Posts tagged with 'fannie mae'
by Zach Carter, Media Consortium blogger
Over the past decade, Fannie Mae and Freddie Mac transformed themselves into some of the worst-run companies in recent history. But contrary to current talking points, the firms’ failings had almost nothing to do with their programs for low-income borrowers. As policymakers debate what should be done with the mortgage giants, a battle is now beginning in which the very availability of affordable housing for the middle class may be at stake.
A history of affordable housing
As Tim Fernholz emphasizes for The American Prospect, before the U.S. government created Fannie Mae in 1938, mortgages were very pricey 5-year loans, so expensive that only very wealthy Americans could ever hope to own a home. Fannie Mae changed all that by rolling out the 30-year mortgage, which lowered monthly payments for borrowers by providing a government guarantee against losses for banks. It worked.
But as Fernholz notes, without some kind of government involvement in the housing market, home ownership will revert to its pre-Depression status a privilege reserved for elites. Policymakers will have to implement significant changes in the mortgage finance system to ensure stability in the U.S. housing market, but whatever changes may come, a robust role for the government in housing will be essential.
Fannie and Freddie have been justifiably but inaccurately maligned in the aftermath of the mortgage crisis. In recent years, their executives ran the firms like out-of-control hedge funds, lobbied Congress like arrogant Wall Street banks and did nothing beyond the bare minimum required by law to help low-income borrowers. But Fannie and Freddie did not go headlong into subprime mortgages—the primary source of their losses came from loans to relatively high-quality borrowers.
The terrible mortgages that crashed the economy were issued by banking conglomerates and Wall Street megabanks—Fannie and Freddie were almost entirely divorced from that line of business. The problem with Fannie and Freddie was largely structural– investors and managers saw the potential for big profits from taking on loads of risk, but believed (accurately) that the government would eat losses if those risks backfired. So Fannie and Freddie ramped up risk, taking on as many mortgages as they could while keeping as little money as possible on hand to cushion against losses. Eventually the strategy destroyed them.
Fixing the mortgage system
Exactly how the government stays involved in the mortgage market is still open to debate, as Annie Lowrey emphasizes for The Washington Independent. Nearly every member of the private sector who testified at a recent housing forum sponsored by the Treasury Department endorsed some kind of government backing for the housing market. This was a meeting of private-sector bigwigs—no community groups or affordable housing advocates were invited to speak at the meeting. Proposals ranged from scaling back government support for some types of mortgages, to the full nationalization of Fannie Mae and Freddie Mac (Fannie was a nationalized entity for the first 30 years of its existence).
In other words, the government is going to have to keep subsidizing housing, but it will have to find new ways to do it. The old Fannie and Freddie model didn’t work, but the private sector will be unable to get the job done by itself. Private-sector banks and mortgage brokers, after all, were the source of all the predatory loans issued during the subprime crisis, and the source of all of the most offensive loans that drove the economy off a cliff.
Inefficient and often predatory players on Wall Street are still causing problems today. As Ellen Brown highlights for Yes! Magazine, the mortgage system is so bizarre that banks are finding themselves unable to document their right to foreclose on properties—and courts are (fortunately) refusing to let them do it.
It’s a rare situation in which borrowers may actually hold the higher legal ground against powerful corporations. About 62 mortgages are registered through an electronic documentation system called the Mortgage Electronic Registration System (MERS), which helps banks with the foreclosure process. But MERS has repeatedly been unable to show proper documentation assigning a mortgage to a specific bank, and courts are now challenging its right to foreclose on behalf of big banks.
That’s good news, Brown notes, because MERS’ shoddy documentation has made it very difficult for borrowers to figure out who actually owns their loan. If you don’t know who owns your mortgage, it’s impossible to modify it if you find yourself unable to pay it off.
As Shamus Cooke argues for Truthout, even successful innovations like the 30-year mortgage are beginning to look a little outdated in an era of heavy, chronic unemployment. Many people can no longer expect to be gainfully employed for three decades on end. If the government refuses to repair our damaged jobs infrastructure, even simply maintaining the status quo in housing could become impossible.
Deficit reduction is not a cure-all
That brings us to another favorite conservative bogeyman, the federal budget deficit. The deficit and jobs generally stand in direct opposition. Creating jobs costs money, and spending that money expands the deficit. Cutting the deficit, by contrast, means cutting support for jobs.
As Steve Benen emphasizes for The Washington Monthly, conservative lawmakers are still harping on deficit reduction as a cure for everything that ills the nation, when the real solution to our problems is a serious jobs bill.
Even if the deficit were a huge problem, trying to cut important social services in the middle of a deep recession is not a good way to go about solving it. Drastic cuts to government spending in a recession result in lower tax returns for the government, which can often be self-defeating, especially in the face of expanding joblessness. The resulting push for deficit reduction—known in economic circles as an “austerity policy,” is better understood as the active pursuit of economic decline. As economist Robert Johnson notes in a New Deal 2.0 piece carried by AlterNet:
Deterioration of government services is bad enough, but imposing austerity due to lack of trust in a time of high unemployment and slack resources is tragic. It is a means to accelerate the decline of living standards of those who have taken a beating since 2007. Double dip or stagnation is too subtle a distinction. We are amidst an unfolding collective choice to pursue a downward spiral.
