Mortgages go up or down, yet big lenders always win
|September 11, 2008||Posted by Jeffery J. Smith under Progress Report, The Progress Report|
Mortgages go up or down, yet big lenders always win
While foreclosures hit records, top guys stay on top
To make sense of the Bush Administration bailout of Fannie Mae and Freddie Mac, we trim, blend, and append a half dozen articles of 2008, beginning with an update of the housing recession that has triggered such huge losses.
by Jeffery J. Smith, September 2008
US home — actually home site – prices fell at a record rate in June, The Case-Shiller index of 20 major metropolitan areas for the month dropped 15.9% from June 2007 (MarketWatch, Aug. 26)
The percentage of home loans entering foreclosure nationwide rose to a record level in the second quarter of this year, due to a sharp drop in prices along with the resetting of ARM. Loans in California and Florida accounted for 39% of all foreclosures started. (Los Angeles Times, September 5)
More than 4 million homeowners, or 9.2% of those with mortgages, were delinquent by at least one payment or in foreclosure at the end of June. It’s the highest rate ever, breaking records for late payments, homes entering the foreclosure process, and for the inventory of loans in foreclosure. (AP, September 5)
Sales contracts on previously owned US homes fell 3.2% in July from the prior month. The index was down 6.8% from the prior year. (MarketWatch, September 9)
The fall in home site sales and prices has made mortgages worth a lot less to those who invested in such debt. Freddie Mac and Fannie Mae combined own or guarantee $5.4 trillion in outstanding mortgage debt (about half the US total). Over the past year, they have sustained combined losses of $14 billion. Fannie Mae and Freddie Mac shares each are down about 90% from a year ago. Central banks around the world hold these insecure securities. (USA Today)
By placing both quasi-public agencies into a conservatorship, the US Government takes over their liability. US Treasury pledged to keep making interest payments to Fannie and Freddie bondholders, but not stockholders. Treasury also said itd keep buying previously issued mortgage bonds (LA Times, Sept 8) – whose face value set by brokers may well exceed their actual value.
As with most of its bailouts, the US Government blesses some, not others.
The winners: As with most stocks and bonds, many middle class people own a little and a small number of wealthy people own a lot, so paying bond dividends means more to them. And buying bundled mortgages bails out brokers, who tend to be rich. When Fannie Mae and Freddie Mac sell their own mortgage bundles, they pay hefty fees to big Wall Street debt underwriters, and that is unlikely to change. Fannie Mae and Freddie Macs business was worth $1.5 billion in fees to broker in 2007. (NY Times, September 7)
The losers: Got stock? Or do you hold bonds? If not bonds, well, sorry banks and pension funds and Fannie and Freddie employees, but risk is what you investors cite when defending fat or steady rewards. And if you want security from socially-generated site values, thats something we all need to do together.
The rescue of giants is not going to prevent or undo millions of foreclosures on middle class family homes. And certainly it offers no help to families whod like to buy a home that (whose location) is still overpriced.
Actually its the people paying taxes — mainly the middle class — who have to pay for the bailout of the Fannie and Freddie, while rich people who can afford to steer their fortunes thru custom-designed tax loopholes.
The housing bubble still has not finished bursting; give it another year, year and a half, before the slide halts, prices find bottom — i.e., sufficient numbers can afford them — and the cycle can start up again. Then we can have a final tally on foreclosures, bankruptcies, bailouts, federal debt — whether in the hundreds or thousands of billions — and extra tax burden (already in the multi-trillions), before starting up our fervent hope in housing again.
Of course we could smooth out the boom/bust housing site cycle into a gently undulating climb/glide cycle. Just make land no longer an object of lusty speculation. Dont let land value be collected via sales, leases, and loans. Instead, recover and share land value society-wide, by charging land dues (or land taxes) and paying out rent dividends.
Government getting land rents would make it possible to dramatically curb taxes and citizens getting dividends would make it possible to dramatically curb subsidies. Thus both public debt and private debt (mortgages) would shrink. The economy would no longer be top heavy but stand on stable ground. Then people could eat their cake — get dividends — and keep it, too — get wages, untaxed. Thence fades away the rationale for bailing out the biggies, once the populace in general are secure.
Jeffery J. Smith runs the Forum on Geonomics.
The real reason for favors to mortgage holders
More chunks fall off the façade
The business press points to unstable underpinnings
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