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The One Mortgage Fix Washington Isn’t Talking About

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Obamacare’s early problems could recast the debate about mortgage market reform.

What does health care have to do with housing prices? A lot, actually.

The stumbles with the Healthcare.gov website and the individual policy cancellations may or may not get resolved soon. But they have served a purpose. They have highlighted the extent to which health care reform is a “kludge,” as Paul Krugman recently wrote, a jury-rigged and complicated structure that extends social insurance largely through private sector means, leavened by a passel of government regulations and subsidies.

Obamacare was a concession to the status quo. Many progressives would have preferred a government-run, single-payer plan — Medicare for all — but that was politically impossible. Such a change would have been hugely disruptive, since tens of millions of people would have had to be moved off their policies, and many thousands in the insurance industry would have lost their jobs.

So let’s turn to mortgage market reform. Congress is debating what to do about Fannie Mae and Freddie Mac, the government-owned mortgage insurance companies that collapsed during the 2008 financial crisis.

Worried that the government backs too many new mortgages, the Washington consensus has coalesced around a solution that looks a lot like Obamacare. The leading proposals involve getting rid of the Frannies to have private companies create mortgage-backed securities. The government’s role would be to insure some of those mortgage-backed securities, to subsidize the home purchases of the disadvantaged and to regulate mortgage-market players to prevent predatory practices and risk-taking that could lead to taxpayer bailouts. Sens. Bob Corker, Republican of Tennessee, and Mark Warner, Democrat of Virginia, have a bill that embodies this harmony.

So what about alternative ideas? There are surprisingly few.

Some conservatives argue for the government to get out of the mortgage market completely. But what passes for the left’s position in Washington is not the opposite of the right’s. The liberal establishment concedes the argument that reform should bring investors back into the housing market and shrink government’s role. They spend their energies pushing to expand and protect housing affordability and access.

The Center for American Progress, a group that has a pipeline to the Democratic mainstream, has played a big role in formulating the current kludge concordance. Even the Center for Responsible Lending, a progressive group dedicated to fighting predatory loans, agrees “with the emerging consensus,” according to a vice president of the group in Senate testimony last month, “that taxpayer risk must be insulated by more private capital.” (The Sandler Foundation, the founding donor of ProPublica, has long been a leading supporter of both organizations.)

What’s almost entirely missing is any unashamedly liberal argument that the government should continue to play a large role in the mortgage market. In fact, it’s taken as a given that too much government involvement is a worrisome thing.

The opposite may well be true: There’s a good argument that preserving the government’s large and active role will make the market safer and more efficient than the reforms.

The consensus has it right that housing is a public good. Homeownership builds wealth, even for low-income households, according to Carolina K. Reid, a professor of city and regional planning at University of California, Berkeley. Of course it’s no guarantee. When the poor buy homes, they don’t stay in them as long as those in the middle and upper classes, meaning that homeownership is more likely to be a losing proposition for the poor than for the better off. Even when the poor do manage to build wealth, they tend to have lower returns than the wealthier. But renters build almost no wealth at all, Professor Reid says.

A large government role in housing is also, let’s face it, unavoidable. As even centrist Republicans agree, the government is and always will be on the hook if the housing market crashes. So many Americans own homes that the government will intervene during a crash. By including the government guarantee in the Frannies’ reform plans, overhaul proponents are conceding that government involvement is necessary to lower the costs of mortgage financing. Given that, it’s probably cheaper for the government to do it as directly as possible. That would be simpler than insuring private mortgage-backed securities, cutting out a whole swath of middle men and overhead.

And it’s more honest. Yes, keeping the Frannies in the government would put their liabilities on the federal balance sheet. Lyndon B. Johnson moved Fannie Mae out of the government to play this very game. But because the government obligation is inevitable, it ought to be transparent and explicit rather than obscure. Keeping Fannie and Freddie as government operations is the cleanest way to do this.

Is it realistic? Keeping the government directly involved in the mortgage market has a big advantage over single-payer health care: It is the status quo. Taxpayers now own Fannie and Freddie and the federal government controls them. It might well be more disruptive to raze them and create a private mortgage market.

