The Obama Administration is releasing its plan on the future of the housing finance industry. More specifically, they are releasing their plan on what to do with the mortgage giants, Fannie Mae and Freddie Mac.
The Obama Administration’s plan for housing finance will likely be short on details and long on government involvement in the housing and mortgage market. Remember, the Obama Administration is wedded to “Big Government” solutions, so any final form of FHA, Fannie and Freddie will likely be a reshuffling of the deck chairs on the Titanic rather than a sensible reconsideration of national housing policy.
The Administration has signaled that it would like an explicit guarantee for residential mortgages rather than the “implicit” guarantee that Fannie Mae and Freddie Mac denied for years. The explicit guarantee will be welcome news to banks, investment banks and investors like Bill Gross at PIMCO. The guarantee is bad news for taxpayers since it signals that will be on the hook for staggering losses in any future housing bubbles/bursts or recessions.
The irony of making the government guarantee explicit (rather than implicit) is that there has always been a spread between Fannie and Freddie debt and comparable-risk commercial banks. This indicates that the guarantee has always been explicit (that is, everyone in the capital markets knew that the Federal government would bail out Fannie and Freddie when the time came). So simply making the guarantee explicit is misguided at best and disingenuous at worst. Even if the Administration or Congress said that there would be no future bailouts of Fannie and Freddie, nothing would prevent Treasury or the Fed from doing it anyway. So, it is really a statement about doing nothing.
We need to have a discussion in Congress about how much “affordable housing” we want in the USA. We simply don’t know the size of the affordable housing mission, since Fannie, Freddie and the FHA are almost purely opaque (that is, has virtually no transparency). This debate will likely never happen, so we will never know how much affordable housing were are subsidizing or at what cost. Of course, if the Federal government wants to have risky affordable housing mandates at taxpayer expense, it would make sense that they fight for little or no transparency. I predict that no steps will be taken towards any meaningful transparency.
The other problem with Fannie and Freddie is that they are essentially off-balance sheet entities (in other words, our own big Greek Islands). If we aren’t going to put them on balance sheet as we do with the FHA, they must be at least transparent so we and the rest of the world knows how much risk they are bearing. It is doubtful that the Obama Administration wants any transparency at all.
Of course, it makes sense to downsize Fannie and Freddie over the next five years so that they will be gone or minimized in the near future. This can be accomplished by reducing the conforming loan limit 1) back to pre-crisis levels and 2) then reducing the limits by $50,000 per year. And their retained portfolios, the source of much of their losses (along with “investments” in subprime ABS), should be sold off and unwound over, say, 5 years.
Eventually, the US has to return to the 20% down payment standard for loans. Households unable to accumulate the 20% down payment and rent their dwelling and save for a down payment. Otherwise, we are doomed to repeat bubbles and bursts in the housing market. Of course, this type of financial discipline is very unpopular with affordable housing groups (except that they don’t bear the risk of declining house prices — the taxpayers bear that risk). We have the FHA for affordable housing programs and we don’t need Fannie and Freddie doing the same thing. Our Federal government actually subsidizes affordable housing groups, so it is likely that they will fight extremely hard to keep low down payment mortgages and Community Reinvestment Act (CRA) programs,
Everything Fannie and Freddie does can be done by the private sector. The only thing Fannie and Freddie have going for it is the 1) government guarantee and 2) lack of transparency. Both should be abolished. Besides, we know the Fed will step in for to provide liquidity. The default insurance should be wholly privatized. The notion that someone at the GSEs or Fed can magically determine the correct risk premium is hilarious; the moral hazard implications of having the Federal government pricing insurance or anything else are legion.
The Fannie/Freddie debate will be the first test of the Republicans will to tackle endless socialization of mortgage risk. Unfortunately, our country is so addicted to government subsidization and control of the housing and residential mortgage market that politicians will have great difficulty imagining a world without Fannie and Freddie. For the preservation of our future, we really need to shut down Fannie and Freddie and let free markets operate again.
See U.S. Representative Darrell Issa’s piece on unaffordable housing here.
Dr. Anthony B. Sanders, Distinguished Professor of Real Estate Finance, George Mason University
Fannie and Freddie need to be shut down ASAP.
