Okay, everybody needs to calm down. We all know there's a bit of an economic crisis going on. However, that doesn't mean we need to start making irrational decisions.
Let me explain how we got here.
This problem starts back in 1938 when FDR created Fannie Mae. This was a government-created and government-backed institution that could purchase mortgages. This put a surge in the mortgage market then because privately owned banks could originate loans and then, to make quick money and to protect their risk, they could immediately sells the loan to Fannie Mae. This is called the secondary mortgage market. Most likely, the loan you have on your house is no longer owned by the same company that originated it.
In 1968, Fannie Mae became a new institution called Ginnie Mae and a NEW Fannie Mae was created. This new Fannie Mae would be privately owned yet was IMPLICITLY backed by the government. Let me reiterate, even though it was a privately-held company, the public assumed it was backed by the federal government and the federal government never EXPLICITLY denied it. To make sure they didn't violate at monopoly rules, another institution was created identical to Fannie Mae called Freddie Mac.
Throughout the 1970's and 1980's, the lending guidelines between Fannie Mae and Freddie Mac began to loosen. They began buying loans on multifamily properties, which were riskier than an owner-occupied residence. They were then allowed to buy adjustable rate mortgages, which are riskier than fixed-rate mortgages. They were also allowed to purchase secondary mortgages, which are riskier than the first lien position mortgages.
While all of this is going on, Fannie Mae and Freddie Mac became publically traded companies that would package bundles of loans and sell them as mortgage-backed security bonds. These were very popular in the investment world because they were perceived to be safe as the bonds were backed by real estate and the company was backed by the government.
Well, as the loans themselves became riskier, Fannie Mae and Freddie Mac also increased the amount in which they would allow a loan to be. In 1980, they could only take loans nearing $100,000. By 2008, it had increased to $730,000. You've heard about the bubble in the marketplace, right? This bubble was caused by Fannie Mae and Freddie Mac increasing their loan amounts, then making loans easier to acquire, which raised prices, in which they responded to by increasing their loan amounts again.
If it wasn't obvious, a huge multi-billion dollar company in which its profits were privatized, yet its debt were paid for by the public started to become a magnet for corporate corruption. In the early 2000's, there was a huge accounting scandal. A BILLION dollar audit was performed that still never resulted in a true financial status of the companies. While it was obvious that the executives were involved in nefarious activities, there were no reprimands.
As Fannie Mae and Freddie Mac still had ties to the government, they were able to access much lower interest rates than their privately-owned competition. With this, Fannie Mae and Freddie Mac effectively seized the secondary mortgage market. They owned nearly 90% of all of the housing mortgages in the United States.
All of these factors began to reach a critical mass as people who never should have qualified for the loans they received started to default. Over the last 6 months, Fannie Mae and Freddie Mac lost so much money that they became insolvent. The federal government acted on their implicit promise, and bailed them out.
The big investment banks that filled their books with the mortgage-backed securities Fannie Mae and Freddie Mac offered started to fall. This includes Bear Stearns, Merrill Lynch and Lehman Brothers. Also, you should realize that all of these risk-infested, mortgage-backed securities were marketed to the world as safe, AAA investments. Our dollar has decreased in value because confidence has been lost in the international marketplace due to this false misrepresentation.
You have probably read that AIG just got bailed out too. AIG is an insurance company that insured the owners of these mortgages in case the borrower defaulted. The biggest insurance company in the country is now bankrupt.
This is what has happened.
As the federal government is bailing out Fannie Mae, Freddie Mac, Bear Stearns and now AIG, we are going to have to foot the bill in the form of higher taxes and inflation. Keep in mind that we are being taxed by the government to keep private companies afloat.
You should note that, aside from this, the market is doing fine. Unemployment is fine. Our import/export operations are fine. While the dollar has taken a hit, it is still relatively okay. The information-age based companies are still growing. Everything else is pretty much fine.
The root cause to all of the turmoil in the market place is a result of the federal government nationalizing the housing market through Fannie Mae and Freddie Mac. This is not a failure of capitalism, it is the failure of a socialistic program trying to integrate in a capitalistic marketplace. Anybody you announces that the solution to this crisis is for the federal government to seize control of the housing industry has NO CLUE what they are talking about.
I know emotions are running high, but to act flippantly and start making decisions without closely analyzing how we got here is likely to cause more problems than they are going to solve. I write this to try to bring some rationale into the discussion and I hope you do the same.
-Beasley
Comments(0)