Mortgage Blog

This year our financial markets have been on a wild roller coaster ride. The last 10 days have been especially dramatic. First our government bails out Fannie Mae and Freddie Mac – result is mortgage rates drop quickly, stock markets feel good about the move. A few days later – Lehman Brothers announces bankruptcy and our government does not bail them out – result is our stock market drops and our mortgage rates start climbing. Then AIG insurance announces that they are in trouble as well –government bails them out with an 85 Billion dollar loan- result is stocks tumble – our mortgage rates increase slightly.

Now we learn about the latest and greatest bailout of them all – our government is setting up an entity to allow banks to dump their garbage loans. This organization will absorb the bad mortgages, rework or refinance them and sell them back again over time. The idea is to essentially take the bad mortgage loan risk out of the markets. The impact to us tax payers could be enormous.

The big question is will it work? All of the other bailout/rescue plans were band-aids. This plan is surgery. If it works - our housing and stock markets will start on their recovery. If it does not work – we don’t have many options left. Our markets are still digesting all of this and no one really knows the outcome yet. (Will have more on this next week).

I still believe that under normal circumstances, good old capitalism would have worked without government intervention, however in this case “government intervention” is what got us into this mess in the first place. And unfortunately it will take government intervention to get us out. If Fannie Mae and Freddie Mac had not loosened their lending standards 10 years ago, we would not be facing this problem. These government agencies encouraged home ownership to such a degree that basic logic regarding borrower’s qualifications for a loan was completely ignored. Fannie and Freddie wanted to make as many loans as possible to as many people as possible. As we all know – too much of anything has consequences. If we had still kept our normal loan qualifications based on time tested criteria for income, assets and credit history – these bailouts would not have been necessary.

I find it insulting when our politicians claim that the private sector was the problem and that our government has to fix it. It is becoming very clear that the people that governed Fannie Mae and Freddie Mac escaped this crisis themselves with tens of millions of dollars in their pockets. It is also clear that execs had strong relationships with politicians in Washington. Where is the outrage? When Enron executives ran their company into the ground, they were condemned and prosecuted quickly. This mess at Fannie and Freddie dwarfs Enron, yet we do not hear anything from our politicians to take some kind action against these execs. I wonder why?