In a free market, if a person wants to sell his home, he must put it on the market for a price. If no one buys the home, the seller has the option of reducing the price until someone can’t resist the bargain: the home sells and a market price has been established. This home is affordable housing, because it sold at a market price. If you cannot afford that house, but you want the home, you complain that the market is overpriced, rather than settling for a home that isn’t the dream home that you figure you deserve and can afford.
In reality, if the market was cheaper, the original buyer would have made a better offer and you would have still lost out on the sale. Affordable housing means buying a home you can afford or renting until you have the resources to buy; otherwise, we eventually endure a catastrophic collapse of the housing market. Yet our government is not really trying to solve the debacle, to the contrary, they are still trying to save the economy by keeping unqualified people who can’t pay for their homes in their homes, even if it means the rest of us will pay the mortgage for them. To accomplish what? an artificial market that is doomed to failure at some point in the future.
In the mean time, an artificial market is a weak market and if the consumer doesn’t have faith in a weak market and chooses to sit out and wait for a stronger market, the market will continue to disintegrate. Theoretically, the first rule concerning a bargain eventually comes into play, except for one little factor, our economy has a large percentage of our wealth embedded in real estate and when that market is in near chaos, there is no liquidity. Soon the Free Market itself grinds to a halt without liquidity, but some of our most prominent politicians and their cronies have made fortunes by mishandling Fanny and Freddy, so it has not been a total loss.
We taxpayers are carrying the loans on $5.3 TRILLION mortgage bonds through Freddie, Fannie and Ginnie Mae.
An average home costs less than $1 MILLION.
Let’s get a handle on what we’re talking about here.
What does $1TRILLION even look like?
http://www.pagetutor.com/trillion/index.html
The irony is the Democrats lamenting the “lack of affordable” housing. Yet, instead of allowing the market to correct and letting foreclosures happen, prices drop, etc, which would create affordable housing, they prop up the bubble.
I see it this way. If I loan you my money, I am going to do everything to make sure you can pay it back. If I am loaning you someone else’s money, I don’t care if you pay it back. In this case, everyone was originating loans, making money off that process and selling the mortgage. Absolutely asinine for the taxpayer.
The Republicans can end many of these unconstitutional agencies.
But they won’t as they really aren’t for small government.
Just watch. They’ll disappoint when all is said and done.
The issue is no one in the housing industry wants anything to be done. The current arrangement is immensely profitable for everyone but the homeowner, and the homeowner doesn’t count.
Affordable housing isn’t the problem; the issue is that the mortgage lenders don’t care if the loan is paid back or not. Before the ink is dry, it’s been sold off to an investment bank, which bundled it up with a whole bunch of other bad mortgages, gets it rated AAA, and foists it off to some pension fund. When the security tanks, no one cares. The investment bank was betting against it anyways, so they make money. The mortgage lender doesn’t care; not only have they gotten their money back anyways, they also get to foreclose on the house and sell it again.
It only gets worse though. Most of the paper work regarding these mortgages has been lost and/or falsified, yet the foreclosures go through anyways because the whole system is greased in the name of profit. The banks get as many attempts to foreclose on you as they want, while if you can’t defend yourself one time, you loose your house. As a result, people who’s payments have gotten lost have been foreclosed on, people who have already paid off their mortgage have been foreclosed on, hell, the banks have told people who want to refinance to stop paying their mortgages for a month. When the owner complies, the bank forecloses.
And nothing is going to get done, ever. Both parties are being paid off to a massive extent by the whole system to leave it alone. Even if we could do something, we’d still risk trashing our entire financial system, because every bank and firm on wall street is playing the game. So don’t just blame the government. It’s the bank and the government working in harmony to screw us over.
@logicallyrandom, there’s a couple of things in your post that either I am misinterpreting what you are saying, or you’re not quite sure how the secondary mortgage market participants fit into the foreclosure process. i.e. you said:
The originating lender has, in most instances, sold the promissory note. This is different than the idea of “owning the mortgage” that lay people use. That promissory note can then be repackaged and sold out to investors and portfolios, etc. So it may be that many people and/or companies own that note in the end.
Now, what most people assume are their mortgage holders are actually the mortgage servicing companies. i.e., those that take care of the accounting (receivables) for your mortgage. They generally make better cash when the mortgages are late since they get to keep the late fees as part of their servicing charges. Think of them as an accounting/property management entity for “whomever” the promissory note is ultimately owned by. The mtg servicing company passes the payment thru to the nominee who is acting as the representative for the note owners.
