News reports (e.g., Financial Times, article by Stephen Foley, 11/13/12) reports that the Obama administration is telling Wall Street that the President will fire Edward DeMarco, Head of the GSAs (Fannie Mae and Freddie Mac) at the beginning of the year. This is a gift to the banking industry. As these two GSAs have bought almost 80% of the nation's mortgages and securitized them for sale to bond dealers and pension funds, they also guarantee the loans against any loss. Since the credit crisis began the Obama administration has been pressuring DeMarco to allow borrowers to write off part of their mortgage debt, such a write off would require bond holders to accept a loss or the bonds could be refinanced and that would also trigger a loss for the GSAs. Keeping things as they are means minimal losses for the GSAs as foreclosures are low now and investors are buying up properties at reduced costs.
DeMarco is holding the line on a no-win situation for taxpayers but a win-win one for Wall Street. In her new book, (Fannie Mae & Freddie Mac: Turning the American Dream into a Nightmare, Bloomsbury Academic, 2012) Oonagh McDonald covers the history of these GSAs. The initial idea of FDR's advisers to produce the Federal National Mortgage Association (Fannie Mae) was to revive a collapsed housing industry and small banking system. By the time Nixon created the Freddie Mac (the Federal Home Loan Mortgage Corporation) banking was long recovered and the system became a means by which the large banks were able to shift all the risk in loans to the taxpayer.
It is time for the banking industry to stand on its own two feet and take the risks in loans it writes. Freddie Mac should be unwound and Fannie Mae may have outlived its usefulness unless it is to be turned into a Nationalized banking system for infrastructure financing of the kind we need now when the banks refuse to lend and the President needs to put people to work. Otherwise the future should consider:
1. Stop buying mortgages and only process those on the books now. Service them and stop securitizing the loans.
2. Lower the volume of loans bought to under 25% of present volume in 5 years and then decrease to 10% in the next 10 years.
3. No longer guarantee loans of any kind.
4. Eliminate all pledges of restitution of losses for either loans or bonds immediately.