Monday, January 30, 2012

Dealing In Outrage

Did you know that Freddie Mac is betting against hardworking Americans struggling to pay off their mortgages - and stacking the deck so that it wins the bet? It's true! I read it on NPR!

Except that the NPR piece doesn't tell the whole story. In fact, if you think about it in the context of such basic lending concepts of "interest rate risk," why lending institutions sell loans in the first place and what constitutes a "bet," you quickly come to realize that the story here isn't about big Wall Street banks colluding with a government sponsored enterprise to rip off home-buyers who are barely keeping their heads above water. The story here is about how it's pretty much impossible to balance competing interests in a way that everyone comes out ahead. And perhaps how a news outlet spins a story to drive pageviews and position itself as a populist champion for the downtrodden while ignoring important underlying issues that simply wouldn't  be as sexy in the current news environment.

To go into detail about how the story takes a financial quandary and turned into fodder for misplaced populist anger threatens to become a deeper analysis of the whys and wherefores of mortgage lending than I'm really comfortable with writing myself. To make a long story short, the FHLMC is in a position where it serves multiple constituencies: the banks (big and small) that originate home loans, the home buyers who take out the loans, the investors who buy securities on the loans and the taxpayers of the United States, who are the ones who have to make up shortfalls in the FHLMC's finances. This particular NPR story pits the home buyers against the taxpayers. The FHLMC stands accused of making it harder for homeowners to refinance, while at the same time having structured its portfolio in such a way that if large numbers of the mortgages it purchased are refinances, it would lose quite a bit of (taxpayer) money. Or, to be a little more breathless about it, "Freddie Mac prevented households from being able to take advantage of today's mortgage rates — and then bet on it."

The story contends that by siding with the taxpayers, that Freddie Mac chose the wrong side. Because, you see, there's a win-win, if only Freddie Mac would take it:

"There is an argument for [... the actions of the FHLMC being better for taxpayers in general, even though it harms many home buyers] and the Obama Administration and the regulator who controls them have to weigh helping out taxpayers generally against more specific homeowners, but as Chris [Arnold] said, it's very possible that a lot of refinancings could help the economy and taxpayers in the long run."
Jessie Isginger, Pro Publica
Part of the problem here goes back to the multiple masters that the FHLMC was intended to serve. Whenever you set up a system designed to look out for the interests of groups whose interests are directly at odds with one another, someone is going to be screwed. NPR and Pro Publica decided that there was an easy way out, in the form of making the assumption that the taxpayer subsidy that would be given to home purchasers in the form of letting them off the hook for the interest that they originally agreed to pay would be made up for in a new refi-financed spending spree that would drive economic activity to the point that all of the lost revenue would be made up.

In other words, THIS would be the economic stimulus plan that finally worked. Proof of that? None. But this isn't unexpected. After all, it only an eight-minute piece. And it would likely take at least a couple of hours to lay out all the reasoning that underlies their position.

But even if it were explained, would it be any less a "bet?" In fact, it seems like more of a literal gamble than buying a mortgage with a payment stream attached and expecting that payment stream to actually be there. Remember how "frugality" was supposed to be "the new normal?" So... what happens if rather than blowing it on consumer goods, a sizable percentage of these people put the money into the bank? Or pay down other debts? In other words, what happens if this new bet, the one that NPR and Pro Publica are pushing, doesn't pay off? What will their headline be then?

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