According to the Wall Street Journal, Fannie Mae is riding to the rescue of as many as 150,000 struggling homeowners by offering to refinance up to 120% of the property value of the homes it insures:
That’s Fannese for “We’re trapped together, just like Harold and Kumar at Guantamano Bay, but our books are so hallunicatory that we don’t even need a bong. If we actually tried to collect on our bad loans, everybody would know we were going down the tubes.” Cutting the payments of people who can’t pay their loans and are drowning in debt just defers the resolution of the crisis–and increases losses by encouraging underwater property owners to let their properties run down through deferred maintenance. Twenty years ago, refusing to recognize loan losses turned the S&L crisis into a disaster and triggered Japan’s Lost Decade. Fannie has a capital base that makes that other pothead, Jimmy Cayne of the late Bear Stearns, look like a model of prudence–even if Fannie raises a projected $6 billion, it will have only $89 billion capital for $5 trillion in debt and other obligations, the New York Times reports–or 1.8%. Yet Fannie’s stock price jumped 9% one day last week, and its regulator, the Office of Federal Housing Enterprise Oversight, has actually lifted limits on Fannie’s growth and weakened its capital requirements. The assumption is that, having caused the housing bubble by recklessly pumping subsidies into the housing market, the federal government will solve the situation by pumping even more subsidies in, courtesy of its implicit guarantee of Fannie. With housing prices so far above median incomes, who’s going to pick up the tab if prices keep falling?
