Terror of Freddie Macagodzilla

Mechagodzilla Action Figure. It's debt-free!

Let’s say, just for example, that I had my eyes on a Mechagodzilla action figure that cost $20.00.  And for the sake of our argument I had only $5.00.  The dealer would finance the remaining $15.00 at 6.5% interest for 30 years.  I would pay nine cents a month. But wait!  There’s more!

Suppose this dealer then sold the mortgage on my Mechagodzilla to another dealer soon after my purchase.  This new dealer would purchase the promissory note for, oh, say $17.00.  The first dealer has made an extra $2.00 over the list price of the Mechagodzilla.  Meanwhile, Dealer 2 is hoping that the action figure will appreciate in value, and I will sell it in a three years for $25.00, and pay off the note.  Not only does Dealer 2 get the $2.95 in interest during those three years, but he will receive the $17.00 he initially paid to purchase the note.  And I will have made a little bit of profit as well.  If I keep the Mechagodzilla for all 30 years, Dealer 2 gets $34.13, of which  $19.13 is interest. His total profit is $17.13.

Broadly, this is what “securitizing” loans is all about.

Continuing our supposition, let’s suppose that I’ve owned this Mechagodzilla for six years.  I’ve been riding high on the speculative market and Mechagodzillas have risen in value to a massive $28.00!  But the bottom begins to fall out.  Folks are losing their jobs and just don’t have the money to buy Mechagodzillas.  In three months the value of my Mechagodzilla has fallen to less than half of list price.  Now I own a Mechagodzilla that is worth only $9.37 and I still owe $13.79.

Broadly, this is the danger of “securitizing” loans and why our housing market is in such crisis.

Broadly, this is why Freddie Mac is in deep deep trouble.  Much of this quasi-governmental agency’s business was buying mortgages on the secondary market, packaging them up, and reselling them to investors.

David M. Moffett has resigned as CEO of Freddie Mac.  He took the job just last September.  The massive losses at Freddie Mac may have been too much for him to get a handle on.

This is going to be one brutal job, and it’s going to take a Mechagodzilla style of leadership to pull it off.  The first thing I would do is squash this 40 year mortgage concept that’s floating around right now.  I think 30 year mortgages are too long already (I’m on track to pay mine off in 20).    I would also try to minimize the buying and trading of real estate like baseball cards, which played a big part in getting us into this economic morass.  Houses are homes not poker chips.  Adjustable Rate Mortgages are also on my hit list.  ARMs should go down, not up, when interest rates go down.

Give me an Absolute Zero Cannon and let me get to work.