A housing market devoid of any government-backed mortgage guarantee but still serving the best interest of homeowners is inconceivable, according to a letter to the editor published in the New York Times. Many prospective homebuyers and homeowners, as well as a majority of real estate professionals, believe a stable and consistent supply of home financing can only be supplied through the mortgage market if the government provides a guarantee, promising investors the government will pay if homeowners default on their loans.
Many mortgage bankers are particularly concerned about the 30-year fixed-rate mortgage (FRM), which may become less popular for investors if not backed by the government sponsored entities (GSEs) Fannie and Freddie. The private mortgage market claims interest rates and loan fees will rise to cover the greater risk of originating a 30-year FRM without a government guarantee.
A common thread of concern among brokers and lenders alike is the fear of change. Many believe dismantling the government guarantee — especially in the midst of this existing economic turmoil — would only serve to further delay recovery.
first tuesday take: Sometimes the hardest thing to do and the right thing to do are one and the same. While eliminating Fannie and Freddie’s grip on the housing market will not necessarily be a walk in the park, it is a necessary measure to stave off yet another housing crisis. Only during a crisis can hard decisions be made and implemented, and we do not want this current crisis to go to waste.
Fannie and Freddie, as an arm of the government, must certainly continue their role as lender of last resort until the housing market stabilizes and harkens a return to fundamentals. Like the gradual tipping of a scale, the GSEs’ exit must be staggered over a period of time and unwind gracefully as the private market gains confidence and slowly takes over. [For more information regarding the fate of Fannie and Freddie, see the February 2011 first tuesday article, Frannie’s future is at stake and the March 2011 first tuesday article, Mortgage market reform from the executive branch.]
The 30-year FRM is a current necessity, but that does not automatically mean it is the best financial choice for housing our population. If interest rates are too high for lack of a government guarantee and borrowers can’t produce a 20% down payment to eliminate the risk of default covered by a government guarantee, the question we should be asking is not what kind of deal a lender is willing to make. Rather, the prudent question is whether those homebuyers are financially capable of managing homeownership at all. The economic reality for many prospective homebuyers is it would be more financially beneficial to rent than to own. [For more information regarding renting, see the February 2011 first tuesday Market Chart, Rentals: The future of real estate in CA?]
American culture heavily emphasizes homeownership as a pillar of social success. Our governmental policies in turn facilitate the achievement of that pillar, but at great cost to most individuals’ financial well-being and net worth since investors are usually the only ones fit to take the risk. As evidenced in our current taxation policies, we prize homeownership by indebtedness over living within one’s means. That policy is being rejected as the population is deleveraging in an act of revulsion. [For more information regarding homeownership tax loopholes, see the March 2011 first tuesday article, The home mortgage tax deduction: inducing debt and stifling mobility.]
Maybe the real change needs to start by evaluating the ideals our economic policies endorse…
Re: “Discouraging Home Buyers” from the New York Times
“Does anyone realize that a handful of banks have monopoly over government bond auctions”
This is wrong, bond auctions are open to the public. What this group of banks does have is the ability to buy bonds on credit, so they get paid interest even though they’ve made no investment. The justification is that they are facilitating the circulation of currency.
“When the Bush Admin. basically pressured lenders to give “anyone” a loan (minority and low income) for a house, whether they could truly afford them or not–what was the purpose of that?”
I can’t remember when I first heard the term “redlining”, it was either the late 80s or early 90s. The responsibility for this problem does not lie with Obama, either Bush(it was happening big time under GHWB, google RTC or resolution trust corporation), or Clinton, though all these share some blame for letting business as usual proceed. Same with congress.
It lies with the American electorate, pure and simple. How many times throughout history do we see political “leaders” asking the populace
“What do you want”
and the populace says
“We want everything”,
and the politician says,
“Hey, you’ve got it, just elect me.”
Politicians cannot spin wealth through legislation, or by creating out of thin air something that used to represent wealth, paper money. Do your homework, this process has been in the works since the dollar became a pure fiat currency August 15 1971. The first effect was the “oil crisis” a few years later, when the price of gasoline doubled.
The first cracks in the mortgage market showed in the early 80s, with 15% T-bills, the advent of money market mutual funds, and massive withdrawals from the S&L’s. Congress scrambled to save the industry, allowing NOW accounts, essentially interest-bearing checking accounts, and CDs. But it was too little, too late. This is basically the time derivatives contracts began to show on Wall Street, Bear in mind that FNM was always meant to buy mortgages from S&Ls so they(banks) could get capital to make new loans.
