Goodbye Fannie and Freddie, Hello MCGE

CNBC ^ | September 2, 2009 | Diana Flick

[CutePuppy]

It's careful, it's complicated, it's got a catchy name, and it's first.

At face value, that's what I see in the Mortgage Bankers Association's proposal to formulate a new, government-guaranteed, mortgage backed securities market to take the place of Fannie Mae and Freddie Mac.

Let's start at the very beginning, with the MBA press release:

The centerpiece of MBA’s recommendation is the creation of a new line of mortgage-backed securities (MBS). Each security would have two components – a loan level guarantee provided by privately-owned, government-chartered and regulated mortgage credit-guarantor entity (MCGE) and a security-level, federal government-guaranteed wrap.

America, meet the MCGE, and yes, that's pronounced McGee, and perhaps aptly, as it aims to provide fast food for hungry investors who are currently quite risk averse when it comes to buying pools of mortgages.

Simply put, the MCGE buys mortgages from banks, pools them into securities, pays an insurance premium to a new government fund and then sells them to investors with government guarantees against the default of those securities. So the investors take the interest rate risk but they are not taking a credit risk.

The MCGE takes the credit risk, but the new insurance fund guarantees the principal and interest payment on the mortgage securities should something bad happen at the MCGE.

I spoke with the chief architect of the plan, MBA Vice Chairman Michael Berman, who says, "The key here is to virtually eliminate taxpayer risk and keep the risk in the private sector."

Berman says the MCGEs would be highly regulated, kept to a certain size, and would use other tools to manage their risk, like private mortgage insurance, credit default swaps, etc.

.....

[CutePuppy]

Le Roi Freddie Mac est mort. Viva Le Roi Mac Gee!

Fred is dead, long live MacGovernment!

I think we have seen this movie already, just recently, it doesn't have a happy ending. Same private profits, losses are socialized by government / taxpayers guarantees. "Good bank" assets and profits go to private investors, "Bad bank" assets and liabilities stay with taxpayers.

MacGovernment and crony socialism at its worst!

[Arthur McGowan]

Calling it Fibber McGee would probably be lost on most people.

[CutePuppy]

Correction: author's name is Diana Glick.

Like I said, it's careful, but it would also involve dismantling the behemoths, Fannie and Freddie, and transferring the intellectual capital there, as well as the servicing relationships and the systems, i.e. the good assets, to the MCGEs and cordoning off the bad assets to be dealt with otherwise. Sort of like the good bank, bad bank model of the S&L crisis.

"Good bank, bad bank" idea has been bandied about earlier in the year and had been (thankfully) rejected because it's a bad idea, will not do anything to spur the housing market, and may even delay the recovery as someone has to unbundle, separate and evaluate / put the price on the $Trillions of "good" and "bad" MBS.

By the way, I'd recommend mostly excellent 4-part TV series by historian and author Niall Ferguson Ascent of Money from the unexpected source (PBS) http://www.pbs.org/wnet/ascentofmoney/ for a historic overview of booms and busts, disfference between private insurance and government welfare (sold by politicians in all countries as "social insurance"). You can watch all videos online, but if you only have one hour to spare, Part 3: Risky Business is a must see. Particularly, it deals with Milton Friedman and Chicago Boys experiment in pension reform in Chile, and has an interview with George Soros...

[dalereed]

Would that take the place of Ginnie Mae Securities?

I’ve got $300k in CDs coming due in a couple of weeks and was thinking of putting it into a GNMA fund that is paying 3.96% currently.

CD rates suck now and I don’t want to lock anything up long term as I think that interest rates will climb in the near future.

[CutePuppy]

Keeping F’s and M’s together, good show! Of course, they could add Federal to MCGE, but they probably would not want to as it just might give away the “secret” of, literally, a “change in name only”.

[torchthemummy]

Berman says the MCGEs would be highly regulated, kept to a certain size, and would use other tools to manage their risk, like private mortgage insurance, credit default swaps, etc

Then what is the need for a government entity? If regulation is supposedly needed to "reign in" bad private mortgage companies then, theoretically, the regulations need to be changed. But once again we're promised that a new government entity will be successful because it's...a government entity in charge.

[CutePuppy]

No, this is just repackaging FNM and FRE under a different name with explicit guarantees... which is moot now, since Fannie and Freddie have been effectively nationalized.

Now that Fannie and Freddie have been nationalized and thus under the light of public scrutiny (no hiding behind "corporate" accounting and sets of books, like Franklin Raines and Jamie Gorelick had done), "they" are trying to set up a replacement, "new and improved" public-private partnership where they can move assets around at will and cherry-pick good assets from bad ones - "good bank, bad bank".

They might still sell MBS rated / backed funds, but it would not be the same as GNMA.

[CutePuppy]

Then what is the need for a government entity?

That's the right question. The answer is, because they can.

It's a scam, always has been, ever since Franklin Delano Roosevelt set them up at the time of Great Depression. The PBS series Asent of Money, parts 3 and 4 describes exactly how and why it was done and why it really had no choice but to fail, i.e. specifically because it was a government program. Yet another Ponzi scheme / income or wealth transfer run by the government.

[101voodoo]

Simply put, the MCGE buys mortgages from banks, pools them into securities, pays an insurance premium to a new government fund and then sells them to investors with government guarantees against the default of those securities. So the investors take the interest rate risk but they are not taking a credit risk. How is this different then FANNIE MAE? A FANNIE MAE FUND is made up of government securities and government backed securities which back mortgages.

[101voodoo]

Oops, I confused FANNIE MAE with GINNIE MAE, my bad.

[Right Wing Assault]

Mickey Gee?

[ntmxx]

Let’s see, they did not get it right the first several times, could not fix the problem they created, the tax payer had to pay all the “Friends of Government” off, without any returns. And now they want another corner operation with a Three Card Ponzi scam. So how many times does it take to get beaten like a whore before they call you the stupid ones here?

[CutePuppy]

The differences with Ginnie Mae are structural and substantial, though on surface negligible. Ginnie's debt is explicitly guaranteed by the government GNMA is not a GSE, which Fannie and Freddie were before "nationalization".

Besides private profits and public losses, there are also differences in regulation and level of long-term risk / guarantees.

Simplistically, what they are actually trying to do is to recreate another, bigger, public-private GSE (MCGE) from remnants of Fannie and Freddie, offload "bad assets" to taxpayers ("bad bank"), get the "good assets" to private investment firms ("good bank"), and guarantee any losses to them.

GSEs and public-private enterprises are actually favorite ways of socialist / fascist strategists under the guise of Third Way economic structure. Tony Blair was the most ardent proponent of Third Way, with Clintons just slightly less explicit - they didn't use the name.

[ExiledChicagoan]

Calling it Fibber McGee would probably be lost on most people.
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Better adjust those rabbit ears.