During 2004-2007, Fannie Mae and Freddie Mac stockpiled mortgages, many from the widespread practice of “liars loans” (i.e., no-documentation or low-documentation applications that skipped over validating income that could support the mortgage being sought).
Liars loans were consistent with Congress’ exhortations that the mortgage lenders bend over backwards to help low-income families attain home ownership. Liars loans became popular with real-estate speculators (at all income levels) who saw them as a way to achieve high leverage equity in a market of rapidly increasing real estate prices. Once lenders issued those loans, they quickly sold them to Freddie Mac or Fannie Mae, effectively transferring the risk to the taxpayer.
Before 2007, some in Congress pushed hard to make low-income home ownership a reality, but in 2008-2010 when prices plummeted and mortgage defaults crushed Freddie and Fannie’s finances, Congressional support for low-income homeownership wilted.
Congress appointed a commission that claims government policy was not the primary cause of the financial meltdown – is anyone surprised? Congress’ commission blamed mortgage lenders for the debacle, and authorized the federal government to treat the wounded Fannie and Freddie with $187 billion of taxpayer crutches.
In 2010, Congress infested the financial industry with regulatory kudzu called the Wall Street Reform and Consumer Protection Act (aka “Dodd-Frank”). Dodd Frank is so massive and byzantine that it is still being translated into regulations that cover the entire financial sector, including mortgagors and mortgagees. We’ll know whats really in it when we see the regulations.
So when a bipartisan group of Senators propose a new structure for housing finance insurance called Federal Mortgage Insurance Corporation (FMIC) we are rightfully wary. Senators opine that forcing mortgage issuer to keep 10% of their own money at risk will lead to better underwriting results, protecting FMIC. Forcing banks to leave skin in the game is a good idea, but ultimately, FMIC is just another label for taxpayer insured mortgages.
FMIC’s skin in the game requirement might provide some protection, but Congress rarely leaves a good idea un-messed with.
The taxpayer should earn a compensatory insurance premium for insuring any FMIC-covered mortgage. How likely is it that Congress will exempt premium obligations for its favorite voter blocks? It did under Obamacare.
How likely is it that Congress will divert FMIC trust funds from the intended purpose? It did with Social Security.
How grievously will FMIC hemorrhage if Congress reduces the tax-deductibility of mortgage interest? And will it be a felony to accept a political contribution or preferential treatment from FMIC or a mortgage issuer that FMIC insures?
Issues like these have been common Congressional foibles and if repeated, they may harm taxpayers again.
Alan Daley is a retired businessman who lives in Florida and who writes for The American Consumer Institute Center for Citizen Research