The untold story in the foreclosure crisis unfolding across America is that, following a foreclosure perpetrated by one of the October 2008 Bailout Banks (e.g. Bank of America, Citibank, JPMorgan, Wells Fargo) Fannie Mae or Freddie Mac suddenly appear as the record owner of Average Joe’s home. These federal government sponsored entities then go into local housing court and get a court order authorizing them to evict Joe. If Joe resists, these supposedly charitable institutions obtain a writ ordering the local sheriff to forcibly remove Joe from his home.
Newt Gingrich recently admitted to accepting $1.8 million from Freddie Mac ($25,0000 to $30,000 a month during one span of time) for advising this proto-fascist entity. Gingrich claims that he supports Fannie and Freddie because he believes the federal government “should have programs to help low income people acquire the ability to buy homes.” But Fannie and Freddie don’t do this and never have. When government “helps” someone by subsidizing the purchase of something (through easy credit or lower-than-market rates), it makes that something more expensive. Helping someone buy something that is overpriced because of your help is not help. Fannie/Freddie subsidies not only hurt the low income people they intend to help, they hurt everyone by subsidizing, and therefore distorting, the entire housing market. Fannie/Freddie’s charity has now taken a dark turn. Like their Depression-era New Deal predecessor the Regional Agricultural Credit Corp., Fannie/Freddie are now repossessing homes at an increasing and alarming rate.
Mr. Gingrich either does not understand economics – government subsidies make things more expensive, not less expensive, and therefore hurt their intended beneficiaries – or he is a vain, selfish, and cynical man with no interest in actually helping his neighbor.
THE OCTOBER 2008 BAILOUT PAID OFF THE HOLDERS OF MORTGAGE BACKED SECURITES AND DERIVATIVE INSUREDS
The facts indicate that the Federal Reserve “printed” at least 16 trillion dollars as part of the 2008 bailouts. The bigger questions, however, who got it, why and what did the Fed get in return? The Fed doesn’t just print money. It prints money to buy stuff. Most often this is U.S. Treasuries. That changed in October of 2008. In and after October 2008 the Fed printed new money to buy mortgage-backed securities (MBS) that were defaulting at a rapid rate. Want proof? Here is a link to the Federal Reserve balance sheet which shows that the Fed is holding over a trillion dollars in mortgage backed securities that it began acquiring in 2008.
Why is the Federal Reserve holding all these MBS? Because when “the market” collapsed in September of 2008, what really collapsed is the Fannie/Freddie/Wall Street mortgage “daisy chain” securitization scheme. As increasing numbers of MBS went into default, the purchasers of derivatives (naked insurance contracts betting on MBS default) began filing claims against the insurance writers (e.g. AIG) demanding payment. This started in February 2007 when HSBC Bank announced billions in MBS losses, gained momentum in June of 2007 when Bear Stearns announced $3.8 billion in MBS exposure in just one Bear Stearns fund, and further momentum with the actual collapse of Bear Stears in July and August of 2007. By September of 2008, the Bear Stearns collapse proved to be the canary in the coal mine as the claims on off-balance sheet derivatives became the cascading cross defaults that Alan Greenspan warned could collapse the entire Western financial system.
Part of what happened in October 2008 is that the Federal Reserve paid AIG’s and others’ derivative obligations to the insureds (pension funds, hedge funds, major banks, foreign banks) who held the naked insurance contracts guaranteeing Average Joe’s payments. To understand this, imagine that a cataclysmic event occurred in the U.S. that destroyed nearly every car in the U.S. and further that Allstate insured all of these cars. That is what happened to AIG. When the housing market collapsed and borrowers began defaulting on their securitized loans, AIG’s derivative obligations exceeded its ability (or willingness) to pay. So the Fed stepped in as the insurer of last resort and bailed out AIG (and probably others). When an insurer pays on a personal property claim, it has “subrogation” rights. This means when it pays it has the right to demand possession of the personal property it insured or seek recovery from those responsible for the loss. In Allstate’s case this is wrecked cars. In the case of AIG and the Fed, it is MBS. That is what the trillions of MBS on the Fed’s balance sheet represent: wrecked cars that Fannie and Freddie are now liquidating for scrap value.
Thank you Mr. Gingrich. Great advice.
BUT FANNIE/FREDDIE WASN’T MY LENDER AND WASN’T MY MORTGAGEE, SO HOW CAN THEY TAKE MY HOUSE?
To understand how it came to be that the Fed has paid Average Joe’s original actual lender (the MBS purchaser) and now Fannie and Freddie are trying to take Joe’s home, you first have to understand some mortgage law and securitization basics.