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
I am curious why NO ONE has gone to jail for causing essentially the collapse of the entire US economy and the loss of 50% of the value of all retirement accounts, business stock values, home values, etc…
How many TRILLIONS of dollars worth of value evaporated? Yet no one is being held accountable.. Curious.
At the same time, the companies that were directly involved in securities with 100 to 1 leverage are the same companies that got Trillions in freshly printed money that came out of thin air, but taxpayers are going to be paying interest and fees on.
Now we add fake robo signers for foreclosures, plus no way to find the original deeds for many of these homes to this mess, and still no one goes to jail and nothing seems to be changing.. Curious, would you not agree?
Thoughtful discussion. I agree with many of my colleagues that the root cause of this mess was not that of the buyers or their agents. They didn’t create the pyramid scheme that propped up the secondary mortgage markets, not the credit rating agencies who rubber stamped junk loans. There is more than enough blame here to go around but ‘we the people’ are the victims of greed run amok.
Stabilize Fannie and Freddie, yes, then proceed with cautious reform and transition to a stable platform.
“This bubble was caused by Wall Street and Bush, period.”
Idiot. This problem has been in the making since at least 1980, and more like 1971.
“Suddenly, the banksters got greedy …”
Greed? Greed? You think the paper money crisis is caused by greed? It is caused by, and enabled by, ignorance.
Does anyone on this board know how the federal debt market works? Greed?
Fanny Mae and Freddy Mac needs to be shut down. Let the people take responsibility for themselves and not rely upon the government for anything.
What’s very interesting to me, is the authors ignorance of a healthy housing market on local economies.
One of which is the positive employment effects of non college males (mostly). The social benefits of having large portions of the population having assets (a stake in the country).
I have managed a good sized pool of units and believe me, homeowners have a more positive impact on a community than tenants
I would suggest to the author that she write for a different entity. I have been a First Tuesday reader since 1973. The original owner would turn in his grave if he read the article
Abolishing Fanny & Freddy is too simplistic an answer, admittedly there was fraud and deception. However Wall Street created investor pools (mostly overseas) with incomprehensible tranches insured by AIG who didn’t have the assets to cover their insurance liabilities. The governing agency knew of the issues thru a whistle blower, yet did nothing about it.
Lee’s question is spot on. why hasn’t anyone gone to jail
We’ve had over 60 years of low down FHA and no down VA financing. We’ve had 40 years of 90% and 95% Fannie Mae and Freddie Mac financing through purchasing INSURED loans from local banks, credit unions and savings and loans. We had virtually no troubles for all that time. Suddenly, the banksters got greedy and began to originate their own loans, most of which went sour since they failed to meet basic underwriting, credit and property standards. These sub-prime and no doc loans were bound to fail from the start. Now the banksters want to blame Fannie and Freddie for their irresponsible behavior and to further punish the victims of the housing meltdown. Meanwhile, they get huge bonuses either way.
The ideas they are looking at are to not get rid of Fannie and Freddie, but to make GB guarantees to low and moderate income Americans. Which is just about everybody, except investors. Also to taper the regulations in over a period of time. A great idea. Perfect scenario when housing prices hit bottom would be 10% down, 15 year term, reasonable rate. The average home buyer will be able to afford the payments and the sales will take off. Best idea of all is the State Bank, used just for state RE loans.
This bubble was caused by Wall Street and Bush, period. The largest financial fraud in U.S. history. How come nobody has gone to jail? Obama also has surrounded himself with Wall Street types and better wake up quick. None of this will matter, of course, if most Americans do not have decent jobs. They will not be able to save the down payment to buy homes, and anybody in the RE business, will be out of business.
“…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”
That’s because mortgage bankers DON’T make their money off the loan itself anymore these days. They make their money by illicitly slicing & dicing high risk government-backed mortgage loans and then selling them to pension funds, retirement plans, unwary private investors and other soon-to-be VICTIMS. The United Sates of America is the world’s EPICENTER OF FRAUD & EMBEZZLEMENT.
FORGET about Gaddafi, we need to OVERTHROW OBAMA/GOLDMAN SACHS.
Sorry, no F&F, no housing bubble. That would have changed our society for the better, if we’d started with that.
Instead, people would either be saving for a downpayment or investing their money into the bond, equity, & futures (if they’re savvy) markets. Either situation is responsible citizenry.
Please stop blaming the irresponsible home owners who are just sheep in the big picture. The real vilians are the bankers of whom seek legislation that allows them to dump their bad loans on government entities like Freddie and Fannie, so that we can all pay for it with our taxes.
Good riddance to Fannie and Freddy! The availability of too much easy credit to folks who really couldn’t afford the homes they (and their RE agent, and mortgage broker) convinced them that they could, is the
very cause of the housing bubble and subsequent inevitable bust. The fact that the loans were govt (read:
taxpayer-) guarenteed eliminated any need for caution on the part of the lenders who, afterall, like the appraiers, loan officers, RE agents and home-inspectors, all stood to profit from every transaction.
I am not against *reasonable* financing of *reasonably-priced* homes, but my definition of “reasonable” is probably far-removed from what most folks’ definition of “reasonable” would be (and unfortunately, probably still is).
In a nutshell: 20% down, minimum, 10 year fixed-rate loan, maximum, to be loaned out at NO risk to any taxpayer. This means the bank making the lending decision must be extremely careful and conservative when deciding wether to approve the loan or not, and that PMI may well be required for most borrowers.
If that means that only *some* people will qualify, so be it. If that means lowering your expectations from
your “dream” McMansion to a modest, older ranch or Cape Cod or even a bungalow, then maybe that is all you can really and truly afford at this time.
This will also serve to keep the RE bubble from re-inflating.
IMHO, indebting yourself for the better part of your working lifetime to pay off the box you live in, is insane.
Thay may have worked out ok as long as home prices kept rising, but those days are likely over for good.
Time to get real. A home should be a place to live, not a debt-trap. If you can’t pay it off in full within 5-10
years, you probably shouldn’t buy it.