Counterparties: Fannie and Freddie’s slow metamorphosis

October 26, 2012

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Today, FHFA announced that Fannie Mae and Freddie Mac are expected to cost taxpayers $76 billion through 2014, instead of the previous projection of $142 billion. But that may not be enough to save their regulator’s job. Shahien Nasiripour reports that the Obama administration is pondering a recess appointment to replace Ed DeMarco, who was named the acting director of FHFA in 2009.

DeMarco may be the most reviled bureaucrat in Washington, thanks to his repeated opposition to principal reduction for struggling homeowners. In January, the Treasury Department tripled the incentives for mortgage companies to offer homeowners such reductions; DeMarco promptly refused to consider them, even when internal company reports suggested principal reductions would actually save Fannie and Freddie money. As Felix wrote in July, DeMarco’s argument against principal reductions was “less financial than moral”, and DeMarco put his government agency in the strange position of vetoing the same government’s economic policy.

That wasn’t the first time the agencies have held back efforts to help homeowners. Jesse Eisinger has a fantastic story about how Freddie made it harder for millions of Americans to refinance their mortgages, fearing that it would hurt its profits. Freddie execs worried that the Obama administration’s mass refinancing program — named HARP — would hurt the company’s mortgage portfolio, even as it could help the larger economy:

Freddie Mac produced a memo in the fall of 2011, which was described to ProPublica, estimating that HARP would cause hundreds of millions of dollars in losses. The memo estimated big losses on the portfolio as well as from giving up the rights to return the loans. It minimized the benefits to Freddie’s insurance business from an improved housing market and improved economy. It also minimized the costs to the company of trapping homeowners in mortgages with interest rates so high they would eventually default.

Freddie has since stopped blocking HARP refis, but the missed opportunity was immense. One economist told Eisinger that a larger refi program by Fannie and Freddie could have saved homeowners $75 billion and prevented “hundreds of thousands” of delinquencies and foreclosures. — Ryan McCarthy

On to today’s links:

Beer
One company controls 48% of the American beer market – Businessweek

Old Timey
Transcript of the 1944 Bretton Woods conference found at Treasury – NYT

Taxmageddon
The fiscal cliff is already hurting the economy – WaPo

Defenestrations
Vikram Pandit was given three choices he couldn’t refuse – NYT
Vikram Pandit, “create and capture” victim – Ben Walsh

Wonks
Why financial crises happen – a Q&A with Gary Gorton – Cardiff Garcia

Plutocracy Now
Wen Jiabao has 2.7 billion problems (if you’re counting in US dollars) – NYT

Compelling
“Amazon is a black hole that is threatening to devour corporate America” – Matt Yglesias
Amazon posts $274 million loss thanks to Living Social – Amazon

Oxpeckers
How the NYT handles reader comments – NYT

Alpha
Bill Bain defends private equity – Alex Klein

Green Shoots
Consumer sentiment is at the highest level in 5 years – Reuters

It’s Academic
Why your brain is trained to think the number 3 is special – MIT

Housing
The massive cost of living next to foreclosures – Center for Responsible Lending

Primary Sources
US GDP growth increases to 2% in the third quarter – BEA

4 comments

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Has Carlos Brita heard of Schlitz beer? He might want to study this particular bit of history before committing fully to repeating it.

Posted by dWj | Report as abusive

Fannie and Freddy should never have existed and opportunities to dismantle them have been squandered again and again. It will be a great day when we can finally say that they no longer exist. It will be bittersweet though, like the end of a plague.

Posted by Changnoi | Report as abusive

Pundits endlessly missing the point! Freddie can pay taxpayers back in four years, Fannie in five. That’s the story.

Posted by fourcentson1 | Report as abusive

Wow, superb blog layout! How long have you been blogging for? you make blogging look easy. The overall look of your website is magnificent, as well as the content!