Fannie & Freddie--Give Back the Money
Written byon 2008-08-02T13:32:35+00:00
Recently, the Washington Times ran an article on the highest paid executives in the DC Metro area. Guess who was on the list? That's right--all of the key executives of Fannie and Freddie. Each executive earned $10-20 million in one year, yet these organizations want the taxpayers to bail them out. What is wrong with this picture?
The subprime market was created by the market with the blessing and push of Congress and The White House so more low income and minority families could own their own home. This is a great goal. When these individuals are put in the situation of not being able to make their mortgage payments after the "sweetheart loan rates" end and the real rates are put in place, this is a real crime.
THERE WAS a time when scrutinized subprime mortgages seemed like an elegant solution to the stubborn lack of liquidity in the housing market for people with less-than-perfect credit. If adjustable-rate or "no-doc" loans didn't meet traditional underwriting criteria, no problem. They could be packaged and sold as bonds to investors all over the world, with the blessing of supposedly knowledgeable financial ratings agencies. For a while, this even struck some people as a smart way to "spread the risk" of defaults.
The restoration of safe and sustainable financial activity depends in large part on reestablishing the link between risk and responsibility. A prominent example is the need to reform the government- sponsored enterprises Fannie Mae and Freddie Mac, whose privileged access to capital has enabled them to take on massive risks that may yet trigger a massive taxpayer bailout.
Over the longer term, mortgage markets need alternatives to the Fannie-Freddie model, which is why a new Bush administration effort to promote "covered bonds" for mortgage finance is welcome news. We would say necessity is the mother of invention -- but covered bonds have been in use for many years in Europe, where the market for them is worth almost $3 trillion. Issued by banks, covered bonds are backed by interest-payment streams from mortgages. Unlike securities backed by subprime mortgages, however, covered bonds remain on the balance sheet of the issuing institution, giving it a strong incentive not to issue unduly risky mortgages.
With new financial programs for the mortgage industry, the Congress is trying to cover their behinds from very bad decisions in the past. I would like a Congressional Hearing on why so many executives of Fannie and Freddie earn millions of dollars and almost bankrupt the organizations. Why is this money not given back to the taxpayer?
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