Saturday, July 26, 2008

After a $5 trillion bailout, do we need Fanny&Freddie any more?

The rationale for Fanny and Freddie is they can borrow money more cheaply than banks can. The downside to Fanny and Freddie is when they blow it, we taxpayers take one helluva hit. We could go back to financing houses the old fashioned way, with bank depositors money. Of course for that to work, banks would have to pay decent interest on savings deposits, which they don't do anymore.
Nowadays, to get decent interest, investors have to go thru Wall St whiz kids, who take their money and buy weird bonds that put money into banks to make mortgages with. And sometimes the weird bonds don't pay off. In olden times investors simply deposited their money in a reliable bank. We could go back to that. It would put a lot of Wall St whiz kids out of work, but they could get real jobs in sales, manufacturing and new product design. Finance isn't a real job, it's parasitic.
For 6% mortgages the banks could pay depositors 5% interest. For the depositors it's good money, as good as they get on "mortgage backed securities", and with FDIC protection to boot. Unlike subprime mortgage backed securities.
So, why not rein in Fanny & Freddie? Prohibit them from buying anything but real mortgages, no mortgage backed securities. Set a limit on their liabilities, about equal to their current ones. Demand they raise capital equal to 5% of outstanding liabilities before they can take on any more debt. Insist upon the borrowers putting up 5% of property value. Insist that the borrowers live on the property. Each borrower gets only ONE mortgage on ONE property. Don't do mortgages on McMansions. Lower the mortgage limit to $500,000, any house costing more is a luxury house and fat cat buyers will have to get a private bank mortgage. Appraise each property with in-house appraisers who have to personally sign the appraisal. Fire them when they inflate the value of any property. Never do a mortgage for more than the appraised value. Prohibit them from making campaign contributions (aka bribes) to elected officials. Limit salary and bonus to less than $1 million a year for senior management/every employee. Prohibit payment to consultants for anything.

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