Monday, July 12, 2010

Balance Sheet Hot Potato: FED Reserve vs. Fannie/Freddie/FHFA vs. the US Taxpayer

Stepping back from the microcosm that is Oregon and Portland's real estate market, a rather interesting and massive reclassification of toxic mortgage debt recently took place. The Federal Reserve moved $4.4 trillion in mortgage debt from "Mortgage Pools and Trusts" and placed them on the balance sheets of the GSE's (Fannie/Freddie/FHFA). The interesting part is that the GSE's balance sheets from the same period do not reflect this adjustment, which in total is roughly 40% of all outstanding mortgage debt!

To make matters worse, keep in mind that Treasury (ie: taxpayers) now own the GSEs since they were put into conservatorship, and according to the conservatorship agreement their balance sheets were to remain below $900 billion. Adding a cool $4.4 trillion instantly puts them in violation of the agreement, and if in fact Treasury now owns those mortgages it also puts the nation about $3 trillion over the congressionally approved debt ceiling.

In a rather ironic coincidence, you (via your elected officials) pledged
unlimited taxpayer support for the GSEs on Christmas Eve 2009. Now just 6 months later both Fannie and Freddie stocks were recently de-listed from the NYSE, and today trade with other penny stocks on the OTC bulletin board.

At it's core, this is a mere accounting adjustment, however it's implications are massive when it comes to who foots the bill when these mortgages fail to perform, and/or the GSEs are dissolved/bankrupted. The main stream media has either missed or completely ignored this story, and most any meaningful reform of the GSEs (beyond toxic mortgage dumping ground) that is publicly reported will surely not be attempted until after the mid-term elections.

Step right up taxpayers and get your toxic mortgage potato while its hot!

Source: Bruce Kasting