The Bailout May Need a Bailout
Lance on Sep 27 2009 at 9:36 pm | Filed under: Uncategorized
Our government is now on the hook for trillions in mortgage loans, and traders are making money selling them more debt. The problem is that the bailout just may be suffering losses that are leaving our government scrambling to shuffle the pea from cup to cup. From Heidi Moore:
Look deeper, however, and the government isn’t really quitting its bailouts at all. It is just shifting strategy away from banks and financial services to a new set of quieter bailouts, centered on the housing and real estate markets in general and Fannie Mae and Freddie Mac in particular. In this way, the administration’s actions are meshing with the wishes of House financial services committee Chairman Barney Frank, who said last year, “I want at least two years with President Obama and a solidly Democratic Senate so that we can get the federal government back in the housing business.” Now it is, even to the point that the government is at risk of creating another mortgage bubble. We just have to see if the government can handle it.
The government has to concentrate all of its resources on keeping the housing and real estate markets stable because the government is now the single biggest investor in mortgage-backed securities. It bought more than 80 percent of all the mortgages issued by Fannie and Freddie. What this means is that if homeowners start to fall behind on those mortgages in even bigger numbers than the current 9.24 percent default rate, the government is in deep trouble, starting with the Federal Reserve. The Fed’s own balance sheet—its financial holdings—has ballooned to $2.1 trillion from just $800 billion a year ago. One-third of the Fed’s balance sheet is weighed down with $625 billion of troubled mortgage-backed securities, once floating around the market and now invited to stay in Uncle Sam’s own accounts.
