Dean Baker
TPMCafé, April 4, 2009

See article on original website

Apparently we have to give them more than $200 million in bonuses to give them enough incentive to lose taxpayers billions of dollars. The NYT says that 213 employees are slated for bonuses of more than $100k each and the top paid ones will pocket over $1 million.

That seems like a lot of money. After all, can't we pay a high school kid the minimum wage to throw away taxpayer dollars? Just to be clear, I'm not referring to the money that was lost on their prior loans, I'm referring to the money that they are losing on the loans that Fannie and Freddie are buying every day.

Fannie and Freddie continue to buy loans that were used to purchase homes at bubble-inflated prices. These loans will go bad at very high rates, because the prices will plunge and the homeowner will then be underwater. Underwater mortgages are very likely to end in foreclosure or short sales.

The easy way to avoid issuing loans that are likely to lead to large losses is to base valuations on appraisals of rent. If Fannie and Freddie refused to approve any loans that could not be justified based on a multiple of 15 times the annual appraised rent (with some regional variation), then they would substantially reduce their loss risk.

Note that this policy would help, not hurt, homeowners. We do no one a favor by encouraging them to buy a home at a bubble-inflated price. They end up paying more in housing costs each year that they live in the home and they likely end up with a foreclosure or short sale when they leave the home, or at the very least losing whatever equity they put up.

I argued repeatedly with the chief economists at Fannie and Freddie about the existence of a housing bubble in the years 2002 to 2007. I would think that we no longer need to have this argument. Unfortunately, Fannie and Freddie are still making loans as though they haven't noticed the bubble. It is hard to justify six and seven figure salaries for this level of incompetence.

[I almost forget to mention the boards of directors of these government owned companies. Board members at Freddie get paid $160k a year. I assume that the salaries at Fannie are comparable. That's pretty good pay for government work, especially since the directors probably only put in a few weeks a year of work. And, these are not especially astute people. Several of them slept through the original bankruptcy of Fannie and Freddie.]

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.