This is not a wild proposal; we’ve already tried it. From its creation in 1938 to 1968, Fannie Mae was part of the government. It bought loans from banks and held them on its balance sheet. Homeownership expanded by about 20 percentage points and we had no national housing crashes that wiped out homeowners and the country’s banking system.

Fannie and Freddie’s problems developed much later, after they became publicly traded companies. These “neither fish nor fowl” hybrids had both government charters with implicit government guarantees and had shareholders to please. In their drive for shareholder value, the companies took more risk. And then they lobbied to lower their capital requirements to take even more risk. (They were not the cause of the financial crisis, as some continue to argue.)

The danger of the untested reform proposals is that they may create new versions of this distortion — and bring about more reckless risk-taking. In addition, the proposals benefit the banks more clearly than they do homeowners.

Keeping the Frannies as part of the government could resolve this issue. Government operations have flaws, but a voracious appetite for risk is generally not one of them. The mortgage market might become safer.

And, possibly, smaller, with less trading of mortgage-backed securities than we had before the financial crisis. But what matters is the homeownership rate and housing market stability, not how many investors can bet on securities.

A final objection is that any government entity is vulnerable to shutdowns, to horse-trading, to political popularity. Right now, Congress is treating the immensely profitable Fannie and Freddie as a piggy bank. It’s a valid criticism, but one could insulate the Frannies by making them a government corporation, like the Federal Deposit Insurance Corporation.

The kludge consensus may happen to be the best solution. But it’s hard to tell because we don’t hear other visions. Housing was central to the financial crisis. If any topic should generate a full spectrum of radical and imaginative ideas, this is it.

I’m told that the Canadian government does not get involved in the housing market. Surprisingly then (to the social engineers), the homeownership ratio is higher in Canada than in the US. Is it true or not?

Why not debate the question whether or not a government subsidy/assistance ultimately increases the price of goods or services, rather than make it more “affordable.”

What happens when government gives students a subsidy/assistance of, say, $10,000 to make education more affordable? It merely gives college administrators leeway to hike the price by more or less $10,000. The cost of education has comfortably outstripped the rate of inflation ever since Washington decided to offer a “helping” hand.
If I want to sell my home, I’d like to sell to a buyer who gets some kind of assistance from government. I could hike the price of my home seeing the buyer now has greater purchasing power.

Government intervention in the market place is bad news to those who think they are going to be “helped” by it. It “helps” the wrong people. If you were making athletic shoes, would you not love for the government to provide coupons that would make trainers more “affordable” in the interest of encouraging physical fitness? If the coupon/voucher/tax relief comes in the form of, say, a $50 subsidy, the price of trainers would go up by about $50 – not so? (Let’s not lose sight of the fact that whatever economic benefits the government wants to distribute to some, it first has to take from others – or incur debt, which robs future generations. You can’t fill the shallow end by taking water from the deep end, a concept that Washington cannot grasp.)

This is a very important debate. It supersedes all other peripheral matters, because it deals with a fundamental concept, as Reagan reminded us: the most terrifying words in the English language is, “I’m from the government, and I’m here to help you.”

Limit the size of government’s budget to less than 15% of GDP and the nation will prosper, per capita income will rise dramatically for rich and poor. Under our current plutocracy only the rich are seeing a rise in per capita income, so the poor needs “assistance.” The rich are involved in the provision of the subsidized goods and services, making them the biggest beneficiaries of governments’ largesse.

Phil Perspective

Nov. 6, 2013, 12:53 p.m.

“But what matters is the homeownership rate and housing market stability, not how many investors can bet on securities.”

Does the homeownership rate matter?  How about all those that can’t afford housing anywhere near their job?

your real name

Nov. 6, 2013, 2:36 p.m.

Why does one believe that the solution to a problem, was the issue/entity that caused it? Government and Wall Street are complicit in this bipolar housing market. They’ve kept people in homes who shouldn’t be there, run median prices back up to extraordinary levels, and screwed renters in the process. By any stretch, it’s NOT capitalism…

If you mean regulatory captured government was the entity that caused it, you’re correct.

