Politicians have been angry with the banks for not lending more money to the public. Since the banks got the bailout money, they have been sitting on it and only been spending money on “essentials” such as bonuses and dividends.
What is happening now is that they actually are starting to lend. They are giving 30-year fixed rate mortgages with very low interest rates. This is also the centerpiece in a new recovery plan put forth by the Republicans. Making these loans seems like something a very healthy bank would do, so in light of the fact that most of the major banks are effectively insolvent, how are they doing that?
Recently, it has come out that Wells Fargo is giving 30-year fixed rate home mortgages in Portland, Oregon, with an interest rate of only 3.875%. Considering that interest rates everywhere else are much higher, these loans are completely unrealistic from a business perspective. In addition, Oregon’s real estate market is not exactly booming, so the loans are quite likely to go into default.
Today, Citigroup announced that it was going to use $36.5 billion in bailout money to provide home loans for the public. $10 billion of that will be backed by the government entity Fannie Mae. Citigroup has not announced interest rates or other details as far as I’m aware, but the important thing to remember is the combination of using bailout money and government-backed entities to guarantee the loans.
I believe that Wells Fargo and Citigroup are doing the same thing: making loans that are likely to go into default using taxpayer money while taxpayers guarantee the loans if the default.
This is very similar to how the subprime loans were created. When making those loans, the banks didn’t care at all whether the loans would go into default; they just took the fees for making them, and then sold off the loans.
This is the same thing, and from a taxpayer perspective. This amounts to a triple or quadruple whammy.
First, taxpayers pay for the unbelievable mistakes the banks made, then they pay CEO bonuses, then they pay to start up the subprime scourge again, and finally get sent the bill from Fannie Mae and Freddie Mac. When will we stop digging a deeper hole for ourselves???
Moreover, I advise that the winner-takes-all voting system should be destroyed.