Stop the Meddling With the Market!!

On the front page of the 04 December print edition of "The Wall Street Journal," the headline is "U.S. Eyes Plan to Lift Home Sales." Are you kidding me?? The article states unbelievably, "The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages."

You just read what I read, Freddie and Fannie back loans whose rate is below market. Good grief!! The goal is to extend more loans and "address falling home prices." Doesn't anybody remember the housing bubble? Why does the government think it makes sense to prop up home prices instead of allowing the market to price them? Also, why allow failed institutions to back below-market mortgages? I feel like I am living in the Twilight Zone.

Let's take this a step further. This scheme is only for buying a home and not refinancing. However, later in the article, Secretary of the Treasury Paulson says "...is to reduce the cost of mortgage finance so more families can afford to buy a home and so homeowners can refinance into more affordable mortgages." Huh? Now he wants to subsidize mortgages? Maybe the plan can include only those refinancing with bad credit, as the rest of us suckers are stuck with what we've got.

When I bought my house, I had to scrimp and save to get a suitable down payment, as well as prove employment and the ability to pay. Guess what, I have been able to pay my mortgage, on time, and without any "adjustments." So why should things change now? What should happen is that those institutions that made bad loans face the consequences.

As a taxpayer, and somebody who pays on time, I resent that some new home buyer is going to get a subsidized mortgage. I also resent the fact the lenders are going to rewarded for not applying standard risk models and setting rates. Stop this madness!! If the US government wants to restore both faith in the financial markets, as well as stability, mortgage and home prices should be set by the market, not by government interference (and my money!).

Ken Lewis Cleans Up

Its good to be the king, or CEO of a major bank. Ken Lewis, the CEO of Bank of America, is looking quite smart.

Forbes did an article about the whole Freddie/Fannie mess call "BofA's Bailout Benefit" on September 8th.

The article calls out how Mr. Lewis was panned for his purchase of Country Wide, the large and failing mortgage company. Many thought BofA was chasing good money after bad. However, with the bailout of Freddie Mac and Fannie Mae, he is looking crazy like a fox.

From the article: "The Ladenburg Thalman analyst (Dick Bove) argues that Bank of America, and Countrywide, have the existing infrastructure to start buying and securitizing loans on a large scale. He even said in a phone interview that Bank of America's capital levels would allow it to guarantee mortgage payments. This promise to pay has been Freddie and Fannie's traditional role in the U.S. housing market."

Naturally, one questions if a company like BofA can handle the securitization and guarantee of mortgage payments, do we really need Freddie and Fannie anyway?? Arguably, the answer is "No." In my previous post "Taxpayers Cover Freddie's Fannie," I state the bailout is a done deal, but what to do with the Freddie and Fannie is an open question.

It would seem that a market solution may be the best solution after all. Yes, you can hear me grinning, as that is a common theme of mine. Although widespread home ownership is valid policy objective, let's keep the government out of it to the greatest extent.

Again, from the article: "“I would be shocked if Bank of America isn’t happy about how this worked out. For years, banks have been asking for Fannie and Freddie to be cut back in size because they have they an unfair advantage," said Bove.“The government says Fannie and Freddie handled 80.0% of the market this year and someone has to handle that market share.”

There you have it, companies such as BofA are well positioned to handle a piece of the hopefully dismantled Freddie and Fannie. The next question is whether other banks of similar size have enough capital to do the same. If Citi, JPMorgan Chase, and Wachovia can get their capital coffers refilled, then maybe this will be a reality. However, if they can't get their collective acts together, expect to see more Barney Frank (D-MA) and government intervention.

US Taxpayers Cover Freddie's Fannie

The US taxpayer is going to insure the financial solvency of two public companies. Sounds a bit odd. So odd, that Jim Rogers of Rogers Holding proclaims, " (the U.S. is )more communist than China right now."

According to the Wall Street Journal Print edition ("US Seizes Mortgage Giants", Sept. 8, 2008, A1)

"In its most dramatic market intervention in years, the U.S. government seized two of the nation's largest financial companies, taking direct responsibility for firms that provided funding for around three-quarters of new home mortgages."

What is person to think? Should the government be meddling in a publicly-traded company's solvency? Is it right to have the government backing the fortunes of shareholders? Is there some greater good at stake to make this more palatable?

Freddie Mac and Fannie Mae are federally-chartered, publicly traded companies. Both companies' missions are to make home ownership more affordable, as well as making financing more reliable. Sounds good, right? Ah, but the catch is that when government is in the business of making things "more affordable," it presumes that the market can't do that effectively, thus creating constraints and other conditions not present in the market, which may or may not increase risk.

While millions of Americans have benefited from home ownership, and world financial markets have benefited from the buying of mortgage-backed securities (until recently), it would appear that these businesses have been a success. However, with flood of loose mortgages and the collapse of the credit market, maybe these "affordable" mortgages weren't such a good idea.

But they were! When the government chartered the businesses, it assumed the risks via the conditions placed on Freddie and Fannie. While there has been considerable legislative debate over their existence, they have provided the financing for millions of mortgages. However, it is time to pay the piper, and that is just what the government did, step in and put US taxpayer money on the line to pay for a system set up over four decades ago.

Right, wrong, or indifferent, when the government proposes interference in the free market, it is up to the citizens to either approve or disapprove of the action. US taxpayers should view this situation with great concern and think long and hard about the value of these two institutions.

I don't presume to have an answer, but I am willing to hear the arguments for both sides and would like to see more detailed analysis to make an informed decision.