How to Kill Home Ownership
Posted: February 11, 2011 Filed under: commercial banking, Economic Develpment, financial institutions, Surreality, Team Obama, We are so F'd | Tags: Bail out of Fannie Mae and Freddie Mac, Timothy Giethner 38 Comments
Levittown House and family circa 1948
Your house is about to become even harder to sell, even more unlikely to appreciate, and even more unaffordable to more people. Be prepared to go back to the past. All those young Obama Democrats better love their landlords. They’re likely to be stuck with them for some time. Every think you’d see a headline like this for a Democratic President? Here’s one from NPR Today: Obama Administration: Not Everybody Should Own A Home,
For decades, U.S. housing policy seemed to assume that more home ownership was always better.
At one point in the early ’90s, the government launched the “National Homeownership Strategy,” whose stated goal was to “attempt to help all American households become homeowners.”
So perhaps the most striking thing in today’s housing finance report from the Obama administration is the simple idea that not everybody should own a home (emphasis added):
The Administration believes that we must continue to take the necessary steps to ensure that Americans have access to an adequate range of affordable housing options. This does not mean all Americans should become homeowners. Instead, we should make sure that all Americans who have the credit history, financial capacity, and desire to own a home have the opportunity to take that step. At the same time, we should ensure that there are a range of affordable options for the 100 million Americans who rent, whether they do so by choice or necessity.
This is idea, in turn, leads to the Obama administration’s main conclusion: Fannie Mae and Freddie Mac should cease to exist.
I’ve been a critic of the way Fannie Mae and Freddie Mac were managed for about 15 years. They were packaging up loans and paying bonuses like the worst of the Wall Street set. This had nothing to do with their basic government franchise agreement which is to provide long term funds to back up home loans. The packaging and wheeling and dealing were part and parcel of Fannie and Freddie trying to mimic Wall Street and privatization. However, they both provided products with implied government guarantees. This implies a higher level of due diligence in underwriting and packaging that they basically ignored. It’s similar to USDA grade beef. There was a guarantee that these loans would hold mortgage insurance and be underwritten carefully. The root cause of the problems were not the attempts to get more qualified people into affordable mortgages, it was to feed Wall Street greed and shovel money to their executives who were frequently just political hacks. They simply did the worst of the Wall Street practices at a much higher volume with a more damaging result because of the US stamp of approval; the implicit guarantee.
Now, we have a back to the gilded age future ahead of us. What has made these loans work as loans and the securities that back the loans work is the implied low risk with a decent rate of return. Many, many pension funds and institutional investors hold huge numbers of Fannie and Freddie Securities because they’ve always had high ratings. Most of these pension funds and institutional investors are sources of long term funds. There’s not a lot of a lenders that will lend long these days and that’s going to be a problem for most people looking for a home now more than ever. My guess is that most home loans will now go down to terms of about 15-20 years or they’ll be completely variable rate. That means the homeowner will have to bet on the rate to get an affordable mortgage and gamble their incomes will go up to secure the lowest rates and longest terms. Both of these are highly risky bets. Past data has shown that most people loose with these kinds of mortgages.
Plus, that’s if they can get the funding at all. Without something similar, I doubt that the major sources of these funds which are usually forced into safe investments will be available. Either that, or you’re going to lock in to a fixed rate but for an intermediate term loan. Think about your own house loan and what that would mean for you. You either double your house payment or take the bet that the rate won’t go up enough to force you to default in the future. Most people don’t have sophisticated enough knowledge of economics to even make an educated guess. My guess is that if they take the loan at all, they’ll go for the short term fixed rate loan on a much cheaper house. This is going to change the complexion of the housing market for ever if it goes through as planned.
This is a President used the gipper metaphor for himself. This is the White House that wants less Government in the Mortgage system.
The Obama administration wants to shrink the government’s role in the mortgage system — a proposal that would remake decades of federal policy aimed at getting Americans to buy homes and would probably make home loans more expensive across the board.
The Treasury Department rolled out a plan Friday to slowly dissolve Fannie Mae and Freddie Mac, the government-sponsored programs that bought up mortgages to encourage more lending and required bailouts during the 2008 financial crisis.
Exactly how far the government’s role in mortgages would be reduced was left to Congress to decide, but all three options the administration presented would create a housing finance system that relies far more on private money.
“It’s clear the administration wants the private sector to take a more prominent role in the mortgage rates, and in order for that to happen, mortgage rates have to go up,” said Thomas Lawler, a housing economist in Virginia.
Abolishing Fannie and Freddie would rewrite 70 years of federal housing policy, from Fannie’s creation as part of the New Deal to President George W. Bush’s drive for an “ownership society” in the 2000s. It would transform how homes are bought and redefine who can afford them.
