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By now we all know that it was the U.S. housing market that catalyzed the financial meltdown we are still sorting through. It has also become painfully obvious to most that the value of homes has declined at the same time as homeowners’ earnings, thus impairing their abilities to pay or repay their mortgages. In simple English this means that homeowners as a group owe more than they can repay, and it is this rather unfortunate but simple situation that has led our government to much frantic activity to “fix” this problem. In its zeal, the government has effectively nationalized the mortgage business. Returning it to the private sector and extricating the U.S. taxpayers from risk will be quite a challenge.

In the past few years the government has made or guaranteed nearly 100% of every loan originated, and this despite FNMA and FHLMC having both collapsed.  With this unprecedented government involvement one might rightly wonder how the home mortgage market is being funded, and what the implications are for taxpayers and our nation’s future. In the past year the Fed has, for the first time ever, purchased mortgage-backed securities (“MBS”), and a whopping $1.25 trillion at that. Also, through the magic of pushing a few buttons on a computer, banking reserves have been massively increased giving banks virtually no cost capital with which they can buy up the “risk free” MBS, earn a profit margin and re-build their equity bases, all the while serving the public good of stemming the housing market decline. 

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