Before George Delano Bush unveils yet another vast, socialist scheme in response to today’s financial turmoil, his administration should try something as simple as ABC. While the following may not solve the problems of all the institutions in distress, it may be the best bet to minimize the damage from the implosion of two of the largest failed enterprises: Fannie Mae and Freddie Mac.
Now that these two entities have been fully nationalized, they should be divided into much smaller parts and sold off. This can be accomplished in six steps.
First, declare that Fannie and Freddie are dead. Make this painfully clear to everyone by using crowbars to pry the brass nameplates off of their respective headquarters buildings.
Second, pour their assets into a new, temporary agency whose legal authority expires within 90 days. The Asset Breakup Corporation will supervise Fannie and Freddie’s orderly dismemberment and sale in much smaller pieces.
Third, use Fannie’s and Freddie’s databases to create a list of their customers ranked alphabetically according to the individual homeowners’ surnames.
The first set will contain people whose surnames begin with the letter “A.” Americans named Aaronson, Adams, Alvarado, and Antonucci. The second will consist of those whose surnames begin with “B.” People named Baca, Benson, Berkowitz, and Brooks will compose this category. Next, people surnamed Caruso, Charles, Chavez, and Chung will populate the “C” group.
This simple method soon would divide Fannie’s and Freddie’s assets easily, fairly, and transparently into 26 distinct slices.
This method automatically would minimize risk. Rich people and poor folks, hard workers and slackers, cheapskates and spendthrifts, city slickers and country bumpkins, Southerners and Northerners, Pacific surfers and Atlantic lobstermen, blacks and whites, the young and the old, and everyone in between are scattered evenly and randomly across the alphabet. The “A” group, “D” group, or “W” group all will include many diligently paid mortgages and some turkeys. Some mortgage owners will live in thriving communities while others will reside in sleepy little towns. Some will bask in the Sunbelt while others endure endless rain.
By evenly spreading risk this way, any business that purchases these blocks of former Fannie and Freddie assets will be confident that there will be enough performing mortgages to compensate for those that have gone sour.
The alternative — selling these assets by geographic region, according to their current status, or by homeowners’ incomes — would yield a predictable and understandable result: Investors would line up to purchase mortgages belonging to creditworthy, high-income homeowners in affluent parts of the country. Taxpayers would get stuck with non-performing mortgages from, say, downtown Detroit or New Orleans’ embattled Lower Ninth Ward.
Fourth, each “lettered” company will contain hundreds of thousands of units across which to average risk. Similarly, each “lettered” company’s mortgages, on average, should approximate the balance due on a typical Fannie/Freddie loan. As of last June 30, according to slide 33 of its Investor’s Summary, the average Unpaid Principle Balance on a typical, single-family, Fannie Mae loan was $146,503. So, if the letter M group has 1 million such mortgages, it should be worth $146.5 billion. While the winning bidder will end up paying “too much” for mortgages with balances due of say, $125,000, those homeowners who owe $175,000 will have their debts purchased at a discount.
Auctioning off these 26 units will determine what proportion of this price the market is willing to bear. This price-discovery process would be far preferable to having the government cheat taxpayers out of potential cash by charging prices that are too low, or attenuating the current mess by charging prices that potential buyers will not pay, thus marooning these assets even longer.
Obviously, the A, E, I, M, S, and O groups will be larger than those for surnames starting with Q, X, and Z. The Q, X, and Z companies will be smaller, and thus cheaper, than the others. Thus, these 26 separate asset classes could be sold at a range of prices, which would make them affordable to market players of various sizes.
These 26 companies should be sold to the highest bidders in open outcry auctions accessible to the general public and members of the news media.
Fifth, once banks, hedge funds, private-equity companies, pension funds, or whoever purchases these assets, the new owners will be responsible for contacting mortgage holders and making payment arrangements. For many, it simply will mean giving them new addresses to which to direct their monthly checks. Other people will need to work out payment terms or take other actions to normalize their affairs.
Even if these loans need to be untangled and “de-securitized” in order to compensate various intermediaries between original borrowers and the winners of these auctions, far better to let 26 flowers bloom and manage this challenge privately than to leave a financial Katrina in the lap of the corrupt, spendthrift incompetents who are a nickel a dozen in Washington, D.C.
Meanwhile, the new private “landlords” who run these 26 new companies will have an instant audience of homeowners to whom they can market insurance, roofing supplies, lawn care products, air conditioners, steak knives, or anything else homeowners may want to buy. If these companies can make money this way, more power to them. The prospect of former Fannie and Freddie customers suddenly getting junk mail about the latest innovations in attic insulation may not be immediately appealing. But far better an outpouring of catalogues and coupons than the outrage of watching Uncle Sam toss 200 billion of our hard-earned tax dollars onto a giant bonfire.
Sixth, once these 26 alphabetically divided former components of Fannie Mae and Freddie Mac are sold off, the Asset Breakup Corporation will expire, 90 days after it was born.
At that point, the U.S. federal government should declare itself out of the home mortgage business, once and for all. Having made a Doberman’s breakfast of things, Uncle Sam should walk away and redouble his efforts to keep our borders safe and kill Islamic terrorists before they try to kill us.
– New York commentator Deroy Murdock is a columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution.