The White House is cooking up a plan to breathe new life into Fannie Mae (FNM) and Freddie Mac (FRE), the basket-case GSEs, which have put taxpayers on the hook for $400 billion.
According to the Washington Post, they’re bringing back the old Good Bank/Bad Bank idea. All the toxic, garbage assets will go in one, bad institution, leaving relatively healthy ones to get back out there and prop up the mortgage market.
This is a terrible idea.
It’s not that it’s a bailout, as these schemes typically are. That ship is already sailed. We already know we’re going to guarantee every last dollar of their debt.
No, the problem is that we’ll be creating two new, reinvigorated GSE, with AAA balance sheets and government guarantees to match. This means they’ll be able to create havoc in the housing market all over again. Maybe they’ll start modestly, with strict guidelines or whatnot — but then, since so much of the turnaround plan revolves around bad lending practices (document-light lending, high LTV ratios, etc.) they very well may go straight back to their old ways. Certainly, the political pressure will be on them to prop up as much of the market as they can handle.
We’ve already bailed them out. Is it too much to ask that they slink quietly off into the night?
Incidentally, this almost certainly has something to do with yesterday’s resignation of FHFA chief James Lockhart, though we’re not sure if there’s any connection between the news and the huge rally in FNM and FRE shares, yesterday.
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