Saturday, June 26, 2010

Financial Reform Comes Cheap Compared To What Fannie And Freddie Lurk

In the polarization of politics, parsing words of politicians has become a fine art form by opponents to score points as if the public has a mental scoreboard in their heads.

I'm drawing from memory here as most voters would on criticism tossed at House Speaker Nancy Pelosi and Senate
Banking chairman Chris Dodd.

After passage of the health reform legislation, Pelosi said we won't know what's in the law until it plays out in real time.

After the joint conference agreement on the pending financial reform package, Dodd said he hoped the new regulations would work.

That's how I understood what they were trying to say.

The Republican attack machine framed it differently. They suggested Pelosi didn't bother to read the health legislation. And Dodd was dabbling in some unproven experiment for heavy-handed governmental interference of the capitalist system.

Both pieces of legislation are 1,500 to more than 2,000 pages thick. Not in a million years am I so altruistic that I believe all 535 House and Senate members read every word of both legislative proposals.

Nor do I believe every subsection of each law will work as intended.

Laws are not set in concrete. They can be amended. They can be improved to meet the test of pragmatism. They can be dropped as failures. Awkwardly, it takes Congressional action to do that.

During the 1992 presidential campaign, the one proposal Ross Perot advocated I subscribed to was that each law passed by Congress have a two to five-year sunset clause to determine if it was working.

Now that's a reasonable concept rather than the Republican battle cry to repeal the health reform law because they don't like the one section, of hundreds, that mandates purchase of insurance coverage. Some opponents, such as former Alaska half-Gov. Sarah Palin, I presume would not settle for less than a repeal of the entire legislative act.

As for the financial reform legislation, no one other than a cheer-leading President Obama, who does not have a vote, is so bold as to predict passage, especially in the Senate.

What Dodd maybe was referring to as a "hope," is based on what a batallion of lawyers will write as specific regulatory rules applying to each subsection of the massive legislation overhauling our financial industry how it conducts business.

How that plays out is anyone's guess. Here are two analyses that may help in determing the prospective winners and losers.

What I object to is that the financial reform package exempted Fannie Mae and Freddie Mac which were instrumental in creating the housing market collapse.

The Congressional Budget Office says Fannie and Freddie will end up costing taxpayers more money than the historic bailout of the financial industry.

Congress voted in 2008 to effectively place the two mortgage giants in a federal receivership  by taking over 80% of its paper holdings.

So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage. The CBO predicts that the final bill could reach $389 billion.

Rather than being in the lending business, Fannie and Freddie are just as active in the foreclosure end of it.

Every 90 seconds in the first quarter of this year the two giants foreclosed on a home they financed and guaranteed to pay back investors.

By the end of March they owned 163,828 foreclosed homes, about the same number of total households in Seattle.

"Our business is the American dream of home ownership," Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. The New York Times, reporting from Casa Grande, about an hour's drive from Phoenix:

Fannie and Freddie increased American home ownership over the last half-century by persuading  investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors.
Rather than actually making loans, the two companies — Fannie older and larger, Freddie created to provide competition — bought loans from banks and other originators, providing money for more lending and helping to hold down interest rates.

They paid no heed to predator lenders requiring no money down, balloon payments nor financial statements
from new home buyers' ability to pay.

The result is Fannie and Freddie today are the nation's largest landlords.

The two companies together accounted for 17% of real estate sales in Arizona during the first four months of the year, almost three times their share of the market during the same period last year, according to an analysis by MDA DataQuick. 

It costs the government about $10,000 to sell each foreclosed house and recoup less than 60% of what the homeowner failed to pay after a resale at deflated market values than the original mortgage purchase price.

Some sales are to investors who "flip" the houses for quick profits after the government repaired interior damage and maintained its yards.

Fannie more than Freddie have programs to new homebuyers who pledge to use the houses as their primary residence.

As to the maintenance costs, just the cost of contracting mowing an empty foreclosed property costs $80 per month. The Times:

That's a monthly grass bill of more than $10 million.
All told, the companies spent more than $1 billion on upkeep last year. 

To ensure more new homeowners buy the foreclosures, Fannie and Freddie agreed to sell to nonprofits usuing taxpayer grants from the federal Neighborhood Stabilization Program.

Chicanos por la Causa, which won $137 million under the program in partnership with nonprofits in eight other states, plans to buy more than 200 homes in Phoenix in the next two years. It plans to renovate them to sell to local families.

Another gimmick:

Fannie Mae last summer announced that it would give people seeking homes a "first look" by not accepting offers from investors in the first 15 days that a property is on the market. It also offers to help buyers with closing costs, and prohibits buyers from reselling properties at a profit for 90 days, to discourage speculation. Fannie Mae said that 68.4% of buyers this year had certified that they would use the house as a primary residence.

Fannie Mae and Freddie Mac is our problem because Congress bought them for us without our asking.

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