Friday, January 15, 2010

The big US mortgage heist

One part of the US crisis concerns the mortgages. Until now the US government has spent $111 billion for the mortgage guarantee that it provided through Fannie Mae and Freddie Mac. But as it recently
raised the cap of $400 billion there is the fear that the final bill may be much higher.

This sounds like the US is just paying for past sins, but I don't believe so. I suspect that much or even most of the money is landing in the pockets of the banks and other mediairies that are between the Fannie Mae and Freddie Mac (the big guarantee holders) and the mortgage holders. These inbetweens tend to give their customesr big fines when they are late with payments. This often results in swamp of fines where customers get another fine for not paying the previous one on time, etc. As a consequence the money that those customers can pay ends up in the pockets of the inbetweens who charge it as a (very generous) reward for their extra work to reclaim the money. The creditors end up getting nothing.

The Obama administration has tried to improve the situation by trying to stimulate the rescheduling of those loans. But this has effectively been sabotated by the inbetweens who formally consider rescheduled loans as new ones and ask the same proves of creditworthyness that they demand for new loans. Given that these customers are in financial trouble it is no surprise that very few loans have been rescheduled. I think the Obama administration has made a mistake by seeing this only as a consumer problem. It encounters the same problem as a guarantor of those mortgages.

The "securization" of mortgages is a recent innovation. In the past banks sometimes outsourced the contact with the customer, but they always kept the final control so that they could push out the intermediary when they found that necessary. In the present situation the economic owners of the mortgages no longer have that possibility. It looks like that has become a serious problem now.

In my opinion there is only one solution: removal of the inbetweens. The US should nationalize Fannie Mae and Freddie Mac and they should take over the handling of any mortgage that is guaranteed by them where the customer is late with payments. Local offices of those organizations should then take care of rescheduling those mortgages when necessary.

Such a solution would be quite similar to the Resolution Trust Corporation that handled the aftermath of the savings & loans crisis.


Anonymous said...

"The US should nationalize Fannie Mae and Freddie Mac"

Fannie Mae and Freddie Mac are already federal (government) agencies. They are already nationalized.

Wim Roffel said...

You can buy shares from them. So the US government does not have 100% control.