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 CommentsYour 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.
TGFriday Reads
Posted: February 11, 2011 Filed under: Egypt, Foreign Affairs, John Birch Society in Charge, morning reads, U.S. Politics | Tags: Climate change, CPAC, Dick Cheney, Donald Rumsfeld, Donald Trump, Egypt, Mississippi Confederate hold outs, Muslim Brotherhood, Noam Chomsky, Ron Paul, The Nation 39 Comments
Good Morning!
I’ve thought about writing some posts about the CPAC circus but frankly, any thing that gives Donald Rumsfeld a “Defender of the Constitution Award” plus features Dick Cheney and Donald Trump is just way too over the top for me. There were several interesting things and most of it came via Ron Paul and his very dedicated groupies. One of them shouted Dick Cheney down as a “war criminal”. Most of the Fundies were AWOL because they didn’t want to be seen networking with folks that might be out there trying to convert them to the “radical homosexual agenda”. Then there was The other Donald with your zen moment of the day saying that Ron Paul was a nice guy but had “zero chance” of get elected. Next question, Mr. Trump. What are your chances of being elected then?
One shout of “where’s Bin Laden?” rang out as Cheney spoke of Rumsfeld.
That led to the pro-Cheney contingent (which it should be said greatly outnumbers the opposition) to shout the hecklers down with the familiar “USA, USA” chant.
It was all very odd, especially considering that when Cheney appeared as the “surprise guest” at last year’s CPAC he was greeted with the kind of cheers generally reserved for a rock star.
But Team Paul — whose numbers appear to have grown at CPAC in 2011 — were not going to let that happen this time around.
“Uh, Defender of the Constitution?” Justin Bradfield of Maryland scoffed when I caught up with him after he walked out of Rumsfeld’s speech. “Let’s see: he expanded the Defense Department more than pretty much any other defense secretary and he enforced the Patriot Act.”
“[Speaking] as a libertarian, that’s not really the type of person who should be getting Defender of the Constitution,” he added.
Wow, this is the sort’ve thing that calls for popcorn and chagrin. The Hill covered the Trump card.
Business mogul Donald Trump said Thursday that Rep. Ron Paul (R-Texas) could not possibly win the 2012 presidential race.
“By the way, Ron Paul cannot get elected, I’m sorry to tell you,” Trump said at the Conservative Political Action Conference (CPAC) on Thursday. “I like Ron Paul, I think he’s a good guy, but honestly he just has zero chance of getting elected.”
Then, the Caucus at the NYT covered the background on the Trumped-up decision to run for President. Oh, the drama! Oh, the pathos! Oh, the ratings boost!
“Obviously, it’s a tremendous forum to espouse his views and to express the fact that he is legitimately contemplating on this run,” said Michael Cohen, the executive vice president of the Trump organization, who confirmed his attendance at the forum. “He is seriously considering doing this because he’s disgusted with how the country is being run.”
Mr. Cohen, a special counsel to Mr. Trump, has started a Web site, http://www.shouldtrumprun.com, to serve as something of a draft movement. But the Web site is far from an organic outpouring, considering that it is run by people on Mr. Trump’s payroll.
Advisers to Mr. Trump say that he will decide by June whether to go forward with a Republican presidential bid. The timing is built around his television program, “The Apprentice,” which is scheduled to end by June.
I have to admit that I was more interested in who WASN’T as much as I was in hearing about the theatrics concerning the attendees. What does it say when two of the top draws in Republican Straw polls find better things to do?
I’m not sure if you caught the WAPO editorial written by a member of the Muslim Brotherhood, Abedel Moneim Abou el Fotouh but you may want to give it a read. I’m basically of the opinion that we should worry about the Fundies in our back yard before we worry about the Fundies in some one else’s back yard. El Fotouh tells us we shouldn’t worry at all. He also reminds us that peoples of a nation have a right to self-govern. That’s the basic American principle that does make the US exceptional.
Contrary to fear-mongering reports, the West and the Muslim Brotherhood are not enemies. It is a false dichotomy to posit, as some alarmists are suggesting, that Egypt’s choices are either the status quo of the Mubarak regime or a takeover by “Islamic extremists.” First, one must make a distinction between the ideological and political differences that the Brotherhood may have with the United States. For Muslims, ideological differences with others are taught not to be the root cause of violence and bloodshed because a human being’s freedom to decide how to lead his or her personal life is an inviolable right found in basic Islamic tenets, as well as Western tradition. Political differences, however, can be a matter of existential threats and interests, and we have seen this play out, for example, in the way the Mubarak regime has violently responded to peaceful demonstrators.
We fully understand that the United States has political interests in Egypt. But does the United States understand that the sovereign state of Egypt, with its 80 million people, has its own interests? Whatever the U.S. interests are in Egypt, they cannot trump Egyptian needs or subvert the will of the people without consequences. Such egotism is a recipe for disaster. With a little altruism, the United States should not hesitate to reassess its interests in the region, especially if it genuinely champions democracy and is sincere about achieving peace in the Middle East.
I have to admit that any one who lives in Louisiana usually has a huge number of Mississippi jokes up their sleeve. The same was true for Nebraska on Iowa. Nebraska had a red and white license plate design and we always called Iowa Drivers out as ‘blue plate specials’ for there blue tags. I got to use that same joke down here on the folks from Mississippi; especially my New Yorker transplant boyfriend who taught molecular biology and lived in Forrest County. I just learned where the Forrest came from and I’m not even sure I can express what I want to say about this tidbit on a proposed Mississippi license plates: ‘Mississippi May Honor Early KKK Leader On Commemorative License Plate. Some historical figures are best left dead and buried’.
Controversies over honoring Confederate heritage are not uncommon in the South, but some activists in Mississippi are pushing the envelope even further. The Mississippi Division of Sons of Confederate Veterans is proposing a license plate that honors Confederate Gen. Nathan Bedford Forrest, who was also an early leader of the Ku Klux Klan.
Following the Civil War, Forrest was involved with the very first incarnation of the KKK. He was so closely associated with the group’s formation that he is sometimes incorrectly referred to as the KKK’s founder — though he was quickly elected Grand Wizard, and began centralizing disparate KKK groups under his authority. He believed that while blacks were now free, they had to continue to toil quietly for white landowners. “I am not an enemy of the negro,” Forrest said. “We want him here among us; he is the only laboring class we have.”
Perhaps even more disturbing, however, were Forrest’s violent actions during the Civil War, specifically a massacre of black soldiers at Fort Pillow, TN in April 1864.
Yup, this guy slaughtered black union troops that had already dropped their rifles. What is wrong with modern Mississippi and what will its Governor Haley Barbour say about this?
So, here’s an interesting YouTube with Noam Chomsky on ‘How Climate Change Became a ‘Liberal Hoax’ in a series from The Nation’.
Known for his criticism of the media, Chomsky doesn’t hold back in this clip, laying blame on mainstream media outlets such as the New York Times, which will run frontpage articles on what meteorologists think about global warming. “Meteorologists are pretty faces reading scripts telling you whether it’s going to rain tomorrow,” Chomsky says. “What do they have to say any more than your barber?” All this is part of the media’s pursuit of “fabled objectivity.”
Of particular concern for Chomsky is the atmosphere of anger, fear and hostility that currently reigns in America. The public’s hatred of Democrats, Republicans, big business and banks and the public’s distrust of scientists all lead to general disregard for the findings of “pointy-headed elitists.” The 2010 elections could be interpreted as a “death knell for the species” because most of the new Republicans in Congress are global warming deniers. “If this was happening in some small country,” Chomsky concludes, “it wouldn’t matter much. But when it’s happening in the richest, most powerful country in the world, it’s a danger to the survival of the species.”
Okay, so, just so you know that our Congress is on the up and up these days, I’m going to leave you with this headline: ‘The Pajama Party Is Over, Ethics Group Tells Congress’.
A Washington ethics watchdog says it is time for Congress to crack down on lawmakers who sleep in their offices rather than pay for a place to live. Reacting to a surge in lawmakers’ bunking down in their work spaces, Citizens for Responsibility and Ethics in Washington wants the Office of Congressional Ethics to investigate whether the politicians are getting an unfair tax break and violating their own rules by making personal use of public resources. “House office buildings are not dorms or frat houses,” Melanie Sloan, the
group’s executive director, said Thursday. “If members didn’t want to find housing in Washington, they shouldn’t have run for Congress in the first place.” Aside from the legal and rules questions, Ms. Sloan said she has heard reports from Congressional staffers about uncomfortable work environments. “Especially if you’re a woman and you’re working late and your boss is there getting ready for bed, that seems designed for discomfort,” she said.
They should just be glad their Senator isn’t David Vitter who probably uses campaign funds for hookers and diapers. Don’t make me think about what he’d be up to in his office!










Recent Comments