What to do about Freddie and Fannie? Pay it forward.
In Today's Washington Post, Barnie Frank and his chance to reform Freddie Mac and Fannie Mae next year (assuming a House majority) are profiled.
I have some ideas on this issue, but they have more to do with Federal Reserve action than congressional action.
First off, the Federal Reserve should write down the Mortgage Backed Securities in its portfolio to the market price of the underlying mortgage and then use its leverage to decrease the loan balances of the underlying assets, reducing both principal balances and monthly payments. Nothing else will really stimulate the economy like paying this problem forward.
Second, the Federal Reserve should buy Freddie and Fannie from the federal goverment for the current market value of their portfolios. Again, the underlying loans should be adjusted.
Third, the Fed should buy up all the Securities it can on US mortgages that are under water discounted to the market value of the underlying assets. This may take some encouragement - I suggest that this encouragement come in the form of Bankruptcy Reform, where borrowers are allowed to petition that their first mortgages be crammed down to market value. Meanwhile, assets should be required to be marked to market. Do these things, and assset holders will be all too happy to sell to the Fed.
Fourth, repackage mortgage backed securities held by the Fed on a regional basis - corresponding to Federal Reserve Bank regions. Then, create two new GSEs in each region, with the Federal Reserve receiving the proceeds from the initial public offerings to compensate them for the write downs.
Do these things and the prospect of a double-dip recession - which would in actuality be a Depression - would pass. Don't do this and a douple-dip is a sure bet, especially if the Republicans win and grid-lock results in Washington.
I have some ideas on this issue, but they have more to do with Federal Reserve action than congressional action.
First off, the Federal Reserve should write down the Mortgage Backed Securities in its portfolio to the market price of the underlying mortgage and then use its leverage to decrease the loan balances of the underlying assets, reducing both principal balances and monthly payments. Nothing else will really stimulate the economy like paying this problem forward.
Second, the Federal Reserve should buy Freddie and Fannie from the federal goverment for the current market value of their portfolios. Again, the underlying loans should be adjusted.
Third, the Fed should buy up all the Securities it can on US mortgages that are under water discounted to the market value of the underlying assets. This may take some encouragement - I suggest that this encouragement come in the form of Bankruptcy Reform, where borrowers are allowed to petition that their first mortgages be crammed down to market value. Meanwhile, assets should be required to be marked to market. Do these things, and assset holders will be all too happy to sell to the Fed.
Fourth, repackage mortgage backed securities held by the Fed on a regional basis - corresponding to Federal Reserve Bank regions. Then, create two new GSEs in each region, with the Federal Reserve receiving the proceeds from the initial public offerings to compensate them for the write downs.
Do these things and the prospect of a double-dip recession - which would in actuality be a Depression - would pass. Don't do this and a douple-dip is a sure bet, especially if the Republicans win and grid-lock results in Washington.
posted by Michael Bindner at 1:13 PM
3 Comments:
Michael, I recognize that monetizing the mortgage losses is an attractive option.
I interpret your post to imply that that the fed can wipe the slate clean of past over-investment in housing, presumably without much cost. I recognize that my interpretation may be incorrect.
If it is correct, such a result would be wonderful, even magical.
But I think those losses will have to borne by someone. Attempting to monetize them, and spread the loss even wider among people or over time could destabilize the economy more, and for a longer term.
Unfortunately, it seems probable to me that there is no easy way out.
I'd like to be wrong.
Thanks for commenting. I sometimes suspect I am the only reader. Thank you for proving me wrong.
There would definitely be costs involved. Essentially, the taxpayers would be giving the Fed the entire portfolio of Freddie and Fannie - although in many cases, it is not worth much - or at least not worth market value. These would then be sold to investors when these firms are split into regional entities, with the Fed receiving the funds to cover its losses and transferring the excess back to the taxpayers.
The book value of loans currently on its books as mortgaged backed securities would not be monetized so much as deflated.
The book value of Fannie and Freddie assets would be similarly deflated - although in both cases one can argue that in reality this deflation has already occurred - what is necessary now is a mechanism to recognize it.
Private sector mortgage backed security holdes would have to take a haircut, since I propose that the Fed by them at the market value of the assets rather than at their book value. Last I heard, the majority of these assets were in private hands. Again, this would be recognizing loss that has actually occurred - and it should occur anyway if accounting were not in the pockets of the investment sector.
On the question of disruption. I contend that eventually losses will have to be realized and it is better to manage the disruption than to hope for the bubble to reinflate, which is essentially what the financial sector is now doing by holding these assets without adjusting the underlying loans and writing down their value.
It is better to take this medicine now than in 2012 - at least for the administration.
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