SALT LAKE CITY, UT | 12 July 2008 | Ten years ago, a good friend was diagnosed with highly advanced brain cancer. The doctors told the family that there were some tough choices to be made. The tumors had grown to the point that standard treatments wouldn’t slow their growth. Their placement within his brain was such that any surgical attempt to remove them would do more damage than good, and he likely wouldn’t survive the procedure. Even if he did survive, he would probably die of complications within a few short years. Weighing the options available to them, the family decided to let the cancer run its course. They felt that the exorbitant cost of questionable surgeries and procedures was unjustified. They loved this man and were sad to see the end draw near, but wisely realized the futility of trying to intervene and determined to make the best of what they had.As part of FDR’s cavalier New Deal that was going to save the nation’s economy, Roosevelt injected steroids into the mortgage markets without concern for their carcinogenic effects. Today, the doctors are telling us that we have some tough choices to make because the cancer is here and the tumors are inoperable. To get a picture of how large the tumors are, imagine the combined size of Countrywide, Bank of America, Citigroup, Washington Mutual, Wachovia, Wells Fargo, and every other banking name, that you can think of. Now imagine how big you would have to be if you were the organization that all of those banks depended on. Then throw in some unregulated government spending and you have the approximate size of these tumors.

In 1938, the Federal National Mortgage Association (Fannie Mae or FNMA) was created as a government agency to create liquidity in the failing mortgage market. Then, in 1968, Fannie Mae was privatized—not because the government shouldn’t be messing in private market matters, but because Fannie Mae’s numbers were messing up the Federal Budget. In the same year, congress chartered the Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC) as a private corporation to provide competition to Fannie Mae’s 30 year monopoly on the secondary mortgage market. Nothing like fair, open-market competition between Uncle Sam’s step children, is there?

While both Fannie Mae and Freddie Mac hold the status of being Government Sponsored Entities (GSE), they are technically private institutions. As GSE’s, both enjoy relaxed regulatory guidelines, so they hold an obvious upper hand in the competitive market place. So much so that virtually all privately owned lending companies base their guidelines on standards set by Fannie and Freddie.

And now, even with that competitive advantage, both organizations are on the verge of collapse. Ironically, their collapse is being blamed on current mortgage market conditions, when in reality, the presence of GSE’s in the market-place is one of the leading factors in the meltdown. Lenders, borrowers, and investors have poured money into the system based on the mistaken belief that FNMA and FHLMC are backed by the government. They are not. That false sense of confidence and security has led to over-extension of credit and speculation. FNMA and FHLMC are companies that were created by a government inexperienced in that field, with dollars that weren’t theirs to spend in the first place. Had either company had an honest start in the market place, they would have likely collapsed decades ago. Instead, we have an entire market segment that is based entirely on unsustainable foundations. The foolish man built his house upon the sand.

Yesterday’s news was that if the two lending giants were to collapse, there was little that the government could or would do for them. This morning’s news is that, in rethinking the ramifications of that collapse, the government feels we need to preserve these tumors. The foolish man tried to rebuild his house on the sand.

Key Points

• The creation of FNMA and FHLMC using tax payer dollars was an extreme violation of principle (Principle 9, to be specific), and was therefore destined to fail.
• The government is saying that the cost of bailing out either or both groups will have to be passed on to tax payers because it doesn’t have the money.
• The bailouts will only provide a temporary fix and will simply delay the inevitable at an extreme cost to the American people.
• To put this in greater perspective:
  • The total cost of war on terror through end of 2008 is estimated at $752 billion.
  • The high-end potential cost of bailing out private mortgage companies is estimated at $250 billion.
  • No one knows the exact cost of bailing out Fannie and Freddie yet, but they own and/or guarantee around $6 Trillion in loans. That’s 8 times larger than the current cost of the war on terror, and 24 times the cost of bailing out private mortgage banks.
  • While it is not likely that both organizations would be bailed out for every dollar they owe, the level of their insolvency is growing daily.

Conclusion

Allowing FNMA and FHLMC to fail will bring dire ramifications. The entire lending industry and all investments tied to that industry will experience major setbacks. This will affect other seemingly stable industries (such as the insurance industry) that invest heavily in mortgage-backed securities, and it will have direct impact on the stock market and value of the U.S. dollar. Trying to save FNMA and FHLMC, however, will bring much greater problems. Both organizations will still likely fail in time. They will just do so at a much greater cost to tax payers.

Action Items

1. Learn more about seller-carried financing and other lending options that aren’t connected to government lending agencies.
2. Write your congressman and express your concern that spending more to save a dying patient will only multiply the problem.
3. Develop greater levels of self reliance in your life by studying the Principles of Prosperity and learning to effectively apply them.

MRFC Principles: (4, 5, 7, 9, 10, 11, 12)

Sources

Letter to Committee on the Budget, Congressional Budget Office, February 11, 2008.

Mark Zandi, A Mortgage Bailout Would Cost up to $250 Billion, Wall Street Journal, February 27, 2008.