profit motives: they want to make money, no matter what. A retirement account mutual fund manager investing in your mortgage doesn’t give a damn whether you rent or own a house, they just want to make money so their clients can retire. The banker also doesn’t love you, individually – they are interested in your money. They don’t want your house, they want your MONEY. So to make profits, they will have to do what they used to do: require huge down payments and only make loans at low rates to creditworthy borrowers – and jack the interest rates up through the roof for people who are guaranteed to default on the loan, so they will make their profit before the borrower defaults. The profit is what they want. Sure, they get their capital back when they resell a foreclosed house (if the house holds its value, a huge IF), but they don’t want your house they want PROFIT. A person with a low credit score gets 17% loan rates on an automobile loan right now. They will pay it on a HOUSE loan if the federal government doesn’t underwrite the loan. The feds currently hold the interest rates artificially low because the .fed doesn’t give a damn for profit.
And then, you have people with more money tied up in new more-expensive mortgage notes NOT out there buying more stuff to go with their new house. Then again, maybe the borrowers don’t want to pay a mortgage bill from an expensive loan that will be profitable to a bank. They stay in their apartment. That means they don’t go out and buy appliances, window dressing, lawn equipment, efficiency upgrades, new computers for the new rooms, new televisions and stereos for the new rooms. They’re also not paying hook-up fees and monthly cable bills. Them NOT doing all that, means they are not adding their money to the GDP.
In case you missed it: Buying more stuff drives the continued health of the Economy. The ONLY thing driving the economy is people buying more stuff. If nobody bought more stuff, then nobody would be selling more stuff, so the sellers of more stuff would have no money to pay employees and the electric bill, and they go out of business, creating more people with no money for more stuff.
- When mortgage rates go up, fewer people get mortgages
- Fewer people getting mortgages all of a sudden means the economy takes a HUGE hit, all of a sudden
- If FNMA and FMC stop underwriting mortgages, the rates will shoot up
- This means the economy will suffer – badly
- And Obama wants them to stop underwriting mortgages
AND IF B=C
- Obama wants to destroy the US national economy, or
- he is a total ignoramus who should never have been in the White House because he has NO IDEA how the nation works, including (in this case) how a Capitalist mortgage lending system works. I think this is the truth. He does not hold American values because he was not reared in places where they would ever be taught to him. He does not understand Capitalism, so the default is collectivism.
*President Obama is not stupid.*
He got through some tough schools and graduated, though he won’t show us his transcripts. He’s a smart cookie. But he’s book-smart only, and his books were stored in Ivory Towers where his leftist political philosophy was taught as The Way Things Should Be. His parents were leftists, and he is a leftist. You should take it for granted that he does not understand that he is proposing to destroy the economy. He literally doesn’t know that there is something to know, and can much less wrap his mind around the problem he is going to create.
But, whether he realizes it or not, the effect is the same.
Yes, this means the economy, and the President as the leader of the nation, are screwed either way. Funny how that happens when government bureaucrats make the rules to run a private industry without understanding why or how that industry works!