The first comment argues for keeping government out.  I would argue that there is a VALID role government could serve.
For example, I did get some govt. grants and loans for my education, in the 1970’s.  I also worked.  When graduated I made up a payment plan that paid off all my loans in two years.  I lived like a pauper those two years, but my goal was to be debt free within a certain period of time.  I also paid off a new car during that time also…...a ford fiesta that cost approx. $5,0000+
There were programs that would have allowed me to pay off the govt. loan by working in poverty stricken areas with disadvantaged populations.  I seriously considered that option, but made the other choice because I was determined to do what ever was needed to pay off those loans.  So, I continued to live just as I had while I was a student, with the exception of having a reliable vehicle.  My VW van had died.
If we want disadvantaged peoples to have access to help and if we want to help students who need financial aid then I would say that we could require the option of working in disadvantaged areas and that payment of the loan by the government would depend upon high quality grades while in school and high quality work after graduation.
That would create a win-win for everyone.

Richard I Isacoff

Nov. 6, 2013, 6:45 p.m.

The problem is not whether Fannie or Freddie or USDA Rural Housing or FHA are government agencies, GSEs, private, or Bank owned (gov’t insured anyway). The problem IS NOT MORTGAGES. The problem is securitization.

I realize I have just committed heresy but for a good cause (I think Galileo said the same thing). With Securitization the risk is so spread that we encourage bad underwriting, lying, cheating, and probably “bending folding, spindling, & mutilating” (if you don’t get the reference ask someone 55 yr old+).

When each bank made a mortgage loan, and kept them, the bank took great care to be certain the risk of non-payment was minimized and that the collateral would pay-off the loan. Even in the 80’s, the secondary market bought loans, but if the purchasing bank found fault w/ the underwriting, the originating bank had to take it back and replace it w/in 24 hrs w/ a like sized, better quality loan.

In the 2000s, when mortgages were decoupled from risk, the reality that they are JUST LOANS, albeit w/ collateral, was lost. A 5000 mortgage pool was actuarially evaluated, risk assigned, and then put out in THE MARKET for sale of pieces. Mutual funds, corporations etc bought what they thought were AAA or at least A+ bonds. The rating agencies and the market makers, forgot or purposely overlooked the fact that throughout the entire origination chain, once the loan was sold the first time, no one was “on the risk”. The loans were pooled and subject to the referenced-above evaluation.

If a rating agency saw the actual files on a representative sample of the Interest Only, Negative Amortization, Pick-Your-Payment, etc loans, the Pool would have gotten junk bond status. I have many of those loan files in my office. Had I tried to get a loan like one of those through underwriters I employed in a Bank, they would have said “Are you nuts? I am not risking my FHA/VA UW status for this junk”.

So, why don’t we stop talking about gov’t v private and start discussing how to rein-in the Investment/Mortgage Bankers. That’s were the regs need to be.

Oh, last note: Any institution that writes worthless paper should be tagged at audit and maybe the Sr Underwriter and Sr Lender be fired.

Richard Isacoff,Esq       .(JavaScript must be enabled to view this email address)

Allan Mendelowitz

Nov. 6, 2013, 9:14 p.m.

In answer to Albert Meyer’s comment about Canada: the Canadian federal government directly and explicitly guarantees over half of all Canadian mortgages. That is hardly a situation in which the Canadian government is not involved in housing finance.

ABRAHAM IRWIN

Nov. 7, 2013, 12:34 a.m.

The problem with the article is that it starts with a basic fallacy.  “the immensely profitable Fannie and Freddie”. Smoke and mirrors.

The two are profitable because they are being subsidized by the artificially low interests rates generated by the FRB. These rates are in effect a hidden tax on all savers.

Further, neither Fannie, Freddie nor the FRB have an acceptable plan for unwinding. All three institutions have accumulated substantial long term loans at below average long term interest rates.

The Feds can continue to print money to keep the rates down. Eventually this will lead to inflation. Any attempt to stabilize the currency by raising rates, will cause a substantial loss in the value of these fixed rate obligations.

