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Wakeriding the Fannie ‘n’ Freddie Meltdown

A good number of bills have been introduced this week to distribute blame and respond to the financial crisis triggered by the failure of the government-sponsored home mortgage enterprises.

“Wakerider” legislation – bills that follow the headlines – deserve some skepticism because the time is ripe for political posturing and other silliness, but some of the bills coming forward might be good.

From the posturing department, there’s H.R. 6987. It would require corporate officers of companies to repay their bonuses during years in which their companies are subject to a taxpayer bailout, and the two preceding years as well.

Fine. We get it. Corporate compensation is high. But even the millions and millions paid to corporate executives is an infinitesimal fraction of the losses at stake in the financial crisis.

Maybe the public needs this symbolism, but I’d rather see Congress put its energy into getting its own house in order. It will be spending hundreds of billions of dollars without oversight this week or next (beyond the financial services bailout money) simply because it didn’t follow regular processes for budgeting and allocating its own spending this year.

From the “Hurry! Close the barn door!” department, there’s H.R. 6853 and S. 3547. The House bill would establish a Nationwide Mortgage Fraud Task Force Act in the FBI. The House passed it on Monday. The Senate bill would create a Nationwide Mortgage Fraud Coordinator.

Hmmmm. What about having a “Countrywide” Mortgage Fraud Coordinator to look into the sweetheart mortgage deals some Senators were allegedly getting from that firm? – but that was news a few months ago, wasn’t it. We’ve all forgotten. (Someone hasn’t: S. 3542 was introduced yesterday to require full disclosure of the terms of home mortgages held by Members of Congress.)

From the “Wha’ happan’?” department, there’s H.R. 6990. It would establish an independent Fannie Mae and Freddie Mac Investigative Commission to investigate the officers and directors at Fannie Mae and Freddie Mac responsible and the decisions that led to the enterprises’ financial instability.

If this thing goes, it had better look at the policy – the implied government backing to these behemoths. The ‘public-private partnership’ – so often such a celebrated concept – is why we’re paying such a huge price now. Maybe “public-private” will come to be recognized as “public losses, private profits.”

And from the “This May Make Some Sense” department, there’s H.R. 6986, which would raise the maximum Federal deposit insurance coverage to $200,000. This seems to update the amounts covered by federal deposit insurance not in response to the crisis, but in response to the possibility that it could be needed. Nice to see someone possibly getting ahead of the curve, rather than following along behind it. But I have to say “least bad” is not high praise . . .

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“Wakeriding” the GSE Collapse | Think Tank West

[…] the WashingtonWatch.com blog, I’ve reviewed some of the bills introduced and moved in Congress the last few days to respond – or at least react – to the collapse […]


One of the interesting disconnects in the real estate and home finance business is that people are very willing to go online to do research about a new home or loan, but when it comes time to transact they choose to do it with a human hand-holder. And this despite the fact that both real estate agents and mortgage brokers are not held in high esteem. While customer service ratings for mortgage loan closings are still in the single digits, people have not embraced the online close.

Mike Zarin


The financial rescue package contains a provision that permits troubled financial institutions to apply for insurance (federal guarantees) and could prevent an outlay of $700,000,000. Furthermore, it can cut interest rates substantially, keep troubled homeowners in their homes, and certainly end the credit crunch.

The purchase assets provisions of the bill, buying paper at much less than its face value, will not put the financial institutions in enough funds to mitigate the credit crunch.

In fact the guarantee provision could even go too far in that direction. Administered sensibly by the Treasury Department it could be just right – if they would do it.


If I’m a banker holding 13% sub prime mortgage paper now worth 40 on my books instead of 100, and I get a US Government full faith and credit pledge (insurance, really a guarantee) behind that debt, my lousy paper is worth way more than 100 right now. Maybe 120 or more. No one wants that. Inflation.
Big time.

So, when the banker comes in to get his insurance, he should pay a fee and, most important, agree that the interest rate on his paper will drop to, say, 3.5. He has to agree, because the US government can’t change his contract unilaterally. -more –

In that way, his paper is worth 100. He sells it. He’s back in cash and the credit crunch is over. Regulations should cut back on the permission that sunk Lehman – ability to leverage cash 30 times. Twenty times does it nicely enough.

If you want to punish him because he was a bad boy, cut the interest a little so he only gets 90 cents on the dollar instead of 100. Less than that. No good. Because he won’t be able to do enough business and end the credit crunch.

New point. The homeowner who is paying 13% or whatever on the sub prime debt, a victim or a risk take or whatever (we’re at saving the economy not punishing him, his family and us now) should have his mortgage rate reduced to 5% so that he can pay his monthly charges. A sub prime mortgagor (interest rate, say 7and 1/2% or more) who has enough household income to do that should be part of the program. See below for the others.*

The difference between what the banker gets, say, 3.5%, to bring the paper to 100, and 5% ,what the homeowner pays, should go to the federal government to pay the costs of the program and any anticipated defaults.

That’s a program that works and benefits the economy, the taxpayer who lays out no money now, the financial sector and the homeowner.

*For another program, are we, as taxpayers better off if the guy who can’t pay all of his mortgage is thrown into the street, or do we really pay more to keep him in other housing, welfare and so forth. Maybe he should be subsidized some to keep him in his home. As I say, that’s another program.

The program outlined above works. Secretary Paulson has given no assurance that his plan works.

Mike Zarin

Michael S. Zarin
Wellfleet Investments LLC
P.O. Box 222142
Great Neck, NY 11022-2142
Direct Delivery:
40 Cutter Mill Road – Suite 200
Great Neck, NY 11021
Tel: 516-487-7450
Fax: 516-487-7480

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