The bankers on Wall Street managed to paper over the crisis, but only for a while. The latter part of the nineties saw massive consolidation within the banking industry, from which a few giants emerged. This whole thing smacked of an industry-wide private sector bail-out. Good banks knowingly took on questionable assets. But in retrospect, in a crisis such as we’re in, it’s much easier to deal with 10 banks than with 200.
We are witnessing the end of the dollar. All the king’s horses, and all the king’s men, cannot save it. We were much better off restructuring the federal debt, and forming a new currency. There would certainly be dislocation, but it would only be a matter of a few years. And all that while, at least we’d have the knowledge that a real solution was in the making. Compare this to possibly a decade of misery if we let this thing work itself out.
A big objection to a new currency is that people would lose their current wealth. That loss has already happened, we just haven’t “realized” it. We’re running on fumes, and the people we think are in control have no idea of what to do.
Interest.The whole concept of interest rates in a competitive market presumes a fixed amount of capital available to lend. The more borrowers, the higher the rate of interest(of course, higher rates will bring out new money, but there’s still a limit). Now we have the government itself borrowing hundreds of billions,and interest rates are at historic lows. They create what they need, there is no limit. But this is not creating wealth.
We created money to facilitate the production and circulation of goods and services. If history is any guide, we will now sacrifice production to maintain our monetary system. The tail is wagging the dog. It’s the money that’s sick, not the physical economy, although that needs some work now too, the result of neglecting maintenance for years.
You can’t expect Greenspan to have stopped it, it was done at the behest of the FRB. That, and selling a house worth 250K for 325K in 2004, refinancing at 500K in 2006, still little or no equity, take a vacation, send your kids to college, buy a F150, then leave the house, pack your brand new TVs and computers into your brand new SUV, all bought with cash, none of it repossessable. Good for realtor, loan officer, airline employees, college staff, Ford workers. What’s not to like? The banks who lost millions of worthless currency now own the deeds to millions of properties across the country. Not a bad trade for them, either.
Something has to be done for the average homeowner to survive in these times. If the housing market cannot survive in a better way in this country, how are we going to recover in this country?
When the government is paying lenders incentives when they foreclose on properties, what is the incentive for lenders to truly work with a homeowner to help keep them in their homes? None! There are situations here where there were positively qualified buyers for a home and the lender would let the house go to foreclosure and take $50 to $75,000 less than they would have gotten from the new purchaser, that does not make sense, until the lenders are getting paid in some way. Why wouldn’t they sell to the new buyer rather than foreclose? Obviously, they are getting money from the federeal government (taxpayers again) to allow this to happen.This has to stop!
When the lenders are rewarded to let houses go to foreclosure–that does not help the economy or the homeowner.
Another problem, right now 1,000s of homeowners with modular homes on their land cannot get a refinance loan because the lenders will not loan to them? Why? Because Fannie Mae and Fredie Mac has decided not to guarantee such kinds of loans. Is this fair? This affects a huge number of homeowners (mostly elderly and young couples with children) and should not be allowed, but, is causing 1,000s of foreclosures as well.
When the Bush Admin. basically pressured lenders to give “anyone” a loan (minority and low income) for a house, whether they could truly afford them or not–what was the purpose of that? Where was the policing agencies to prevent what was going on with the lenders giving out no down, no doc loans, etc.?
Any dummy could figure out there was going to be trouble for these families. Where was our trusted intelligent Washington leaders for sooo long while this was going on? Where? Are they all such idiots? Or perhaps they were making millions on those very loans being associated with the lenders.
Remember the lenders were telling the homeowners they could afford these houses, etc. because they were getting the commissions for doing the loans, the realtors were getting the commissions for selling the homes, and all the way up the chain–people were profiting and nobody was stopping the obvious bubble going on–not even Alan Greenspan, who should have known better and stopped the crap early on! He was too smart not to have known–but, he said, “no one would have listened to him”. Poor man! Did he really believe that he had such poor influence among his colleagues to stop things? Now, we still have Golden Sach that is making a fortune again today and no one has spent a day in jail, have they? In fact, the fat cats are just keep getting fatter.
“…‘we the people’ are the victims of greed run amok. ”
Still with the greed. It’s not greed but ignorance.
Does anyone on this board know how the federal debt market works? Does anyone know what a debt currency is? Does anyone realize that a handful of banks have monopoly over government bond auctions, and that they don’t even pay for the bonds, but have their accounts at the Fed debited? Does anyone realize that we pay interest on bonds that were not bought for cash, but with debits? Do you wish that you could buy 100M worth of US bonds with a debit at the fed, to be repaid when the bonds mature, with the interest going into your pocket. Does anyone understand the incestuous relationship of a debt-currency and a welfare state?
This has been going on for 80 years, and now the lights are going down. Greed has little to do with it. The incompetents who are running our currency DON’T KNOW WHAT TO DO.