Today's (September 9) editorial in The New York Times, titled "The Bailout's Big Lessons" claims that one of the reasons the government had to act to take control of Fannie and Freddie was that "investors deemed the government's commitment to Fannie and Freddie as either insufficient or not credible." The Times' editorial team then goes on to point to the Administration's "fiscal mismanagement" as the cause of this lack of trust.
While, I understand that the purpose of the editorial page is to present opinions, it is my view that in critical stories like the nationalizing of these two huge government-sponsored entities, facts and unbiased information should come first.
It is true that foreign investors are skittish about U.S. mortgage-related investments. Why wouldn't they be? Although we have no exact figures as to the losses incurred by foreign investors in U.S. mortgage-related products, we know that U.S. entities have in the last year or so indicated losses or mark-downs of $500 billion. We can presume that foreign investors have paper losses of a similar magnitude.
These losses are not the direct result of government policies (although I certainly wish the Fed had been a more active overseer of the housing and mortgage worlds). For the most part these losses are the result of a system of greed, negligence and fraud gone wild:
1. Borrowers who reached for houses much higher than they could reasonably afford, and/or fabricated income and assets to obtain loans.
2. Real estate agents who encouraged the "just do it" mentality when it came to buying or borrowing too much.
3. Mortgage brokers who were conflicted and had an incentive to give poor advice to home buyers.
4. Lenders who created nutty loan products so that they could bulk up mortgages and sell them for a profit.
5. Investment bankers who syndicated mortgages and mortgage-related products without a good understanding of the fundamentals of what they were buying or selling or, who in fact knew, but turned a blind eye.
6. Ratings agencies who certified mortgage securities with AA or AAA ratings that were then shortly thereafter downgraded, in some cases to junk status ... oh yes, and by the way the ratings agencies' clients were the same lenders or investment bankers issuing the mortgage securities.
7. Government sponsored-entities, Fannie and Freddie, caught between competing agendas - politicians who wanted to use these GSE's to encourage homeownership with affordable mortgages, and investors and executives who wanted to maximize profit to themselves.
And so on.
In the meantime, lots of foreign investors - who were told that U.S. homeowners never walk from their mortgages and U.S. housing prices always go up - lost a lot of money.
Any wonder they are skittish on any investment that has to do with U.S. mortgages?
Jim Randel is the author of the just-published, The Skinny on the Housing Crisis.
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