Saturday, September 13, 2008

$4 trillion

Voltron says: Now that our prudent government bureaucrats have taken control of prodigal sons, Fannie Mae and Freddie Mac they will surely end their profligate ways and quickly return to prudent lending standards. WRONG! Four senators have asked that they put a moratorium on foreclosures for 90 days. Hmmmmm, what’s happening within 90 days . . . hmmmmm . . . why would they want to prevent price discovery and market transparency during that time? Awww shucks, I can’t figure it out. They are also authorized to expand Fannie and Freddie’s loan portfolio until 2010. Also, the FDIC is refinancing IndyMac’s subprime loans at rates as low as 3 percent for terms as long as 40 years! They are also halting foreclosures until all the workouts can be done. OK, let’s engage in a thought experiment: Suppose the government refinances all mortgages at 3 percent for 30 years. If the mortgages are still “upside down” (i.e, the house is worth less than the mortgage), the borrower should still default. If the government offered mortgages at 3 percent for 30 years to NEW home buyers as well, then the house prices would rise so that the existing mortgages would not be upside down. OK, how much would that cost? Well, the 30 year t-bill rate is 4.5% so if the government refinanced the $10 trillion in outstanding mortgages at a cost of (4.5% minus 3%) it would cost about $4 trillion. Good thing Congress gave the Treasury secretary a blank check!

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