The government has taken several dramatic steps to repair the nation’s financial system, but it has done almost nothing to help troubled borrowers and not nearly enough to create jobs. Some of this is due to misguided policies enacted by President Barack Obama, and much of it is due to cynical obstructionism. But we cannot repair the economy without fixing jobs and housing. Both are still in a full-blown crisis, and policymakers should feel an urgent need to deal with them.
This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.
by Zach Carter, TMC MediaWire Blogger
The U.S. economy just keeps getting worse. Given the absolute pummeling the job market has taken over the past five months, we’re going to need some much stronger medicine than policymakers are currently proposing. It’s increasingly clear that President Obama’s stimulus plan was devised for a far milder downturn, and this week we received further evidence of the recession’s high human cost.
The U.S. lost another 663,000 jobs in March, according to a report released by the the Labor Department last Friday. Most of us are getting used to seeing big numbers associated with this recession, but those massive layoffs are perhaps the most distressing statistics of all. Jobs matter most to ordinary people right now, as John Nichols notes for The Nation, and the primary measure of success for any economic policy is whether it will get people back to work. Nichol’s argument stands in sharp contrast to what much of the news media is using as its metric of success: the Dow Jones Industrial Average.
Speculators on Wall Street have pointed to the Dow’s recent upward trend as evidence that things are getting better. We’ll see if that uptick continues after the next round of quarterly banking losses comes in, but even if they do, Nichols emphasizes, happy speculators are not the same thing as a happy economy.
The national unemployment rate currently stands at 8.5% and, without a dramatic increase in government support, will likely be mired in double digits for years to come. Nobel-Prize-winning economist Joseph Stiglitz puts it succinctly in an interview at Salon: “This model no longer works. The Americans are completely over-indebted. They can’t increase their consumption, instead they have to save.”
The recession’s growing severity underscores a host of long-brewing economic problems, not the least of which is access to a college education. The cost of tuition has been steadily soaring for decades, but with the life savings of many families decimated by the housing bust, even relatively inexpensive state schools are out of financial reach, as Andy Kroll illustrates for Mother Jones.
“Simply to ensure that a child attends a four-year public university, a family in the country’s lowest-income bracket now has to pay, on average, 55% of [their] total income,” Kroll writes. That’s not 55% of disposable income, that’s 55% of what the family is taking in, period. President Obama has proposed some solid remedies for this issue—increasing federal grants for low-income students and replacing overpriced private-sector student loans with cheaper government loans, to name a few. But Kroll notes that it’s also important to divert more federal stimulus funds to states to increase the flow of need-based financial aid at public universities.
For many younger students, attending college takes a backseat to making sure they have a roof over their heads. One out of every 50 children in the United States is homeless. This problem will not go away on its own, Randy Jurado Ertll writes for The Progressive. Ending homelessness for children would cost just a fraction of what we’re paying to bailout the nation’s largest banks—there is no excuse for ignoring the issue in the next round of recovery funding.
The housing collapse continues to deepen, but some policies designed to help families keep their homes are quietly expiring. In a story for The Colorado Independent, Mary Kane points out that the moratorium on foreclosures imposed by mortgage giants Fannie Mae and Freddie Mac expired at the end of March. Foreclosure-related evictions are set to resume. Just as depressing: none of the mainstream media seems to have noticed.
As foreclosures escalate, one policy option that would keep families with a roof over their heads is being generally ignored by both the government and the banking world: renting. If, Kane notes, banks rented foreclosed properties to the borrowers who can no longer afford them, the most devastating impact of the foreclosure crisis could be averted.
But instead of dealing with actual problems, some Senators remain more focused on throwing money at rich people. The estate tax has actually surfaced in the recent haggling over the federal budget, Steven Benen notes for The Washington Monthly, a tax that only applies to the richest 0.2% of American families.
We’ve seen enough giveaways to wealthy people in the recent bank bailouts, and we know that they have extremely limited economic benefits. Steering the economy toward recovery will require a much more aggressive investment in the livelihood of ordinary Americans.
This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.
“I’m not talking about a budget deficit. I’m not talking about a trade deficit. I’m not talking about a deficit of good ideas or new plans. I’m talking about a moral deficit . . . . We have a deficit when CEOs are making more in ten minutes than some workers make in ten months; when families lose their homes so that lenders make a profit; when mothers can’t afford a doctor when their children get sick.”
-Sen. Barack Obama, Ebenezer Baptist Church, Atlanta, Jan. 20, 2008
We can drop the “elect” from his title. President Obama is official. Everyone take a deep breath. Let it out slowly. And now let’s focus on the work.
