Fannie and Freddie Must Go

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.

Bank Lending Big Government Style

The latest weekly read of “Total loans and Leases of all Commercial Banks” indicates that banks are pulling back lending at the fastest pace on record with total loans and leases declining 8.55% on an annual basis.

U.S. government securities at all commercial banks, on the other hand, are booming increasing 13.45% on a year-over-year basis.

This likely underscores a fundamental quirk of today’s commercial lending environment.

High rates of delinquency and default on business and consumer loans are working to tighten direct commercial lending overall while government sponsored lending activities, such as is carried out through Fannie, Freddie, Ginnie, Sallie and FHA, work to prop specific lines of lending.

Commercial banks are, in a sense, refusing to generally lend unless they have a government guarantee.

Further, with the latest aggressive round of government mortgage mitigation initiatives the risks associated to lending directly to households is likely becoming more uncertain.

Existing Home Sales Report: November 2009

Today, the National Association of Realtors (NAR) released their Existing Home Sales Report for November showing a continuation of the epic government sponsored surge in home sales activity particularly for condos and lower end properties.

In fact, the stimulative effects have been so pronounced that sales of single family homes were up over 42% annually while sales of condos jumped a whopping 60% over the same period.

As for prices, they are still declining with single family home prices declining at 4.4% annual rate while condos declined at a 3.1% annual rate.

It’s important when reflecting on the sales results to consider that over 70% of all sales were for properties priced below $250,000 while only 7.3% were priced at or above $500,000.

Clearly, today’s results unequivocally indicate that the government’s tax gimmick drove a surge in "lemming" demand, bringing a renewal of speculative animal spirits but the cost has been high with at least $500 million of outright fraud and an FHA that is on the rocks.

So, while the federal government works tirelessly to prop unaffordable housing prices, Realtors are quickly lining their pockets with commissions that are a direct result of American's current and future tax dollars.

The following (click for larger versions) are charts showing sales for single family homes, plotted monthly, for 2006, 2007, 2008 and 2009 as well as national existing home inventory and month supply.







Below is a chart consolidating all the year-over-year changes reported by NAR in their most recent report.

Extended Unemployment Benefit Explosion!

While yesterday’s jobless claims report continued to show a steady trend down to both initial and continued unemployment claims with a nearly textbook peak shaping up, considering the federal extended claims data offers a more dire view of the state of the job market and of the economy as a whole.

Since the middle of 2008 two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 4.729 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 5.39 million people that are currently counted as receiving traditional continued unemployment benefits, there are just over 10 million people on state and federal unemployment rolls.