Reforming-Fannie-and-Freddie-a-6-Trillion-Dollar-Problem

Reforming-Fannie-and-Freddie-a-6-Trillion-Dollar-Problem

The missing issue in this discussion is bankruptcy reform. Unless something is done to provide for the 25% of mortgages that are under water currently, going forward is almost impossible. Without some mechanism to force the write down of these loans, other than foreclosure, the housing bubble will reinflate to values that bear no relation to the income of the borrower. The mortgage industry promising to be good is not nearly enough of a reform.

Any recapitalization of the private mortgage market must sell the underlying securities at the market value of the underlying properties. Anything else would be to create a toxic asset that is doomed to fail.

The Fed needs to buy Freddie and Fannie from the Treasury, detranche the loans and adjust the mortgages to reflect market value and then repackage them on a regional basis, establishing a Freddie and a Fannie for each Federal Reserve Bank region. The proceeds from the IPO for these would cover their losses in writing down the MBS portfolios that they already hold and that they acquire from Freddie and Fannie. Any profit over that would be returned to the Treasury.