97% of All U.S. Mortgages are Backed by the Government
I heard a recent talk by Richard Wolff - Professor of Economics
Emeritus at the University of Massachusetts in Amherst (PhD in
Economics from Yale), where Wolff said that 97% of all U.S. mortgages are either written or guaranteed by the government.
As Bloomberg explained last August:
Mae and Freddie Mac, the government-controlled companies that issued
and guaranteed more than 71 percent of mortgage-backed bonds last year.
Between those companies and Ginnie Mae, which guarantees loans insured
by the Federal Housing Administration, the government backed nearly 97 percent of U.S. mortgages in 2009.
There are supposedly plans in Washington to wind down Fannie and Freddie. Critics say that would destroy the "recovery" in housing.
If continuing to throw money at Fannie and Freddie would stabilize the economy, I might be for it - even though it is not free market capitalism. I am not wed to either liberal or conservative ideologies, and am instead simply motivated to do whatever will work to stabilize the economy and help the most people.
But as I noted in January:
independent experts say that the government's housing programs have
been a failure. That's too bad, given that the housing slump is now -
according to Zillow's - worse than during the Great Depression.
Indeed, PhD economists John Hussman and Dean Baker, fund manager and financial writer Barry Ritholtz and New York Times' writer Gretchen Morgenson
say that the only reason the government keeps giving billions to
Fannie and Freddie is that it is really a huge, ongoing, back-door
bailout of the big banks.
Freddie and Fannie's recent settlement with Bank of America - a
couple of billion - has been criticized by many as being a bailout.
In "BofA Freddie Mac Putbacks Resolved for 1¢ on $", Barry Ritholtz notes:
Bank of America settled numerous claims with Fannie Mae for an astonishingly cheap rate, according to a Bloomberg report.
premium of $1.28 billion was paid to Freddie Mac to resolve $1
billion in claims currently outstanding. But the kicker is that the
deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac.
In "Is Fannie bailing out the banks?", Forbes' Colin Barr writes:
Someone must be getting bailed out, right?
yes, say critics of the giant banks. They charge that Monday's
rally-stoking mortgage-putback deal between Bank of America (BAC) and
Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of
the nation's largest lender. It comes courtesy, they say, of an
administration struggling to find a fix for the housing market while
quaking at the prospect of another housing-fueled banking meltdown.
arrangement, according to this view, will keep the banks standing --
but leave taxpayers on the hook for an even bigger tab should a weak
economic recovery falter. Sound familiar?
Pinto says truly holding BofA responsible for all the mortgage mayhem
tied to its 2008 purchase of subprime lender Countrywide would likely
drive it into the arms of the Federal Deposit Insurance Corp., which
has enough problems to deal with. Though BofA would surely dispute
that analysis, it's easy enough to see where the feds don't want that
But how sharp is Freddie if all it can do
is squeeze a $1.28 billion payment out of a giant customer in exchange
for relinquishing fraud claims on $117 billion worth of outstanding
loans? The very best its million-dollar executives can do is claw back
a penny on each bubbly subprime dollar?
That seems pretty weak even given that this is Congress' favorite subsidy dispenser we're talking about.
Freddie can justify this decision to settle 'all outstanding and
potential' claims before any of the private-label putback lawsuits have
been resolved is beyond comprehension," says Rebel Cole, a real estate
and finance professor at DePaul University in Chicago. "This smells
to high heaven and they should be called out."
In "Bank Of America Just Admitted That Its Fannie And Freddie Settlement Was A Bailout", Business Insider's Joe Weisenthal writes:
Bank of America has basically confirmed that the critics are correct: It was the beneficiary of a bailout.
According to Bloomberg,
BofA's Jerry Dubrowski said: “Our agreements with Fannie Mae and
Freddie Mac are a necessary step toward the ultimate recovery of the
Get it? This was not about settling mortgage
putback exposure at the legal level. It was about helping the greater
good. It's the same too-big-to-fail logic all over again: What's good
for Bank of America is good for America.
As the Washington post notes:
is a gift” from the government to the bank, said Christopher Whalen
of Institutional Risk Analytics. “We’re all paying for this because
it will show up in the losses from Fannie and Freddie,” he said.
Congresswoman Waters said:
concerned that the settlement between Fannie Mae, Freddie Mac and
Bank of America over misrepresentations in the mortgages BofA
originated may amount to a backdoor bailout that props up the bank at
the expense of taxpayers. Given the strong repurchase rights built
into Fannie Mae and Freddie Mac’s contracts with banks, and the
recent court setback for Bank of America in similar litigation with a
private insurer, I’m fearful that this settlement may have been
both premature and a giveaway. The fact that Bank of America’s
stock surged after this deal was announced only serves to fuel my
suspicion that this settlement was merely a slap on the wrist that
sets a bad example for other negotiations in the future.
Chris Whalen - who has been hailed by Nouriel Roubini as one of the
leading independent analysts of the U.S. banking system - points out
that Fannie and Freddie helped to create the epidemic of mortgage fraud
in the first place, and Whalen argues that Fannie and Freddie must be
invidious cowards who inhabit Washington are unwilling to
restructure the largest banks and GSEs. The reluctance comes partly
from what truths restructuring will reveal. As a result, these same
large zombie banks and the U.S. economy will continue to shrink under
the weight of bad debt, public and private. Remember that the
Dodd-Frank legislation was not so much about financial reform as
protecting the housing GSEs.
Because President Barack Obama
and the leaders of both political parties are unwilling to address the
housing crisis and the wasting effects on the largest banks, there
will be no growth and no net job creation in the U.S. for the next
several years. And because the Obama White House is content to ignore
the crisis facing millions of American homeowners, who are deep
underwater and will eventually default on their loans, the efforts by
the Fed to reflate the U.S. economy and particularly consumer spending
will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio
earlier this year: "This is not a monetary problem."
policy of the Fed and Treasury with respect to the large banks is
state socialism writ large, without even the pretense of a greater
The fraud and obfuscation now
underway in Washington to protect the TBTF banks and GSEs totals into
the trillions of dollars and rises to the level of treason.
in the case of the zombie banks, the GSEs and the MIs, the fraud is
being actively concealed by Congress, the White House and agencies of
the U.S. government led by the Federal Reserve Board. Is this not
But the bottom line is that money given to the big banks and government-sponsored entities like Fannie and Freddie does not trickle down to Main Street or the bulk of the American people. See this and this.
As Steve Keen points out,
money given to debtors (i.e. the American citizen) provides much more
bang for the buck than money given to the creditors (i.e. the big banks)