Treasury Secretary Timothy Geithner said the plan would probably not happen for at least five years and would proceed “very carefully.” In the meantime, he said the companies would have the cash they need to meet their existing obligations.
There are other ways to do this. Most would have to do with tighter governance of Fannie and Freddie and elimination of private sector practices of bonuses for volume when government guarantees are involved. Also, a cap for the mortgages to prices more standard through out the country rather than Washington DC would help. Fannie and Freddie should have no place in the jumbo market. Here’s a few of the proposals that are in the White House program.
The Obama administration proposals include raising the rates Fannie and Freddie charge to banks for loan guarantees to the same levels as private banks. Private mortgages for so-called jumbo loans, which are not covered by government guarantees, currently cost between 0.5% and 0.75% more than government-backed mortgages. So, if Fannie and Freddie’s fees were to rise to the market level, mortgage rates across the U.S. might rise substantially.
The administration also proposed lowering the maximum value of a mortgage that can qualify to be federally backed from the current $729,750 to $625,500. That’s a widely suggested move that would attract the private sector to make more loans in the upper range of the market. The proposal also called for Fannie, Freddie and the FHA to set a minimum down payment requirement of 10%. Currently, the agencies are authorized to make loans with no down payments at all.
The big issue is what to do about the government guarantee that assures investors who buy Fannie and Freddie mortgage bonds that the U.S. government will pay back the bonds in the event the underlying mortgages default. Because of that guarantee, Fannie and Freddie can offer lower interest rates than the private sector. Investors, especially foreign investors, were burned by subprime bonds during the financial crisis, and now they won’t touch private mortgage bonds without a government guarantee.
There’s obvious problems with Fannie and Freddie but they mostly lie with how it was managed and how it morphed as more up income and high price assets were put into play. Helping upper income people or expensive real estate markets weren’t originally part of the charter. Making it more like a bank isn’t going to remove the abuses but add to them. Bonuses for production quotas lead to reduced quality.
It would be more prudent to take Fannie and Freddie back to their roots rather than to them strip them of their ability to provide affordable mortgages to entry level home owners. The management got caught up in production over quality of loans because they got bonuses. That was a huge problem. The connection to affordable housing initiatives was never the problem. Churning out crap to feed the investment frenzy of Wall Street and peeling off bonuses for their executives led to their sloppy loan processing. They caught the same disease that plagued the private sector at a larger volume. Congress also did a poor job of oversight.
This move will leave a huge gap in two places. First, it will impact investment portfolios that rely on long term, relatively safe but decent yield-bearing assets. It will also remove one more route to the American dream for ordinary Americans. Let’s just say we’re all taking one for the Gipper.
peej
Carissa
bostonboomer
ecocatwoman
mablue2
peggysue22
quixote
skydancingguestblogger
Mona (aka Wonk the Vote)
Sky Dancing 
This is OT, but have you noticed that the links on top to the other posts have the earlier post on the right with an arrow pointing right and the later post on the left with the arrow pointing left. Shouldn’t it be the other way around?
why would left be the default to back? Because Latin-based languages read left to right?
Yes, probably that is the reason. I hope you’re not reading bias into my comment. But if you like it as it is, fine, no big deal. I’ll just have to think a second more before I click on one of the links. Sort of like trying to get used to the idea that red light means “go” and green light “stop.” That was actually true on an old job of mine.
However, English is not a Latin based language, it is a Germanic language.
well, they’re all considered indo european now
Thanks for doing this post Dak. As I read that article all I could see was a lose/lose for the *average* family trying to get into home-ownership and another slap at the middle, lower/middle class.
yup, exactly, that’s what it is
Had a feeling this was bad, especially when the GOP praised it. That whole “less government” meme, together with the cuts to poor Americans’ fuel assistance during this bitter cold winter and the Gipper remark… anyone who thinks Obama isn’t an elitist GOP ass, is really an idiot. (That goes out to all you Obots and Beck followers.)
Minx…that 30 yr fixed-rate mortgage was the bedrock of American home ownership. You bought the “starter” house, paid on it for a number of years and built up equity and then if you’ve done well, and maybe the family has grown, you look to move up…sorta like Sean Payton (inside joke to dak!) 😉
😦
OK, a bit off topic but worth asking…why is Joe Biden going to be on the Ticket again? Joe Biden who can’t see ‘Mubarak was a Dictator’??? Just asking, as he sure hasn’t been out doing much for people to keep their homes, but busy sticking his foot in his mouth.
Now, he is trying to jump into the Iran fight for Freedom, you have to ask, where was he over a year ago?
I have no idea. Probably because Obama feels better about himself with Joe around.
