When the housing market began recently unraveling at warp speed and quickly lugged the overextended mortgage industry along with it things looked quite bleak for the U.S. economy. Housing, after all, is one of its major components and should it be hit with a serious medical condition, taking a simple pain killer wouldn't help much. Then if ever, when the fury of the real estate sector's downturn became better understood, drastic action was called for.
The Federal Reserve bravely stepped forward intent on showing how it's done. Right on the heels of the private investor vanishing from the secondary mortgage market the Fed knew that to avoid an utter disaster with global consequences it had to quickly fill the vacuum. It began buying MBS, or mortgage-backed securities, insuring that home loan interest rates wouldn't shoot through the roof. That was essential to keep the housing market on its wobbly feet, giving it something concrete to rely on. There was some early howling against this vast government interference but it soon abated as stark reality set in. Without the Fed's decisive action Stone Age would have been right around the corner.
Congressional Budget Office, or CBO, reports that the Fed's asset collection now exceeds $2 trillion, of which MBS make up well over half. Other holdings include Treasury securities and bank loans. It earns interest on all that paper, as it should. CBO projects that the Fed will haul in about $70 billion in profit this year on its portfolio, money that it'll eventually remit to the Treasury. The central bank assumed far more risk than it usually does by purchasing MBS, but it seems to be paying off. Who says the public sector can't make money?
The government has bailed out scores of mortgage lenders and financial institutions during this notorious housing meltdown, partly with the idea that they would then help distressed homeowners ward off potential foreclosure. To a large extent, the results are disappointing. Their playbook instead often included such selfish tactics like paying absurd bonuses and completing acquisitions, tricky moves that stimulated much of the angry population into voluntary Wall Street watchdogs with a mission.
What if the Obama Administration came up with a new initiative using the $70 billion Fed profit to make a real and lasting difference in the mortgage foreclosure predicament? The current programs addressing it, the HAMPs, RAMPs and STAMPs and such, have principally proved inefficient. Now is the time to try a fresh angle to try to sort this housing and mortgage mess out and here is a nice down payment for it.
Photo by wwarby