Obama Campaigned for President, But Becomes Top Mortgage Banker

By:Bill Rice

Warren Buffett called it an "economic Pearl Harbor." Even the best economists concede they were hit with little warning of the economic sneak attack, ensuing from the mortgage meltdown. All early indications are that Barack Obama, only hours away from being the 44th president, approaches this crisis with the same weight.

Despite injecting $190 billion into more than 250 banks, the banking system is still not working properly. With the average 30-year fixed-rate mortgage rate and 10-year Treasury yield still spread by 2.6 percentage points and the difference between 3-month interbank loans and the rate Treasury pays (so-called TED spread) at 1 percentage point, it is clear that banks are not lending.

Credit is still frozen. Banks are not lending to consumers or to each other.

President Obama will walk into a banking system that is increasingly government supported, sucking up taxpayer funds, and still not lending. This puts Obama in a precarious situation as the top mortgage banker. He has to figure out how to get banks, his banks, lending again.

One of the notable challenges is an asset-back market, or more specifically mortgage-backed securities market that is still sick. Traditionally, this is the market that buys packaged mortgages, auto loans, and credit cards and turns them into liquid securities. Unfortunately, this system is still clogged with billions in troubled assets--loans that are in default or show a high propensity to default.

An original objective of the Troubled Asset Relief Program (TARP), this program took on new priorities in capitalizing crumbling bank balance sheets. However, the core mortgage meltdown, fueled by toxic mortgages, never cured. This leaves the asset-backed market still frozen.

Frozen credit markets are forcing banks to leave more and more mortgages, many impaired or in default, on their own balance sheets without the liquidity of the securities market. This causes banks to continue to gobble up capital, attempting to maintain their required reserves against these trouble assets that remain on balance sheet.

Will the banks need to come back for more capital--more taxpayer money? Most expert say, "yes."

Soon to be, President Obama has quite the conundrum on his hands. With heavy anticipation the Nation awaits the inauguration of the new top mortgage banker and hope for dramatic and swift action.