Mortgage Bailouts

I’ve been thinking a lot about the mortgage bailouts after seeing the bill offered by Congress yesterday. Despite the fact that I handle about $12 million per year in revenue for my company, I don’t consider myself an economic expert by any means. I’m just REALLY good with Excel. (Normally if I need advice on money matters I turn to my brother, the accountant. Remember, I thought I’d be doing this for the rest of my life.) Still, I think this issue has actually been covered enough in the media that I feel like I am somewhat informed on it and so I’ll throw in my two cents.  

Initially, when the public began to get its head around this disaster it became clear that this was a sort of ‘perfect storm’ in that there were failures and mistakes made by everyone in the lending process. Borrowers, lenders and the companies that bought the mortgages later were all complicit in this mess. My attitude was to let the market sort this out. The lenders would lose billions because they loaned money to people they shouldn’t have. The borrowers would lose the homes they never should have purchased. Everyone would have learned their lesson and hopefully this wouldn’t happen again.

Then Freddy Mac and Fannie Mae started having trouble. While I still believe that leaving them to the fate of their poor judgement would have eventually worked itself out, how much damage would have been done in the meantime? Because neither kept the amount of capital on hand that other lending institutions normally would, my understanding is that both companies have heavy investments all over the market. So if they are allowed to go under or be severely weakened, it could send a ripple effect through the entire economy that could take years to recover from.

So now we have a bailout. The President pushed for helping the two giant lenders on the grounds that it was vital to the health of our economy in the short term. On that point I agree. Democrats countered this request by demanding that borrowers facing foreclosure be helped as well. I’m less enthusiastic about this part of the plan because I think these folks are the ones that are going to have the most trouble learning this lesson. But it seems fair in light of the govt helping the lenders.

The cost? According to the piece I heard on NPR yesterday, the foreclosure bailout will cost less than $1 billion because the government is only guaranteeing the new loans, not actually giving them. This also makes it easier to support this decision.

For the main details of the plan, I turn to NPR:

A look at what the bill would do:

- Give the Treasury Department the power to extend Fannie Mae and Freddie Mac an unspecified line of credit and to buy their stock, if necessary, to prop up the mortgage companies. The two companies back or own $5 trillion in U.S. mortgages – nearly half the nation’s total.

- Allow qualified homeowners facing foreclosure to apply for lower fixed-rate, 30-year mortgages backed by loan guarantees from the Federal Housing Administration. The original lenders would have to agree to take a loss on their loans.

- Create an independent regulator to oversee Fannie Mae and Freddie Mac. The regulator could establish minimum capital requirements for the two companies and limits on their portfolios. It would also have approval power over the pay packages of Fannie Mae and Freddie Mac executives.

I like the oversight that the lenders will now have and I like that the plan also forces the lenders to take a loss on helping the borrowers, which will re-enforce the financial penalty for their mistakes. Hopefully with time this crisis will be a good lesson for America that we have to take our borrowing (and lending) more seriously. I continue to wonder if something like this is on the horizon for the credit card companies as well.