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Jewish World Review
July 22, 2008
/ 19 Tamuz 5768
Fannie, Freddie & the Daybed
The whole mortgage mess reminds me of the daybed incident.
Maybe I better explain.
One day, my next-door neighbor arrived home with a daybed from Ikea. The one-piece bed was built of solid wood and covered in a fine upholstery.
Three neighbors and I offered to help him get it upstairs. As we hashed over strategies, the daybed owner became consumed with doubt.
"I don't think there's enough room to get it up the stairwell," he said.
"There's plenty of room!" we lied.
We were eager, as fellows often are particularly since our stairwell and daybed weren't at risk to see if we could accomplish an obviously impossible task.
We were soon shoving the bed through the narrow space, causing the wood frame beneath the upholstery to tear as it scraped the plaster.
"It won't fit," said the daybed owner. "I should return it."
"It's too late," said another neighbor. "We've torn the fabric. Ikea won't take it back now."
And so we resumed shoving the bed and scraping the plaster as we slowly ascended the stairs. As we attempted to navigate a 90-degree turn into the upstairs hallway, the daybed became impossibly wedged against the walls and ceiling.
"Let's knock a hole in the wall," said another neighbor, unable to conceal his enthusiasm.
"Knock a what?" said the daybed owner.
"A hole! It will provide clearance!"
The first hole provided clearance, too. We were so inspired that, three holes later, we were finally able to shove the daybed, by then mangled and badly damaged, into the hallway.
Which brings us back to the mortgage crisis and government intervention.
During the Depression years, as part of the New Deal, FDR created the Federal Housing Administration. The FHA established rigid guidelines to minimize risk (believe it or not, people used to need good credit and regular paychecks to get approved) and essentially took on the risk that lenders otherwise would have had to shoulder. Mortgage terms became much more affordable and middle-class folks were able to buy homes.
So far so good.
To pump liquidity into the mortgage marketplace, FDR also established Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation); both have since become quasi-government organizations.
Here's how they work: After a lender originates a mortgage, Fannie or Freddie buy it, freeing up cash for the lender to issue other loans (they currently own nearly half of all mortgages in America). Fannie and Freddie then package the loans into bundles and sell them to investors.
So long as housing values continued to rise and people didn't default on their mortgages, everybody was happy banks originated loans, Fannie and Freddie bought them and their investors were paid returns on their investments.
But housing values have fallen drastically in some regions and folks are defaulting on their mortgages in part BECAUSE of Fannie and Freddie.
You see, values have fallen drastically because they were inflated unnaturally. They were inflated unnaturally because ANYONE with a heartbeat could get a gimmicky loan.
Anyone could get a gimmicky loan because lenders knew Fannie and Freddie would purchase virtually any loan they originated even the risky subprime loans.
Fannie and Freddie would purchase subprime loans because Congress persuaded them to it's not fair to leave out folks with bad credit and job histories, after all.
And Fannie and Freddie were happy to do as Congress asked because everybody knew Congress even though no laws mandated it would bail them out if things went sour.
And now that things have gone sour now that lax regulatory oversight let a woefully undercapitalized Fannie and Freddie run free many politicians see only one solution: MORE government promises, subsidies and bailouts.
To wit: taxpayers must bail out fools who took on gimmicky loans they couldn't afford and the bigger fools who gave them loans because they, and our muddle-headed Congress, got us in so deep there's no turning back now.
I sure hope our economy pulls through this mess better than the daybed did.
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© 2008, Tom Purcell
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