Your Tax Dollars At Work

Normal as these things go, the announcement came late Friday afternoon as Washington was empty except for the cleaning crews and crime reporters. Fannie Mae issued a press release announcing it lost $72 billion in 2009. Billion.

Guaranteed by the United States Treasury. Guaranteed.

By comparison the mortgage giant's little brother, Freddie Mac, seems like a slacker in losing only $21 billion in 2009. Also guaranteed.

Fannie and Freddie operated until 2008 as "Government Sponsored Entities," or GSE's. While publicly traded companies with stocks on the NYSE and upper management pulling down the requisite million dollar plus bonuses. But they were also under the supervision of a government regulator to ensure they were following their charters and enabling American families homeownership and investors mortgage backed securities in a safe and fair series of markets.

This relationship changed in 2008 when the government took over both Fannie Mae and Freddie Mac. This was done to prevent them from collapsing and completely wiping out over half of the mortgage financing in America. Since the takeover the Federal Reserve and U.S. Treasury have made moves to try to ensure the flow of mortgage funds to allow Americans to pursue homeownership and refinance or modify their existing mortgages to lower monthly mortgage obligations and perhaps stave off foreclosure.

Now it starts to get a bit expensive for you. Yes, you. You pay taxes? While the media and debates have been clearly focused on the health care debates and how many Trillions of dollars may be shoved, pushed, crammed through Congress to allow President Obama to smile and say, "I did it," while this has been going on, in other sectors of the government billions are being spent with only a handful of Wall Street Journal readers noticing. So far over one Trillion dollars has been spent by the government on Fannie Mae, Freddie Mac and the mortgage markets.

At the time of the GSE takeover the Treasury pledged to back limited losses to ensure Fannie and Freddie could operate with liquidity needed to buy and sell mortgages. In early 2009 the Federal Reserve announced a plan to purchase $1.2 Trillion in mortgage backed securities to ensure liquidity in the mortgage markets and facilitate low mortgage rates to assist current homeowners with refinancing and prospective homeowners with lower payments. The Fed's mortgage purchase plan will end March 31st and on its exit will leave a gaping hole in the mortgage securities market. Or will it?

Now that it will own $1.2 Trillion of mortgages the Fed will need to start to unload those assets. After all wasn't it an overburden of mortgages that unbalanced the balance sheets of brokerage houses and banks? Of the mortgages funded in the past year, almost all of them have been purchased in the form of mortgage backed securities by the Federal Reserve. Not a very diversified portfolio. As the Fed looks to dump the mortgage holdings it will be competing with the new mortgages hitting the market as well as the U.S. Treasury that is issuing another Trillion in U.S. debt in the form of Treasury bills.

Not to worry however because we still have Fannie Mae and Freddie Mac and you are making sure they will be able to operate with business as usual, which means lose money. Remember the movie "Arthur" where Dudley Moore played the trust fund multi-millionaire who walked around drunk all the time? That is about where Fannie and Freddie are today after Christmas Eve.

As businesses closed early on Christmas Eve and Americans scrambled to find that last minute gift for Aunt Caroline or horseradish for the Prime Rib, any news on the radio and television was focused on the Senate and the bare passage of Majority Leader Harry Reid's health care bill. This culmination of months of debate, bribes and arm twisting was the perfect cover for the Treasury Department.

On December 24, 2009 the U.S. Treasury announced that it was covering all of Fannie Mae and Freddie Mac's losses for the next three years--no limit. Lose as much as you want and the United States Treasury (taxpayer) will pick up the losses. Now don't get too excited because after the three years then the Treasury will become very strict and limit loss coverage to $400 billion.

Part of the reason for the loss guarantees are the programs that have been brought forth by the Obama Administration to "help" homeowners in mortgage trouble. The Administration has enacted a mortgage modification program that has gone nowhere as it is ill conceived. Trying to force lenders into cramming down principle balances and interest rates on mortgages, the Administration is essentially forcing billions of dollars of losses on the banks. With the loss guarantees banks have been able to sell billions of dollars of mortgages back to Fannie Mae and Freddie Mac and let them take the losses that federal programs require.

Banks do not have to modify legal contracts. The government wants them to. Borrowers call their lender and say, "what about the Obama modification plan?" Lenders now say, "need to check with the mortgage owner." And it sits for months as the communication goes from borrower to lender to investor. With the loss guarantees the hope is that more mortgages come under direct control of Fannie and Freddie, especially delinquent mortgages, so homeowners can work directly with the investor to modify their mortgages.

With over $3 Trillion in mortgages on Fannie's balance sheet there is an tremendous opportunity for greater losses as unemployment continues to grow and homeowners see the opportunity to lower their mortgage balances and payments by missing a few payments and then negotiating a loan modification. More and more Americans are making their credit card payments and skipping mortgage payments--you can use a credit card to buy your kid a pair of shoes or some hamburger meat but you can't use negative equity.

Already into the Treasury for almost $100 billion the GSEs are on the looking to substantial increase that number in 2010. Between absorbing new mortgages on the market from the exit of the Fed and their purchase program, absorbing delinquent mortgages from lenders, loan losses through modifications and on top of that foreclosures, the losses will mount quickly as the Administration uses taxpayer funds to support the GSEs.

What is happening is the Administration's policy is to try to guarantee as many American homeowners as possible maintain their homes, and if possible see their mortgage payments go down. Regardless of whether their mortgages in default or that are above their homes' values are because of cash-out refinances or where well above common sense qualifying standards, Obama wants you to help these people out and subsidize their mortgages.

