With home prices pumped to record levels, we are hearing more and more about Uncle Sam’s plan to avoid sticking it to taxpayers when the next crash hits. Although it’s always wise to have a plan to deal with catastrophe, especially one that is inevitable, there are reasons to doubt that a mortgage market valued at $12 trillion could unravel without taking the economy and much else — including, conceivably, our system of governance — down with it. Consider that Fannie and Freddie, ground zero in the 2008 crash, still own roughly half of all U.S. mortgages — as much as the three largest banks — but lack reserves sufficient to cover more than a small fraction of bondholders’ losses if it happens again. Of course, the next crash could conceivably be worse, since the financial system is much more leveraged than then.
That’s a concern the Feds may not have fully considered when they created “living wills” for financial institutions under the 2010 Dodd-Frank bill. The law requires large banks to file workout plans that would seek to mitigate the risk of upending the financial system and the economy while accountants deal with the quagmire. Extending this rule to the GSEs reportedly is the last piece of legislation needed to complete the Dodd-Frank reforms.
‘Affordable Homes’ a Gimmick
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