Fed Rocket Scientists Suggest a Full Housing Bailout, MBS Backstop

There's a reason SF Citizen caught me wearing this shirt
and interest rates are but one component
ZIRP til 2012!

It's not enough for the Fed to own all the bad paper, nor is it enough for Timmy to promise unlimited bailouts for these two useless front organizations, a Fed economist is calling for an MBS backstop. Sure, ok, that sounds like a genius idea. Because if investors don't want to touch them, that shouldn't be taken as a sign that they are radioactive, it just means a little more federal money and we're saved!


A U.S. Federal Reserve economist called on Sunday for the creation of a new federal institution to backstop losses on asset-backed securities to prevent any future collapse of mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE).

The government had to take over the mortgage finance companies in 2008 as a devastating financial crisis worsened. The two had been shareholder owned, but their congressional charters and Treasury lines of credit lent their debt securities a status just short of U.S. Treasuries in the eyes of investors.

"There ought to be government-backed ABS," said Fed economist Wayne Passmore in a presentation to the American Economic Association.

Atlanta Federal Reserve Bank President Dennis Lockhart participated in the session but did not make comments.

Fannie Mae and Freddie Mac, even under government control, play a major role in U.S. mortgage finance, and President Barack Obama has promised to propose early in 2010 how the companies should be structured in the future.

Housing has been effectively nationalized.

This isn't the first time the rocket scientists at the Fed have suggested as much, with Fed Governor Elizabeth Duke dropping the scheme at a Chicago Fed event on December 10th:

Federal Reserve Governor Elizabeth Duke said the government may need to “backstop” the market for mortgage-backed securities during future periods of stress.

Fannie Mae and Freddie Mac “have continued to issue large quantities of securities” because investors believe the government backs them up, Duke said today in the text of a speech in Chicago [which can be found via the Board of Governors here]. “That experience suggests that, at least under the most stressed conditions, some form of government backstop may be necessary to ensure continued securitization of mortgages.”

The Fed is purchasing $1.25 trillion in mortgage-backed securities to reduce borrowing costs, revive housing finance and spur economic growth. Costs on 30-year fixed-rate mortgages fell to 4.71 percent for the week ended Dec. 3, the lowest since mortgage buyer Freddie Mac in McLean, Virginia, began compiling the data in 1971.

Tighter credit standards have “restricted a lot of perfectly responsible lending,” Duke said at a conference on foreclosures held by the Chicago Fed. “Banks are reluctant to put any but the lowest possible risk loans in their portfolios. And the market for new private mortgage loan securitizations is essentially closed.”

The housing market remains “challenging,” with foreclosures this year prompted by higher unemployment and lower prices rather than poor underwriting of mortgages, Duke said. She didn’t discuss the near-term economic outlook or monetary policy in the text of her remarks.

Of course now, if she were to acknowledge monetary policy, she would also have to identify that this does not bode well for monetary policy moving forward. But for her to do that would show a tremendous amount of foresight which the Fed is not exactly known for.


The Fed would also, then, have to admit that despite Dallas Fed President Richard Fisher's declaration that the Fed is not "handmaiden" to the Treasury, the Fed is handmaiden to the Treasury. [see my July 23 2009 Dallas Fed's Fisher: "The Fed is not the Treasury's B*tch, B*tch"] (that's a nice way of saying "the Treasury's bitch" because Fisher is a classy bastard from Texas. Since I'm not, I'll go ahead and say it)

Good luck with that. Why don't we just admit China has us by the balls and we don't have the money to pay them back and call it even? It's a lot easier than these really boneheaded plans.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.