[Dork.]

Buried in the news yesterday, under the news about Egypt, was this nugget:

http://www.nytimes.com/2011/02/12/bu...12housing.html

The Obama administration’s much-anticipated report on redesigning the government’s role in housing finance, published Friday, is not solely a proposal to dissolve the unpopular finance companies Fannie Mae and Freddie Mac.
It is also a more audacious call for the federal government to cut back its broadly popular, long-running campaign to help Americans own homes. The three ideas that the report outlines for replacing Fannie and Freddie all would raise the cost of mortgage loans and push homeownership beyond the reach of some families.

At first, this surprised me quite a bit, especially since this is going to run into some stiff resistance from his own party (who still controls the Senate, after all). But then, after thinking about it, it makes some sense:

- You can argue how big a role Fannie and Freddie played in initiating the housing meltdown, but you can't argue about the bill taxpayers were saddled with when it happened, due to government guarantees. Reducing these guarantees will help prevent another crisis, and help trim the deficit besides.

- Since the meltdown was due, in large part, to lenders lending money too easily, looking into policies that will make lending more difficult will not be a hard sell.

- Reform of this magnitude was probably DOA as long as Democrats controlled the House, but has a chance if Tea Party Republicans buy into it.

Like the Health Care reform package, Obama has detailed a few general proposals, but leaves it to Congress to fill in the details. I wonder if the Republicans and Tea Partiers are willing to run with this and push it, even if it might hand Obama a policy victory.

If you can't qualify for a mortgage based on your own credit history, Obama wants you to rent, pure and simple. And if this passes, then the interest deduction for homeowners is next on the chopping block. Maybe even the 30-year fixed rate mortgage, although I don't know enough about the markets to know why lenders wouldn't offer this without government intervention.

In short, Obama is crapping directly on Bush's "Ownership Society" policy. I guess we can't afford it anymore. Maybe we never could in the first place?

[finboy]

Originally Posted by Dork. 

Buried in the news yesterday, under the news about Egypt, was this nugget:

http://www.nytimes.com/2011/02/12/bu...12housing.html

Thanks for posting this. I've been busy and missed the NYT story version. Cool.

The 30-year mortgage, now, relies on the ability to sell the mortgage after creation. The risk of holding a fixed-rate, long-term asset is just too great (not the default risk). Remember, with banks that mortgage is supported by short-term deposits. As interest rates change, so does the value of that asset, and the bank has to eat the change if it goes against them. Particularly right now banks wouldn't want to make home loans into the lowest rates in 40 years because they're locking in low rates AND the mortgage values will drop when rates rise.

So what will happen is that we'll go back to 30% downpayments for everyone, and then use adjustable-rate mortgages for every loan. Your payment will likely float with interest rates. Don't worry though: if the IMF has its way the dollar won't be the universal currency (hah!) and rates will be much more stable. Riiiight.

[Dork.]

Oh, I think I get it now. I always wondered why banks would be so eager to sell loans after they first write them; the answer is that the longer they hold onto the loan, the more risk there is that increases in rates would decrease the value of the loan to the owner. Kind of like an expensive game of "Hot Potato" -- nobody wants to be left holding the low-rate loans. Except Freddie, I guess. As long as a loan met Freddie's guidelines, the banks knew that they could pawn the loan off to Freddie, and when they did they would get cash back that would then be available to lend again. (Freddie would take those loans, bundle them into securities, and sell them as bonds with guaranteed payments.)

So, Freddie provided insurance against both default risk (by guaranteeing securitization payments) and interest rate risk (by being a buyer of last resort for loans when a bank wanted to get them off their books to they could lend again at a higher rate). Without Freddie, banks have to be more careful, because they are not guaranteed to be able to sell off their mistakes anymore. Does that sound right?

[finboy]

Originally Posted by Dork. 

So, Freddie provided insurance against both default risk (by guaranteeing securitization payments) and interest rate risk (by being a buyer of last resort for loans when a bank wanted to get them off their books to they could lend again at a higher rate). Without Freddie, banks have to be more careful, because they are not guaranteed to be able to sell off their mistakes anymore. Does that sound right?

The legitimate purpose behind Freddie/Fannie was to both standardize the market (making it possible for others to buy/trade mortgages too) and also diversify geographic risk. Loan concentration was the first real problem with mortgages - banks held a lot of real estate in their home towns, and rolling recessions became commonplace rather than a national "depression." Secondly, though, after setting up a process to deal with geographic (default) risk, market interest rates (from inflation at first) became a lot more volatile in the 1970s. So having fixed-rate assets, either long-term bonds OR mortgages, was not a good idea. Plus, people can repay their mortgages at will, leaving banks holding the bag. An org such as Freddie or Fannie can sell the bonds to people who actually WANT the counter-rate positions, folks who want to invest in real estate but don't want the hassle, etc.

The point is: Freddie and Fannie and their related agencies actually had a legitimate economic purpose, and worked well, until Congress decided to use them as another distribution of wealth program. It wasn't ORIGINALLY just a scheme for the banks to make money, as some have alleged throughout this crisis. But give politicians some extra cash, or in this case reputational capital, and they'll burn through it every time.

The legacy of this sh*t sandwich is that Fannie bonds were rated AA and AAA by Standard & Poors, who rated other bonds that highly too, and therefore nobody believe ANY ratings there for a while. AIG and Lehman and others created credit default swaps to protect people from useless, biased ratings, and THAT market went berserk.

[OAW]

If Fannie Mae and Freddie Mac are completely wound down then the secondary mortgage market will likely be toast. Home ownership for the working and middle class will undoubtedly suffer, and the wealth gap in the US will only be exacerbated. Home ownership is the number one method for acquiring wealth in the US so it would be a shame if the US government ends up putting it out of reach for the average family because the mortgage industry decided to run wild and market products to people that they knew would be unaffordable after a few years. This was a clear example of deregulation running amok ... because market forces let to their own devices don't always do the right thing. The "market" is concerned with the next quarterly earnings report. And who gives a sh*t if the people taking out that ARM you are aggressively pushing them towards ("cause hey, you can always just refinance again when the loan resets") get left holding the bag? The mortgage originator is just going to turn around and sell the loan to someone else, eventually to get packaged with other such loans into a Mortgage Backed Security, so that default risk will be somebody else's problem.

OAW