The Free Press, Mankato, MN

November 28, 2012

Our View: Bailout of mortgage debts needs attention

The Free Press

— With lots of news coverage and focus on the "fiscal cliff" in Washington, other large debt concerns seem to be escaping the attention of Congress and the president.

The quasi-government agencies Freddie Mac and Fannie Mae remain $140 billion in debt to U.S. taxpayers. That's bailout money borrowed to the agencies to stem their huge mortgage losses in 2008. The losses stemmed from loans extended to people who either weren't qualified, bought more house than they could afford or otherwise defaulted.

The $140 billion owed taxpayers is equivalent to the stock market capitalizations of Kellogg Co, McDonald's and Starbucks combined, according to financial analyst Joshua Rosner, who wrote an opinion piece on the problem for The New York Times.

Rosner asserts that Congress has a bipartisan approach to the problem: Do nothing.

That bipartisan approach most likely stems from the fact that both parties are to blame for the problem. The so called government-sponsored enterprises are stock corporations just like Apple and Google, but they have long been supported, some might say subsidized, by U.S. taxpayers. They made mortgages more affordable to people who might not be able to get them through the private mortgage market.

In the 1990s, things were going well. The agencies were making lots of loans and lots of profits. The Clinton administration then added gasoline to the fire by easing lending standards. When some members of Congress tried to correct that overreach and make the standards tougher again, they were apparently stymied, according to Rosner, by the Bush administration.

Of all the banks and insurance companies bailed out in 2008, most have paid back large portions of their government loans. But the government has only received interest payments from Freddie and Fannie. Then the U.S. changed its policy by taking only profits from the two as payback, according to Rosner.

There were several warning signs that the housing bubble was going to burst. Experts on financial markets in Congress should have known better.

Now, the problem of government involvement in the mortgage market appears to be growing even bigger with the Federal Housing Administration reporting losses of $16.3 billion recently. The federal agency was planning to raise its mortgage insurance rates and sell off bad loans to recoup the losses, with the hope it wouldn't have to come to taxpayers.

The problems at the mortgage lending agencies have renewed some calls in Congress, mostly among Republicans, to shrink the influence the government has in the mortgage market. The three agencies guarantee more than 90 percent of U.S. home loans, according to a report by Bloomberg News.

For a government agency to be at risk and to control that much of the mortgage market seems extremely hazardous to taxpayers' wallet.

Congress and the president have their work cut out for them to not only somehow reasonably get taxpayers' money back, but reduce the risk taxpayers are facing in the volatile housing mortgage market.