‘Toxic Twins’ Fannie Mae, Freddie Mac – Recipe For Disaster

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TOON0105_jpgHousing Wire (Dec,31, 2015) : “In an op-ed sarcastically titled “Fannie and Freddie Forever,” the Wall Street Journal ethers Fannie, Freddie, the risk-sharing programs undertaken by Fannie and Freddie, the Federal Housing Finance Agency, and the entire federal government for supporting the conservatorship of Fannie and Freddie.

Here’s how the op-ed starts:

“Washington is a place where bad ideas go to live forever. How else to explain the latest innovation from federal regulators to keep Fannie Mae and Freddie Mac dominating the market for mortgage finance?

Opinion: No, Virginia, fat cat Wall Street bankers didn’t cause the 2008 housing crisis, government did.

The sad tale began in 1977 with then President Jimmy Carter’s grand idea of the Community Reinvestment Act and was further turbo-charged by President Bill Clinton in 1995.

Enter progressive politicians with presidential clout to pressure banks to loan money based on almost no income or deposit.

By 2005, normal middle class folks became house flippers owning 2, 3 and 4 houses at a time.

Borrowers used any income, including welfare and child support payments, to qualify for loans while banks looked the other way in order to fill quotas and satisfy the government.

The toxic mortgages were bundled and sold as mortgage bonds – mixing bad loans with good. They were called Government Agency Mortgage bonds and carried a AAA rating with a 5- 6% yield.

Banks all over the world loaded up on them and then a dangerous chain reaction occurred:

  • Millions of  people defaulted on their mortgages
  • The value of those AAA mortgage bonds collapsed
  • Banks all over the world became in need of government bailouts

The global economy cratered and hang on to your hats …. it is happening all over again as evidenced by the WSJ:

“These days the Federal Housing Finance Agency that supervises the twins under federal “conservatorship” seems to view itself as the official preserver of Fan and Fred’s market share. So instead of simply telling the mortgage giants to stop buying and guaranteeing so many mortgages, the regulator has been encouraging the use of ever more complex financial instruments to keep Fan and Fred at the center of this multi-trillion-dollar market.”

(See Headline “Even Smith & Wesson is surprised by the red-hot demand for guns” @  BPTnews.org)