Of late, this is where MERS comes in, because foreclosure demands generally include copies of the promissory note and current owners to prove rights of ownership and foreclosure. MERS, as well as a mortgage servicing company, can act as a foreclosing entity on behalf of the note owners, but they are not being paid twice (once for original sale of the note, and again at foreclosure) as you seem to think.
At all points in the chain, despite who appears to be the front nominee or servicing company, the cash for the note is forwarded to the current owners. This is why short sales can take so long.. or not happen at all. Technically, as promissory note holders, any investors must be approving taking a loss. And that can be a daunting paperwork trail.
And yes… there is a fraud going on in every part of the housing industry… from the “foreclosure consultants” to banks rushing to foreclosure with sketchy paperwork details. There was fraud during the bubble, and even more fraud after the bubble burst. Also being defrauded by improper foreclosures can be the note holders… which could be you and your 401K, for all you know.
And it is very annoying to see some in the industry food chain making hand over fist dollars… i.e., does your short sale listing agent also own a side company that is a “foreclosure consultant” service? That agent is now hitting the distressed owner for two fees… one to “negotiate” his short sale, and another as his listing agent. If that same agent brings the buyer… dual agency transaction if legal in that state… he wins the lottery for commission. Taking the listing fee, the buying fee plus the negotiating fee.
The banks have it made because too many have been designated too big to fail. The money they play with, or hoard as increased liquidity/assets, is taxpayer cash.
But one thing you still need to remember. Many of these dreaded corporations are really just shareholders (like 401K and pensioners) who are still homeowners themselves. That is something shared… their home values decline as well, they too can be upside down in their mortgage values, and they too can find themselves out of a job in these economic times. It’s no more difficult to default on a $3-4 mil mortgage than it is to default on on a $100K mortgage. A default is a default, and most of the nation now lives month to month, just a skip away from the beginning of a foreclosure process.
So I will disagree that there is no heart to “do anything” (not that I want government “doing” anymore than they have… they just make it worse). There is no economic recovery without a housing recovery. There will be no housing recovery without unemployment recovery. And the housing recovery will take two more steps backward in our next years’ future…. 1: the increased foreclosures and new defaults hitting the market in 2011, and 2: the inevitable raising of the interest rates, which will drive housing prices down again.
So really, every one wants a housing recovery. It’s just few are willing to take the inevitable hard lumps that entails…. either for living adjustment, or for political blame.
@MataHarley:
I did have the process slightly wrong; the way I figured it, the original lender sold the returns on the mortgage to an investment bank but still owned the right to collect on the foreclosed property. As far as I can tell, the bank is still making money on both the original mortgage and the foreclosure.
As for having sympathy for the companies involved, I have none. They invented the whole secondary mortgage market, and then deliberately set it up to fail by making faulty loans. This is to say nothing of the massive amount of fraud perpetuated in the foreclosure process. As for the investment banks, they had mortgages they either knew were faulty rated AAA, or, if they didn’t know the mortgages were faulty, it becomes massive dereliction of duty.
The government has to get involved if we want to prevent another housing bubble twenty or more years down the line; the who cycle is simply too lucrative in the short term for the market to resist, and it’s too disastrous in the long term for it to be allowed to continue.
You’re getting there, but not there yet.
No, the originating mortgage bank (or lender) is not making money on the “original mortgage”. They sold the note, and retain no rights to cash on that promissory note. A mortgage servicing company is no different than you hiring an independent CPA firm do to your business payroll and daily accounting. Are they making money on your company profits? No. The money they make is their fee they charge you for their services. Same to servicing companies.
“they” invented the secondary mortgage market? Actually, that was a government invention as far back as the creation of the GSE’s, logicallyrandom. Securitization has also been around for quite a few decades, with Congressional blessings. Nothing wrong with it… unless you decide to insert arsenic cookies into the system to securitize.
The government, over all, created the foundation and implementation for this housing bubble. In instances, it was both regulation and deregulation that set the playing field for our fiscal fall. And you want them to get further “involved”? Do I assume you are neither a conservative, or capitalist at heart?
What I meant by ‘making money’ is that the mortgage lender makes the loan, then sells the loan to an investment group, presumably making money off the sale.
