Indications are strong that the Obama administration will order the flailing Fannie Mae and Freddie Mac to forgive mortgages when a mortgage is more than the value of the property. The buying of votes never ends. Every election year, Conservatives speculate on the Democrat October Surprise. In this year of extreme heat in the northeastern states, it appears the heat index may soar if we have this August Surprise.
This "mainstream bailout" of forgiving the mortgage debt of 15 million mortgages - estimated at $800 billion, flies in the face of this report from the Wall Street Journal saying things are beginning to look better at Fannie Mae, which for the first time in three years, showed loans 90 days behind falling to 5.15% in May from 5.30% in April.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:
1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.
2) Wall Street banks are alerting their clients privately to this possibility...
3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.
Fannie Mae is the biggest single source of money for mortgages in the United States. From 1998 to 2004...it was headed by former Clinton budget director Franklin Raines, whose top management team included former Clinton Justice Department official Jamie Gorelick, sometimes mentioned as a future attorney general in a Democratic administration. During that period, the report says, Raines and his team grossly overstated Fannie Mae’s earnings — to the tune of $10.6 billion — for the purpose of paying themselves big bonuses.
In doing so, the report says, Raines and his team steered Fannie Mae far afield from its original mission, transforming it from a stable business into a risky one....
Fannie Mae is not just any private institution. It is congressionally chartered, meaning its existence is established in law, it does not have to pay state and local income taxes, and it is not subject to bankruptcy laws. It can borrow money at a lower rate than anyone else except the federal government itself. Given all that, there is a public perception that Fannie Mae is a rock-solid government institution. “There is an implied guarantee,” says Sen. John Sununu, a member of the Senate Banking, Housing, and Urban Affairs Committee who has sponsored legislation to reform Fannie Mae. “Investors think they are the next best thing to Treasuries.”