Saturday, August 11, 2007

Dry powder to cope with the mortgage mess

With all the talk about "mortgage woes" and even talk that even the Fed can't do anything about it, it is truly amazing that so many people just completely ignore the fact that we have a mechanism in place for fairly rapidly cleaning up the mortgage mess, Fannie Mae and Freddie Mac. These so-called government-sponsored enterprises routinely buy and securitize home mortgages. But Wall Street, Republicans, and various other groups with vested interests actually object to even giving Fannie and Freddie a shot at cleaning up the mess.

The basic problem is that Fannie and Freddie had a great business buying and securitizing home mortgages and Wall Street wanted a piece of the action. Wall Street managed to buy enough political support to effectively "shackle" Fannie and Freddie so that a big slice of the pie would be dedicated to Wall Street. Unfortunately, Wall Street got the business, bit off way more than they could chew or swallow, and presto you have the current mortgage mess.

Fannie and Freddie are still in business and still buying and securitizing home mortages with no real problem (other than lingering internal accounting issues that they are gradually working through.) Fannie recently asked their oversight regulator for permission to exceed their regulatory limit and buy $72 billion in mortgages for its own portfolio. You would think that such a helpful offer would be welcomed, especially in the middle of a crisis, but the politicians controlled by these Wall Street interests strenuously objected for no particiularly good reason.

You can read about the latest episode of the Fannie/Freddie saga in an article in The New York Times by Eric Dash entitled "Fannie Mae's Offer to Help Ease Credit Squeeze Is Rejected, as Critics Complain of Opportunism."

In any case, Fannie and Freddie are still standing by, ready and able and willing to clean up a big part (if not most of) of the current mortgage mess. All that is necessary is for a bunch of politicians to simply snap their fingers, make a phone call, unshackle Fannie and Freddie, and stand back and watch the big dogs run. It probably wouldn't take more than a couple of weeks for these big dogs to chase the kiddies on Wall Street back into their tree forts where they belong.

-- Jack Krupansky

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