Tuesday, October 07, 2008

Sorry folks. It’s that time again, time for one of my infamous rants. You had to know it was coming.

First, my disclaimer; I am not the most politically aware individual you will ever meet, quite the contrary. I don’t read the newspaper if I can help it or watch the tv news. I don’t really subscribe to the theory of ‘what you don’t know can’t hurt you’, it is more a version of ‘The Serenity Prayer’ – give me the courage to change the things I can and the wisdom to live in blissful ignorance about the rest.

Unfortunately, blissful ignorance is not an option here. Seven Hundred Billion Dollars; am I the only one who is having a hard time comprehending that number? Seven Hundred Billion Dollars – I can barely get my head around the idea of a million dollars. That’s way too many zeros for me. Seven Hundred Billion Dollars – that is not just poor money management - that is incompetence of biblical proportions.

How could things have gotten so bad that, not one but, half-a-dozen major business entities would all go belly up within the same two week period? Bear Stearns, Lehman Brothers, AIG, Washington Mutual, Fannie Mae and Freddie Mac. Am I the only one who smells something fishy here?

But let’s focus on Fannie Mae/Freddie Mac and this proposed bailout. First, I will go on record as being adamantly opposed to the bailout. I’ll explain why later. For now, I would like to examine how we got here. Let me reiterate, I am not a financial genius or a student of political science but I have been forced to become somewhat educated as to this problem. Now, if my information is correct, Fannie Mae’s purpose was to provide funds that would allow people, who would normally not be able to qualify for a home loan, to get one. What a great concept. I am all for making the option of homeownership available to anyone who deserves it. Notice I said deserves rather than wants.

Not everyone who wants a mortgage should have one. I am a single woman who purchased her first home when she was in her early twenties. No, I am not a trust fund baby. I had no silver spoon in my mouth when I was born. I have seven siblings and I watched my parents work their fingers to the bone to support us and provide us all with a college education. It was a monumental task. I was fortunate enough to adopt that work ethic and by my second year of high school, I had three part-time jobs. I continued to work multiple jobs, after I graduated from college, until I accumulated the $12K down payment for my first condo. I know what is involved in home ownership. It is not for the weak of heart. As a homeowner, you must always expect the unexpected. Just as you think you have passed the hump, appliances break, taxes go up or carpets get stained – there is always something. So, the fact that you can make an $800 rent payment is not an accurate gauge of whether you can make a similar mortgage payment work. And, might I say, SHAME on the mortgage lenders who convinced uninformed buyers that they could, just so that they could collect the commission on a new loan.

So, yes, unscrupulous lending practices are certainly part of the problem in this, not so little, financial drama. It is not, however, the sole cause or even the major contributor to this disaster. The information that I have gleaned about the workings of the Fannie Mae program are this – traditional lenders would write loans, as is their custom. They would then sell those loans to Fannie Mae. The purpose of this little exercise was to free up money to allow the traditional lenders to write even more loans. Can we all say, DUHHHH? Maybe it’s just me, but this seems to be the equivalent of writing a check and then spending that money on a truckload of snow cones. Is the concept of not being able to spend your money in two places a foreign one to the powers that be?

Accounting 101 – when you write a check, you subtract that amount from your balance and, for all intents and purposes, that money is gone. YOU CANNOT SPEND IT AGAIN! If I am misinformed as to the facts here, please let me know, PLEASE tell me that the greatest financial minds in this country did not think this was a good idea.

So, even if Fannie Mae had funds, other than the Federal Reserve, to back up these loans, they obviously overextended that budget or we would not be having this discussion. This was truly a convoluted and faulty way of achieving what was originally a very worthwhile goal. It seems to me, as an unlearned non-expert, that the more rational approach would have been for Fannie Mae to use whatever funds it had at its disposal to offer low interest loans directly to those who could not qualify for traditional loans. Ahhh, but that is water under the bridge now, which leads me to my thoughts on the bailout.

Bailing out this entity, to the tune of $700 Billion, is just a hugely magnified version of the mistake that was made by Fannie Mae. We use new dollars to cover old mistakes, freeing traditional lenders to continue on their merry way, writing bad, under qualified loans. A much better solution would be to portion out the blame to those who deserve it. I suggest that you take all of the Fannie Mae assets along with their bad loans and put them in a pool, similar to the insurance industry’s high risk pool. This should then be split proportionately among all of the lenders in the country. Each lender would get a manageable portion of debt and assets that they could then put their energy into managing.

Sadly, before I even got to post this rant, I heard that the bailout measure was passed. I think this is a HUGE error in judgment. I don’t care what bills they tacked onto this to make it pass more smoothly, it is not worth it. I believe that our legislature is setting us up for a big failure. I would like to be optimistic about this measure but, let’s face it - the government can barely run itself. Now we are going to entrust it with managing $700 Billion of debt and assets. All I can say is, buckle up your seat belt, I think we are in for a bumpy ride.

Let me just leave you with one last thought. If we had $700 Billion lying around, collecting dust, why are people starving in this country? Why are there people who cannot get the medical attention or prescriptions that they need and why is our public school system failing so miserably? If we don’t have this money just lying around, where do we propose to get it? I am not a great mathematician but, if you divide $700 Billion dollars by 250 Million people, what do you get? I think the figure might exceed our $1000 economic incentive refund, but again, I am no math whiz.



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