Between the mortgage assets held by the Fed, the losses that will rack up through the GSEs and the philosophy of the Administration to subsidize as many mortgages as possible at a loss to the lender (U.S. taxpayer) I feel the final tab to the U.S. taxpayer will surpass two Trillion.

By the way, Treasury Secretary Timothy Geithner has announced that any reform of Fannie and Freddie will not be considered until sometime next year. I can save the Treasury Secretary some time. Put Fannie and Freddie on the auction block and sell to the highest bidder, let the open market take care of them.


DCS03032010

Take The Stimulus Money Back

The news this summer has been very focussed on American citizens at townhall meetings. Some of the news diverts into showing just the screamers, while other reports show the questions being asked and statements being made. Almost all of the reports have been centered on health care reform and the people's objections to legislation currently working through the various committees of the House and Senate. Lost in the reporting is a very common message being given to members of Congress: stop spending money and creating massive debt for our children, grandchildren and great-grandchildren.

On Friday afternoon, with the President and the White House press corps A-Team out of town on holiday, the Administration issued an "oops" press release. It seems that its estimates of the budget deficits in the coming years was slightly off, only about 29%. Instead of the federal deficit reaching $7 trillion in ten years the White House acknowledged the numbers that have been put out by the Congressional Budget Office and said the number is more like $9 trillion--in the hole, negative, red ink.

A LOOK AT OUR DEBT

So far this year the Treasury has been engaged in auctions of all of its bills and notes, 6 month, 1 year, 3 year, 7 year, 10 year. The auctions have actually gone quite well with significant bidders keeping the prices high and the yields low. Low yields when selling debt are important because when you start talking about hundreds of billions the smallest tick in rate costs hundreds of millions. When you are talking about a trillion a small tick is a billion. As of this writing the U.S. debt totals $11,719,060,925,865.86

One reason the Treasury debt auctions have gone well is because there have been plenty of foreign investors. As of June 2009 $3.4 trillion of U.S. Treasury Securities are held by foreign nations and investors. The interest payments on this $3.4 trillion approximates $25 billion per year, being paid to foreign investors, so far. Foreign investment accounts for approximately 30% of our national debt. While much is made of China's holding of U.S. treasury securities, and they own a lot at $776 billion through June, not too far behind China is Japan at $711 billion. What this means of course is that hundreds of millions of dollars per week are paid to both nations in interest payments.

Looking forward from the present there is great concern about the rapidly rising debt and treasury auctions since many of the auctions are used to refinance debt that is coming due. In six months the Treasury will have to pay off the 6 month bills issued this month, how? By auctioning on more bills and bonds. With our economy looking to be coming out of recession in the next six months we will see upward pressures on interest rates. Every one-quarter of one percent in interest rate (00.25%) the interest paid on $11.7 trillion goes up approximately $30 billion--that is the increase in payments.

WHAT CAN WE DO TODAY?

Obviously the primary way to stop debt rising in the future is to stop borrowing today. Since we are talking about the U.S. government that is pretty much impossible, there will always be debt--the U.S. house will never be free from a mortgage. However what can be done is to control spending and reduce hindering future economies and generations with massive debt payments by limiting spending today.

As the current bills have piled up President Obama and the Democrats in Congress have touted that the payments of the bills will come from "the wealthiest among us." Specifically those making more than $250,000 as a family have been targeted as evidently not paying "enough" and will be called upon to pay higher taxes, and or have many tax deductions such as mortgage interest and charitable contributions taken away from them. But how much of a dent can Americans making $250,000 or more put into a $9 trillion deficit? How many Americans will suddenly make $249,000 because they net more after taxes than if they make that extra $1000? Is it realistic to believe that our current spending will be paid by future Americans making above that magic threshold?

It is just as realistic as my proposal to help lower the future deficit and send a message to Americans that they have been heard this summer.

TAKE BACK THE STIMULUS MONEY

Upon returning from summer recess (aside: when you hear Congress is on recess do you picture them on slides and swings, they often act like children I picture them on recess like children), when they return Congress makes huge in-roads with Americans and perhaps gains back a little trust if their first order of business is to repeal the Stimulus Package passed in February for any funds that have not yet been sent out. It is not needed to stimulate the economy as evidence that only 10-15% of the funds have been spent or credited through tax cuts and the economy by almost all reports is on the road to recovery. If the purpose of the $787 billion was to boost and support the economy, and the economy is boosting and supporting without the money then do not spend it. Take it back.

Yes there will be communities through the country upset because their pork projects of renovation of dilapidated and unused rail stations will stay dilapidated, skate parks expansions will stay the same size, walkways will not be built around lakes and some will be stuck with the millions and millions of dollars of signs printed touting a project is being paid for by Federal Stimulus Funding. So what, let them be upset in the end pulling almost $700 billion in spending back into the budget will help reduce the current deficit and the future deficit.

Americans across the country are telling their Congressional representatives to please listen to their constituents, look at how much money has been flowing out of Washington and how much more is on the table--over $1 trillion for HR 3200 the health care reform bill that is the center of most of the debates. Now is a chance for Congress to tell the American people, "we hear you, we understand, we will not spend money that is not needed to be spent by the Federal government."

Were Congress to rescind the unspent stimulus funds and pass a motion to suspend HR 3200 until Congress and the White House are able to reform and make efficient the waste in Medicare and Medicaid, I think they would have a much better chance of passing step-by-step and methodical health care reform.

If I were a "Blue Dog Democrat" on the hot seat in November 2010 for the deficits being rung up I would certainly be touting saving $700 billion and be part of the first Congress to ever un-ring a spending bill.

Think it will happen?

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