Friday, July 11, 2008

Government takeover of Fannie Mae and Freddie Mac?

The government is considering a conservatorship for Fannie Mae and Freddie Mac, the two largest mortgage finance companies.

"Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

The officials also said that such a step would be ineffective because the markets already widely accept that the government stands behind the companies.

The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation. But in recent days, enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans."

First, it's good that people are looking at contingencies. I understand the thinking behind the conservatorship idea - the companies are too big to fail - though I don't necessarily agree with it. But government has no money it doesn't take from others - meaning, you and me.

I'm already paying for my own mortgage. I was a responsible purchaser and read all the fine print, made sure I understood the terms and bought a house that was affordable for our income. Yes, we had an adjustable rate mortgage when we first purchased the home because it gave us a lower interest rate and more available cash for doing the repairs we knew the house needed. We did so with the understanding that in 2-3 years, we'd switch over to a conventional mortgage - and we made sure we had no penalties or clauses that would prevent us from doing so, or make our choice more expensive.

Now, the government wants to take the taxes I've paid and use it for others who were not responsible with their home purchase. I'm a believer in the old addage, "Fool me once shame on you, fool me twice shame on me." If a person was so "inexperienced" (that is: stupid) that they did not know or understand what they were getting in to when it comes to their mortgage terms, that's not my fault and it shouldn't require my tax dollars to be used to save them from their mistakes. Perhaps that type of person shouldn't be owning a home in the first place if they are incapable of entering into the purchase in a knowledgeable manner.

Further, if people find themselves in a period of declining income due to any number of reasons (loss of job, medical issues), there are options available that do not require tax dollars to implement. They aren't pleasant options, to be sure, and I certainly don't relish another's difficulty. But expecting fellow taxpayers to make the situation 'right' (whatever that might mean to the individual in trouble) is not the way to go.

It seems as if whenever a problem arises, the first - and preferred - choice is to turn to government to 'take care of it.' Never mind the fact that it's government interference that caused the problem in the first place, we'll just let them continue to meddle and attempt to relieve people of the consequences of their actions. Government officials proposing such bailouts think people (and businesses) should be protected from making bad decisions - but that only ensures more bad decisions in the future when they fail to learn from the experience.

In the meantime, you and I find our lives more difficult as we pay for government's charity.

***Porkopolis has a background post on these two companies.

5 comments:

Biztube247 said...

Absolutely right! It's terrible and yet people/banks/government only change when there's enough pain. No one seemed to remember life happens when you're making other plans.

Hopefully there's enough pain now. I am especially tired of shoring up greedy lenders and politically expedient congressional decisions. Stupidity? There's a cure for that. It's the old no free lunch rule. Should be taught in every grade in school and reinforced by the people who underwrite ridiculous loans.

Kadim said...

Your old adage reminded me of another one: "If you owe the bank $1000, you can't sleep at night, but when you owe the bank one million, they can't sleep at night."

While it's true that less than competent borrowers share some blame, the article and the events that have occurred show that the majority of the blame rests with less than competent lenders (not to mention professional investors who were pouring billions into financial products whose provenance they simply didn't understand.)

But in the end though, the bailout of Freddie and Fannie is being done for investors and bankers, not to help moronic homeowners.

Maggie Thurber said...

Kadim, to take it a step further, why did banks make such loans? Because the federal government offered incentives to do so in order to try and promote more home ownership. Government backed loans to low income people, downpayment assistance or no downpayment terms...to people who really couldn't afford the purchase in the first place.

I place blame on the elected officials in Washington for helping to cause the problem and for now trying to help those hurt by what those elected officials did in the first place.

Yes, I understand the logic of 'saving the industry' and not letting this 'crisis' further negatively impact the overall economy. Just because we 'understand' what they're doing, doesn't mean we agree with it - nor that it's the right thing to do.

Kadim said...

Maggie,

Let's take it one step further. Why are people so desperate to own a home? Because the government insists on underwriting some of the cost with (significant) homeownership tax incentives.

I understand why they do it, I understand why it's so difficult to get rid of. And I'm by no means a fan of income tax or the capital gains tax.

However, as long as you're going to have an income/capital gains tax, especially one as burdensome as ours, any exemption made will naturally cause distortions and perversions in the market. The homeownership tax incentives pervert the market terribly--people were buying homes when they would be/were better off as renters. People were trading up homes simply because the tax system made it possible. That added artificial demand.

So in my mind, government interference with this market goes beyond low-income homeownership programs. All classes of people are subsidized artificially towards unnecessary home ownership by the tax code.

Maggie Thurber said...

Agreed, Kadim...and very good points!

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