Posts Tagged ‘Timothy Geithner’
Why Fannie & Freddie matter most
New from me in Politico: an op-ed stressing that as important as a Consumer Financial Protection Agency is, the most important looming financial reform battle on the Hill is over the future role of the federal government in backing homeownership. The administration knows that any debate touching on Fannie Mae, Freddie Mac and $300 billion or so in public investment is radioactive. It has been silent on the GSEs’ fate for more than a year, even after it promised that it would illuminate its plans this February.
The House Financial Services Committee was supposed to hear something, anything, about the future of housing finance from Treasury Secretary Timothy Geithner at a March 2 hearing that was then postponed to March 23. I’m marking my calendar again but not holding my breath.
Reform on the horizon
Today in The Washington Post, Treasury Secretary Timothy Geithner and National Economic Council director Larry Summers preview their proposed new regulatory regime for the financial industry. The big news on the mortgage front: They vow to require future securitizers of mortgage and other debt to maintain a financial interest in any any instrument they package and/or sell. That measure is evidently intended to restrain them from reckless underwriting – they’ll now have to live with the consequences of excessive risk-taking.
But will they? Mortgage lenders and those who finance them have proven ingenious at offloading risk onto borrowers, through prepayment penalties, fees and so forth, which remain legal within certain bounds and proved toxic to subprime borrowers. Geithner/Summers commit to a financial product safety commission, per Elizabeth Warren’s exhortations, but in a sense they are allowing the toaster factory to keep churning out incendiary devices. I’ll be very surprised if their reform plans actually do anything to rein the practice of offloading risk onto borrowers – and as long as borrowers continue to shoulder the high price, having skin in the game won’t stop securitizers from underwriting destructo-loans.
Problem solved!
The easiest way to bring bad banks back to health — just change how they tabulate the value of their mortgage-backed securities.
What does this mean for Treasury Secretary Geithner’s asset rehab program? If banks can keep bad assets on their books all tarted up to look like sexy ones, then there may be no reason to sell them — hell, the institutions will need all this “capital” to stay in business.
As if we need one, this is yet another reminder of how horrendously dangerous securitization of mortgages is. At every step of the way, the financial conditions underlying these mortgages have been fiction — and the lies just keep getting deeper and deeper.
If you haven’t seen it yet, Paul Krugman’s column last week calling for an end to securitization is essential reading. He and George Soros are the the two highest-profile voices so far calling so for a new financing model for real estate and other assets, though as Krugman alludes other economists are also coming to the conclusion that the old system is fatally flawed.
I’ve been pondering the same question Krugman has: Why does firming up the capital markets system we’ve got, rather than creating a more functional one, remain the almost unchallenged agenda for the Obama administration and Congress? One answer lies in the very design of securitization: its instruments are engineered to yield healthy returns to any type of investor imaginable, on their terms and on a predictable schedule — meaning that insurance companies, small banks, pension funds, you name it, were all feeding at the teat of the asset securities market. And despite all the chaos that has ensued recently, the institutions that are accustomed to hosting these securities as high-yielding stars on their balance sheets aren’t yet ready to give up the dream that the milk will flow again.
How the homes we live in turned into the monsters that ate our economy and the United States became a nation obsessed with real estate.
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Organizations that matter
- Affordable Housing Centers of America
- Arthur L. Carter Journalism Institute
- Brookings Metropolitan Policy Program
- Center for Budget and Policy Priorities
- Center for Responsible Lending
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- Drum Major Institute
- Joint Center for Housing Studies
- Lincoln Institute of Land Policy
- National Consumer Law Center
- National Housing Institute
- National Housing Trust
- National Low Income Housing Coalition
- National Training and Information Center
- Natn’l Community Reinvestment Coalition
- NEDAP
- New America Foundation
- PolicyLink
- Pratt Center for Community Development
- Revson Fellowship
- Smart Growth America
What Alyssa reads
- Baseline Scenario
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- Bloomberg News
- Calculated Risk
- City Limits
- Consumer Law and Policy Blog
- Doug Henwood
- Felix Salmon
- Galleycat
- Housing Wire
- Mother Jones
- Next American City
- Paul Krugman
- PolicyCents
- Ryan Avent
- Shelterforce
- Street Level
- Talking Points Memo
- The Audit
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- The Big Picture
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