The government ‘created’ the market in that they passed the laws making everything possible. But do you really think some senator woke up one day and decided to write a whole bunch of laws? The fact is, what you ascribe to government action can be more readily ascribed to lobbying. The ideas that created the bubble arose in private industry.
As for my political views; I find that regulated capitalism with adequate counter cyclical policy, and a reasonable safety net is far more viable and efficient than any other system. Combine that with a deep distrust of large organizations and a liberal social view, and I end up left of center.
logicallyrandom, the money a loan makes is 1% of the mortgage amount. Of that, they also pay their loan officers a cut, and charge sundry fees for their admin overhead… i.e. credit checks, appraisals (which they charge to the buyer in order to pay the appraiser), processing fees. In other words, their profit structure is not great. Whether they make money selling the note, I don’t know. Depends on if they are bundling many notes to the seller, doesn’t it? So profit is a dirty word to you?
After that, as a servicing company, they make only the fees for servicing each loan they are contracted for, and get to keep the late fees if the buyer incurs them. Again, we’re not talking about huge pharm type profits here.
The ideas that created the bubble are far from “private industry” creation. Look in the frames on the right, and read “the Perfect Storm” post, which may give you a clue as to most of the elements that came together to create the bubble and collapse. All of them originated from government.
Thanks for your clarification on “left of center”. That makes more sense when I read your comments.
http://www.thefiscaltimes.com/Issues/The-Economy/2011/01/20/Administration-Split-over-Fannie-Freddie-Strategy.aspx
The author (Anthony B. Sanders) is quoted in this article in “The Fiscal Times.” Take a look at the indecision in the Administration and Congress over what to do with Fannie and Freddie. Unlike Obamacare, there will be no consensus in the House, Senate or even the Administration over the path going forward — although it is clear to many who do not have a vested interest.
@minuteman26:
You are correct. But the political realities are such that IF the Republicans shut down Fannie and Freddie and the housing market collapsed, the Democrats would likely get voted back into office.
I prefer that the Republicans take that risk. But the banks are aligned with the Republicans and the banks want to keep Fannie and Freddie around to buy their loans. So until a functioning alternative is around, nothing will happen.
I AM NOT GOING TO WORRY OVER THING,S THAT I CAN,T DO ANYTHING ABOUT .WE ALL SEEN IT COMING FOR A LONG TIME.I STARTED SELLING OFF MY HOUSES FIVE YEAR,S AGO. NOW I HAVE ONLY TWO .I WAS GOING TO SELL THEM . BUT AT THIS TIME I HAVE STOP TRYING .IF I DON,T SELL I DON,T LOSS ANY THING .THE ONLY PEOPLE HURT BY THIS IS THE ONES WHO ARE SELLING. IF YOU DO NOT SELL YOUR HOME YOU PAY FOR IT .IF YOU CAN NOT GET IT SOLD AT THE PRICE YOU NEED TO PAY OFF YOUR LOAN IT IS NOT A GOOD IDEA TO TRY TO SELL SO RENT IT OUT TO CRACK HEADS THEY WILL BURN IT DOWN .HELL IF YOU TAKE OUT MORE INSURANCE THEN YOU NEED YOU COULD DO VERY WELL.IT,S NOT LIKE YOU ASK THEM TO DO IT .IT JUST HAPPENS A LOT WHEN CRACK IS BEING USED.SO TO HELL WITH THE GOVERNMENT AND THE BANKER WE HOLD THE KEY TO IT ALL NOT THEM THEM.JUST DON,T PANIC DON,T GIVE UP STAND YOUR GROUND .WITH OUT US THERE WOULDN,T BE ANY GOVERNMENT
Actually, Republicans want to have another housing bubble and hedge funds are pushing Tea Party people to get the repeal of the systemic risk box they have been put into.
So, while it is true that the big banks want all mortgages guaranteed, the Republicans want the hedge funds involved in the funding of future bubbles, with or without Fannie and Freddie. Here are two links that I wrote about these situations:
http://www.businessinsider.com/wells-fargo-bank-leads-securitization-attack-on-unsuspecting-taxpayers-2011-2
http://www.businessinsider.com/hedge-fund-cantor-and-ron-paul-should-not-both-be-republicans-2011-7