Yesterday’s NPR “On Point” program featured a segment titled “Fannie Freddie and the Sinking Housing Market” which is well worth a listen if only to witness the handwringing that will likely become far more common as the administration moves closer to making real changes in government sponsored housing finance.
Make no mistake, there are many interests that would align firmly against any plan to withdraw government subsidy (which is exactly what mortgage guarantees are) from the nation’s housing finance scheme but most are only now strategizing and determining the best way to position their case in favor of government sponsored housing in light of the fact that Fannie and Freddie are largely viewed as colossal failures.
Longtime readers of this blog should know the drill fairly well at this point… Fannie Mae’s original goal was to help expand and democratize housing finance by creating a secondary mortgage market of insured or guaranteed mortgages but what may have started out as an exercise in basic command-economic policy morphed into a series of reckless actions on the part of the GSEs, multiple administrations, Congress, lobbyists and private financial institutions that ultimately contributed greatly to the collapse of the nation’s housing markets and the major macro-economic decline that ensued.
Let’s recall that while the private label mortgage market (and all the financial engineering involved in the complex synthetic mortgage finance products etc.) was responsible for much of the shoddy underwriting that corroded housing finance during the housing bubble era, many of these private institutions were originating mortgages just to sell to Fannie and Freddie.
For example, in the peak years of 2006 and 2007, Countrywide Financial… probably the poster-boy for shoddy underwriting… was originating 25% of Fannie Mae’s book of business.
In this way, housing finance, in the days building up to the great housing collapse, had become an ever wilder circus of interests and policy with both government-sponsored and private institutions becoming inseparable and mutually responsible for the disaster that ensued.
In proposing the wind-down of Fannie and Freddie, the administration is taking the exact right course… clearly recognizing the mistakes of the past and the inherent weaknesses and instability that is created by having government such a major actor in the nation’s housing finance and restructuring policy to dramatically reduce the government's footprint.
Will this mean that there will be no 30-year fixed rate mortgage or a minuscule private mortgage market with loans directed only at affluent families as was insinuated during the NPR program?
Well… while you will get used to hearing fear-mongering along these lines coming from all the usual organizations (and other lunatics) that have blind interests in simply expanding home ownership at any cost… the reality is that any government guaranteed function in housing finance is simply more of the same and ultimately doomed to disaster.
There is no convincing evidence that the 30-year fixed rate mortgage would fall by the wayside if not guaranteed by a colossal government sponsored train-wreck and, quite to the contrary, there was a very robust market in Jumbo mortgages (primarily 30-year amortizing non-insured non-guaranteed) prior to the massive home price slide that sent investors racing for the sidelines.
When home prices begin a lasting stabilization and the fundamentals of price-income ratio’s rule once more, there will be more than enough investment money for a robust private mortgage market.
Will anyone with a pulse be able to lock-in a 30-year fixed rate mortgage with good terms and a low interest rate? … of course not.
The lending standards by which many millions of Americans (a generation or more) grew to rely on and consider “normal” were simply a distortion created by reckless government policy and overzealous and often fraudulent privateers.
Expanding homeownership at all costs was a failed intuitive embraced by both government and private housing industry groups and we need to recognize it as such.
While zero-entry housing might have been good for home sales and political pandering, its consequences were millions of financially wrecked households struggling through foreclosure and bankruptcy, devastated financial institutions and an economic system teetering on the brink of collapse.