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We seem to be living in an era of the unexpected disaster: A virus that suddenly shuts down the US economy and ends life as we know it. A banking system that is at one minute solvent, and the next on the brink of collapse.
Of course, such calamities are never totally unexpected. The banking system was flashing warning signs about a year before the worst of the 2008 financial crisis. The pandemic was ravaging China before it came to the US, even if we were told it would evaporate once the warm weather hit.
Here’s another so-called unexpected disaster flashing warning signs that will have severe consequences for the American taxpayer if (or when) it arrives: A massive new housing crisis and the very real possibility of a significant economic collapse in the years ahead.
And once again, the trigger won’t be some black-swan event that comes out nowhere. Rather, it will come from the failure of bureaucrats in the Trump administration and progressives with the incoming Biden team to fix a duo of odd-sounding companies that have been allowed to become the lifeblood of the US housing market.
No one will blame you if you’re not fully briefed on the business models of Fannie Mae and Freddie Mac. But their defenders will tell you they are nearly as important as the air we breathe because without them no one will own a home.
The reality is far different. Both were created by Congress; Fannie in the Great Depression and Freddie some 30 years later to help average people own a home by making widely available the 30-year mortgage. Along the way they both also became public companies, serving shareholders as well as progressive government housing policy.
This is where politics and economics don’t mix. You won’t find a politician in America who isn’t for homeownership. The cheap and fixed 30-year mortgages are the best conduit for it to happen, they will tell you, though other countries — like Canada — do just fine with mortgages under 10 years.
And what shareholder doesn’t want his company to make more money even if it’s subsidized by Uncle Sam? No one cares that such public-private partnerships often result in disaster for taxpayers.
That’s the story of Fannie and Freddie, which fuels the housing market by stepping in and buying those mortgages from the banks, and transferring the banks’ risk to private investors after the loans are repackaged into bonds, thus allowing banks to keep on lending and spreading the gift of homeownership.
F&F made its money — and over the years they’ve made a ton of it — by borrowing cheaply at government rates and selling bonds to yield-hungry investors. For a while, everyone seemed to benefit.
Yet as we all know, this Pollyannish view of public policy and economics didn’t play out or we wouldn’t have had the events of 2008.
Homeownership as a “right” always sounds good politically until you unpack it economically. Fannie and Freddie handed money to people who didn’t have the economic means to repay their loans. They turned in enormous profits for shareholders only as long as housing prices kept running higher, which of course they didn’t.
By the time 2008 rolled around, F&F (along with the banks) were near collapse; private investors stopped buying their debt, which sat on F&F’s balance sheet like a ticking time bomb.
The federal government decided to bail them out and take them over because if they defaulted it would have had the market impact of a tsunami. F&F’s interests were so closely aligned with the federal government’s that it would have been tantamount to a default by the US Treasury in the eyes of the investors we need to keep financing our deficits.
After receiving tens of billions of dollars in bailout money, F&F remained wards of the state through the Obama years. After the Great Recession, they recovered and began making profits as housing returned to normal.
But they also became a piggy bank for the Obama administration’s vast expansion of federal government, and then went back to their old ways of allowing banks to make loans to anyone with a heartbeat and maybe no job.
Enter the Trump administration, namely Treasury Secretary Steven Mnuchin, and Mark Calabria, head of the Federal Housing Finance Agency, with grandiose plans to save the US taxpayer and the housing market from a repeat of 2008.
For four years we heard how F&F were supposed to be made free from government control, allowed to retain capital like a bank, and become as safe and secure as any independent financial institution in a post-2008 landscape.
There was even talk of a gazillion-dollar stock offering to “recapitalize and release” those “government-sponsored enterprises” (GSEs) from government control with a fortress-like, JPMorgan-esque balance sheet.
After four years of soul-searching here’s what we have in terms of “reforming” the GSEs, as released by Mnuchin and Calabria in the waning days of the Trump administration: There is no stock sale. In fact, the GSEs are still wards of the state.
There is a broad plan to recapitalize the GSEs, but the messy details will be left to the progressives in the Biden administration who view homeownership as a “right” and can’t wait to get their hands on F&F’s profits to finance a “Green New Deal” and a lot more.
With interest rates near zero, and the Biden administration likely to spread the righteousness of homeownership through F&F still in the hands of the government, those pre-2008 housing-collapse warning lights are once again signaling danger for the US economy.
In other words, all the elements are in place for a redo of 2008 — or even worse.
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