Monday, March 22, 2010

Fannie Mae and Freddie Mac get a pass in Dem's financial reform bill

Before the ink is dry on the President's signature of the Senate health care bill, Senator Christopher Dodd will be demanding a vote on his financial reform bill.  Weighing in at 1336 pages and ostensibly crafted to end "too big to fail" and to protect taxpayers from future bailouts, the Dodd bill incredibly makes absolutely no mention of how to reform two of the biggest bailout benefactors, Fannie Mae and Freddie Mac.  The Wall Street Journal points out that the bill may actually exacerbate problems with the mortgage giants:
Remember, these two government-sponsored enterprises were root causes of the housing debacle. They bought tens of billions of dollars in subprime mortgages from the likes of Angelo Mozilo's Countrywide Financial, slapped their guarantees on trillions in home loans, failed to set aside enough capital, and then collapsed into the arms of taxpayers in 2008.

Fan and Fred's rescue has already cost taxpayers $126.9 billion in direct assistance, with the Congressional Budget Office estimating that the total cost of subsidizing them from the bailout through 2020 will approach $400 billion. Yet Mr. Dodd's bill, when combined with current interpretations of accounting rules, will provide a strong incentive for banks to do even more business with Fan and Fred.

It works like this: One provision in the bill intends to encourage lenders to be more careful about the loans they make by requiring them to retain more of the risk when they sell these loans to investors. Specifically, banks that originate loans and then sell them will need to retain 5% of the credit risk.

But some bankers believe that, under current accounting rules, a pool of such loans will not be considered sold, given that the originator still owns a 5% interest. Therefore, the banks might have to reserve capital against the entire 100%, not merely the 5% they continue to own. This would kill any incentive for lenders to sell their loans as asset-backed securities, and if banks can't sell their loans to investors, they will have less cash available to make new loans to other customers.

The result would be less credit available—except there appears to be a way around this rule. Procuring a Fannie or Freddie guarantee removes the transaction's credit risk, so that, voila, the business of securitizing mortgages can return to normal. Fannie and Freddie become even more indispensable to housing finance. And the only people shouldering more risk are the taxpayers.
In her bestselling book, Culture of Corruption: Obama and His Team of Tax Cheats, Crooks and Cronies, Michelle Malkin points out that Senator Dodd has historically been the number one recipient of campaign finance contributions from Fannie Mae and Freddie Mac. You can draw your own conclusions.

For your reading pleasure, the latest version of the bill which will likely pass out of committee on a party line today is included below.  Republicans on the Senate Banking Committee had originally submitted over 400 amendments to the bill in an effort to water down or kill key provisions, but in an unexpected move today, the amendments were withdrawn.  This may suggest another showdown is on the horizon on the floor of the Senate where the Democrats will need Republican support to avoid a filibuster.

Payback is hell.

Chairman Chris Dodd's Financial Reform Legislation Bill

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