Glenn Beck's Flawed Argument

Earlier this week, I believe on Wednesday evening, Glenn Beck went through a fairly complex explanation of how the US unwisely intertwined federal housing policy, low interest rates and excessive spending to arrive at our current debacle.

He then, understandably, discussed the folly of depreciating the US dollar in order to repay creditors with cheaper currency. Again, understandably, he cited the failed German Wiemar Republic.

But then he veered into dangerous and, unfortunately, intellectually wrong territory. Beck began to suggest that, like the Germans in the 1920s and '30s, the US might issue land-backed debt, because so many mortgages are held by Freddie Mac, Fannie Mae and, though he didn't mention it them by name, the FHA and VA mortgage programs.

In a rare misstep, Glenn said that the government "owns" these mortgages, and implied that, therefore, the feds can just claim them as assets, against which to issue dollar-denominated debt.

But that's not true. Not by a long shot.

Here's how things would have to work for that to be true. Mortgages backing a specific Fannie or Freddie debt issue would have to default. Upon default, it's possible that the owners of the GSE-issued securities might choose to take possession of the properties. But the details here are very important.

GSE's (Fannie, Freddie, as well as non-publicly owned VA and FHA programs) buy mortgages from originating institutions. To do that, they issue debt, with the implied backing of the US Treasury. Then they package the mortgages into pools and sell bonds backed by the income from the pools of mortgages.

The money they receive for these bonds goes to buy more mortgages. When the GSEs wish to expand, they issue more debt.

But they don't "own" a vast collection of mortgaged homes. They typically only "own," which is to say, hold, home mortgages for seasoning and packaging into bonds.

And, to reiterate, Fannie or Freddie wouldn't even "own" the homes connected to those mortgages securing their bonds if the borrowers defaulted. The bondholders would, or could, own them.

It's a nuanced point to many, but I think important. What Beck went on to contend, on the back of assuming the federal government simply "owns" the homes bought by mortgages which may eventually have secured Fannie or Freddie bonds, would simply be unrealistic.

Because this sort of misunderstanding of the actual mechanics by which all of these mortgages could be held, and the underlying homes and land owned by the federal government, and used to back other bonds, could materially damage Beck's credibility.