😀 Kind of the same reason Tricky Dick Cheney kept his little apester arond…
This is related, because my eldest child (old, but you know, still a kid to me) was upset about the foreclosures and the affect on their homes value. They plan on having the home paid off in another 9 years and then pay for college for the kids. Currently the eldest has a ROTH IRA, but that will cover a year and a half. This touches on the hardships of getting a higher eduction in a funny way… 😉 OK, I get the idea too! 😆 RSA Animate – Changing Education Paradigms
LOVE these works. Excellent use of Visual Rhetoric in every way possible or imaginable. Truly brilliant!
Minx said: Had a feeling this was bad, especially when the GOP praised it
Isn’t that always the giveaway…the GOP likes it?
Yes, it seems to be the tell tail sign. Like red sky at night, sailor’s delight…red sky at morning, sailor take warning.
GOP likey = We’re so f’d
OT: Yes, let’s just hope she does get proper care…Girl Gang Raped by Classmates: 13-year-old Girl Allegedly Gang-Raped by Classmates at Park – ktla.com
My Lord…
Was it “forcible rape”. (those idiots)
Exactly, you think she could get federal abortion assistance (help with paying for it) with the new GOP plan?
Oh wait, I got it, GOP idiot thought process …the gang rape occurred in a playground…only fun things happen in playgrounds. The boys were just having fun, nope it wasn’t forcible.
(This is said with disgusted snark!)
I think it’s time for an Egypt style revolt in the US. We could use some of the democracy stuff.
We need to schedule it for 2/11/12.
Amen sister.
I just got into real estate investing and that is exactly what we are seeing here in Houston. Homes aren’t moving like they usd to, and since now we have to factor foreclosures into our comps, it absolutely kills the value of that property and the neighboring properties. Thanks Obumbles….
Asshat.
Hillary 2012
Rock: So you also see this as another problem in getting a restart or improvement in housing issues? From what I understand it’s going to affect buyers or sellers across the markets.
Geithner said it will take around five years to complete but the tight loan market isn’t going to get any better with this in the works. It will gradually defund long term mortgages.
I’m starting to think that the paradigm, the window, has shifted so far to the right that we are simply old-fashioned throwbacks…
We might be correct, we might have been able to create a kinder society, we might have been able to realize FDRs last speech, but no-one will listen. No-one cares.
To heck with it, I’m still fighting for what’s right.
I was amused, in a very sad way, to see one headline in my local news touting how Seattle housing is coming back (headline fed by Real Estate promo people) and then next day, another, fed by government statistics, saying that housing was doing poorly indeed.
Sigh….
I am still appalled that many of my friends here in supposedly liberal MA fail to see how bad things are. Several of us are about to have our incomes yanked out from under us when Deval Patrick takes control of yet another state agency and downsizes by two thirds, yet they keep insisting “it will never happen”. People are living in complete denial about the systematic dismantling of the middle class in America and the plans of our so called govenrment to return to a pre – FDR economy. The only answer I can come up with is, they must be already economically secure and figure they will never be effected.
Hey BBS, it’s good to see you!
They may think they are safe from ‘marxist’ revolts, but I think they need to wake up and smell the desperation outside of their gated communities. The Tea Party is the right wing phenomenon of this starting. It’s just these folks have the wrong ideas.
Sorry I meant “affected”.
Too depressing for a Friday night, so I saved my response until this morning (not that the subject is any less depressing). Can we all say again just how clueless Obama and his team are? He talks about more rental properties, but has anyone told him that it’s more difficult to rent with a bad credit score than it is to try ownership of a modest home with some govt. guarantee behind it? Not to mention all the negatives of renting versus buying on property maintenance, neighborhood stability, crime, etc. I predict we will have massive financial destitution if this plan passes.
I know. It’s like they’re trying to completely destroy all the New Deal things and send us back to the years of Financial panics and extreme poverty. I’m still wanting for some one to announce pauper prisons.
When we lived in Newtown, Connecticut there was many roads named with reference to “Poorhouse Rd.” It always seemed ironic to me that these roads with pauper names had such enormous expensive houses built along them.
Then I think of Tobacco Road, the book and the movie and play. The desperation of the characters, and the expressed feelings toward going to the “poor farm.”
Sad indeed.
Dak, I can’t understand WHY the connection to the 30 year mortage in the article. Can you explain that for me?
The primary source of the conventional 30 year mortgage is Fannie and Freddie.
Here’s a number for you:
Federal programs subsidized nine in 10 mortgage loans made last year. If the Obama administration succeeds, that could plummet to a mere one in 10 loans by the end of the decade.
This could make the fixed rate 30 year mortgage nearly extinct. No financial institution wants to buy and hold 30 year fixed rate mortgages. They got burned on those in the 1980s.