Even before he was sworn in this afternoon, parts of President Obama’s economic platform were already moving through Congress. Overall, the general public remained largely in the dark about his plans for rebuilding the decimated financial system. What needs to be considered as the economic stimulus plan moves forward?
The $350 billion public investment in banks and other finance firms has not spurred banks to make loans that can foster economic recovery, nor has it encouraged them to face up to the huge unrealized losses embedded in their balance sheets. Over at The Washington Independent, Mike Lillis
demonstrates how the current bailout program fails to offer meaningful incentives for banks to direct their public money toward the public good, much less require it.
Moreover, the rescue plan attempts to address a symptom of the U.S. economic malaise—financial turmoil—without directly fixing the bad mortgages that caused the disease. Last week, the Senate gave President Obama the all-clear to deploy another $350 billion for financial rescue purposes, again with no strings attached. Obama and the new National Economic Council Director Larry Summers have pledged to spend up to $100 billion in Troubled Asset Relief Program (TARP) money to avert foreclosures. We should know very soon if they plan to live up to that promise.
For now, the financial system remains perilously close to where it was in September 2008, when a cascade of gigantic firms failed, inciting panic among investors and policymakers alike. The word “nationalization” has been mysteriously sidelined in the U.S. debate over what to do with our Wall Street financiers, despite a major taxpayer commitment of resources. If we want to change bank behavior, the best way to do it is through straightforward government takeovers, as William Greider explains in a piece for The Nation.
“Without such a move, the taxpayers will essentially be financing the slow death of failed institutions while getting nothing in return,” Greider writes.
Greider invokes problems at Citigroup, which inked an agreement to receive an additional $7 billion in taxpayer funds last week, on top of $45 billion it accepted in 2008. Based on the $3.50 closing price of Citi’s stock on January 16, the stock market values the entire company at roughly $19 billion. If any company is too big to fail, Citigroup certainly qualifies, but it is increasingly clear that Citi cannot keep pace with its losses– more than $8 billion in the fourth quarter alone. If we’re on the hook for the company’s collapse anyway, we might as well nationalize them to make sure they go down the right way, and end its predatory lending practices in the process.
Beyond matters of sheer practicality, it’s important to remember that these companies are being bailed out because they completely screwed up. Their errors were not restricted to bad bets on home values, either. Huge U.S. institutions undertook systematic efforts to fleece consumers for every penny they were worth on everything from credit cards to home purchases. In this video spot, Brave New Films details some of the abuses at Bank of America, which received another bailout of its own on Friday.
The Bush administration itself continued to encourage predatory, anti-borrower policies through to its final day in office, thanks to an almost surreal caveat for loan work-outs administered through mortgage giants Fannie Mae and Freddie Mac. This fall, Treasury Secretary Henry Paulson rolled out a loan modification effort at Fannie and Freddie, touting the plan as a major new effort to curb foreclosures. What he didn’t advertise was the fact that borrowers have to sign away all of their legal rights to contest any aspect of their mortgage to be eligible for lower monthly payments.
“In plain English, the waivers mean a borrower can’t sue the lender that originated the mortgage if the loan modification goes bad, or for any other lending abuses concerning their loan,” Mary Kane writes for The Colorado Independent, highlighting Congressional testimony on the program from Julia Gordon of the Center for Responsible Lending.
This legal absurdity is beyond reckless, given that Paulson was trying to solve a problem created by gouging consumers for the benefit of big finance companies.
But even if Obama rights the Bush administration’s bizarre programs and enforces corporate responsibility on Wall Street, a mountain of equally important economic work will still face Team Obama. Writing for AlterNet, Charlie Cray emphasizes that TARP and other salvage plans will not fix imbalances in the drastically insufficient financial regulatory structure. A sweeping overhaul of the nation’s regulatory architecture is absolutely necessary, but will face much stiffer opposition from the bank lobby than, say, a $350 billion giveaway.
While Obama’s economic stimulus proposal enjoys broad public support and will likely be enacted—Steve Benen presents some persuasive statistics on that topic at The Washington Monthly—it will be harder to garner up public support for technical and complex regulatory issues. When was the last time you heard anybody get riled up about how the Federal Reserve is funded?
Fortunately, the stimulus package offers a major opportunity to enact other badly neglected, longer-term projects to update the U.S. economy. OneWorld.net highlights analyses from leading think-tanks revealing that investments in renewable energy create far more jobs than pouring money into environmentally destructive coal-fired power plants, and leave future generations with a stronger social infrastructure.
There is room for hope. Amid a barrage of increasingly grim economic figures, Obama appears to understand what needs to be fixed and how much is at stake. He is certainly aware of the dangers posed by drastic economic inequality. Danny Schechter’s News Dissector blog features a post of Obama’s speech one year ago on Dr. Martin Luther King Jr. and the quest for economic justice. It’s inspirational stuff, particularly on the day the first black U.S. president is being sworn into office.
This post features links to the best independent, progressive reporting about the economy. Visit Economy.NewsLadder.net for a complete list of articles on the economy, or follow us on Twitter. And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net. This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.