Plans to Bail out the Banks and Speculators

Sep 24, 2007

U.S. Senator Chuck Schumer, a Democrat from New York, and top Bush administration officials have been talking about a rescue plan for all those people in danger of losing their homes in the next years. One part of their plan is to raise the limits on mortgages guaranteed by “Fannie Mae” and “Freddie Mac.”

Fannie Mae and Freddie Mac are enormous financial companies, set up by the federal government. Even though both companies are officially considered to be privately owned, they also operate under the government umbrella, that is, with an unofficial guarantee of a taxpayer bail-out if their losses ever get too great. Their stated purpose is to guarantee mortgages. These guarantees are supposed to encourage banks and other financial institutions to offer mortgages to middle and working class people–and supposedly, no one else. There is an upper limit on the size of the mortgages that Fannie Mae and Freddie Mac could guarantee. Currently, that limit is $417,000.

When Schumer and the Bush administration officials propose to substantially increase the $417,000 limit on the mortgages for Fannie Mae and Freddie Mac, it is not to help the middle and working classes, since few of them are buying houses worth nearly half a million dollars. Instead, it is to bail out the banks and big financial companies which hold billions and tens of billions of dollars in mortgages that are much larger than $417,000 and are in danger of default.

In Arizona, California, Florida and Nevada, where the number of mortgage defaults is the highest, between 21% and 32% of the defaults are on expensive mortgages taken out by speculators, according to a recent survey by the Mortgage Bankers Association.

It was these speculators who helped drive up housing prices, by buying up houses and then “flipping” them, that is, quickly reselling them at a higher price, thus pocketing an instant profit. And the banks and big financial companies that provided the credit for these speculators, at enormous fees of course, profited every bit as much as the speculators.

The proposal to lift the limits on mortgages guaranteed by Fannie Mae and Freddie Mac will allow the banks and financial companies to unload those much bigger mortgages on those two companies. And then, because both companies are “guaranteed” by the government, when the loans finally default, it will be the taxpayer who will foot the bill.

Under the guise of helping homeowners buy and keep their homes, a taxpayer-funded bailout is being engineered to protect the profits of those who inflated the speculative housing bubble in the first place.