Thanks Allan, I made no authoritative statement about Canada’s housing policies. Could you be more specific as to what kind of mortgage they guarantee and in what manner?

As Richard Isacoff points out above, there is a difference between a government guarantees and the next step that leads to securitization, which in turn opens the door to mal-investment of all sorts.

My point is that as a seller of property, education, medical services, etc, I would welcome government’s involvement in my market place to make my products and services “more affordable.” It just makes it easier for me to raise prices. In the end the big boys own Washington and they promote programs to “help” us all buying more “affordable” goodies.

Mary, above, believes that government helped with her education, but she fails to address the question whether her education would not have been within her own means, had government not “helped” administrators with their efforts to increase the price of education well above the rate of inflation.

Besides, after subsidizing her education (more correct, transferring tax dollars from the middle class to the privileged college administrative class), the government told her (and all of us) that her education, however expensive, does not qualify her to find ways and means of taking care of herself in her retirement. Instead, she is forced to surrender 15% of her hard-earned income (employer contribution is a misnomer) and dump it into a retirement “trust’ account overseen by the crooks in Congress that will one day per her about a third (if she is lucky) of what she could of have earned through her own efforts or through her appointed agents. She appears to very well equipped to take care of her own financial affairs, without the “help” of government. However, she, and all of us, are slaves to the extent that government allows us to keep some of our hard-earned wages. The rest is confiscated and used to “take care of us.”

It gets even more galling considering that the uneducated and unsophisticated Amish are exempt from having to participate in this bogus insurance scheme. If they know how to take care of themselves, why can’t we, the educated and sophisticated ones, highly educated with the “help” of government subsidies? The answer lies in government coercion and our willingness to “recite the pledge” and bow to our masters in Washington, because they know best what’s good for us. Good luck to the younger generation. Don’t Google US debt clock, and don’t look at the bottom line, the obligations are too enormous to fathom. Still, its makes for a very good case of how “successfully” they run their programs in Washington.

“As even centrist Republicans agree, the government is and always will be on the hook if the housing market crashes.”
If the government is, was, and always will be on the hook for housing market crashes, where were they for me in 2008?  I lost my retirement.  Oh yeah, they took care of the big bankers.  Remember all the jokes about the Republicans who love the bankers and hate the middle class.  It didn’t work out that way.  It was the Democrats slobbering all over the bankers.  What did the middle class get?  A president beholden to Wall St. like never before.
Oh and by the way, where did the bubble come from.  Didn’t dear Barney Frankenstein have something to do with it.  Didn’t it have something to do with banks giving mortgages to people who couldn’t really afford them?  And didn’t that happen because the government told them to, and by they way, if it all goes south, we’ll pick up the tab?  They didn’t pick up my tab.  They are not making any believable promises that even Social Security will be there.

Allan Mendelowitz

Nov. 7, 2013, 11:05 a.m.

Albert, my apology for referring to your question as a comment.  You were posing a question about the Canadian system, not making an assertion.  The Canadian financial world is very different than the U.S.  There are a small number of very large banks that dominate the market, absent the thousands of community financial institutions that exist in the Untied States.  The standard Canadian mortgage is a 5-year balloon, That is, every five years borrowers must refinance their mortgages at the new prevailing interest rate.  In the Canadian mortgage finance model the borrower bears all of the interest rate risk, unlike in the United sates where the 30-year fixed rate mortgage gives borrowers stability in their debt service. Because the lending is done by a small number of large banks that have access to the capital markets, the put the mortgages on their balance sheets and fund them, as needed, with covered bonds. Covered bonds are just bonds that have some collateral pledged to inhance theri credit quality. In this case, the collateral is mortgages.  Small institutions do not have this options.  However, in the United States community financial institutions can still compete because they have access to the efficient capital market funding offered by the Federal Home Loan Banks.  And, these loans are collateralize with the mortgages that the borrowing banks are holding.. And, as regards your point about subsidies, economists generally believe that subsidies for asset purchases usually get capitalized and are reflected in asset prices.

Thanks Allan, that is very useful information. (No need to apologize, but much appreciated - nothing like a civil debate online.)

You write: “In the Canadian mortgage finance model the borrower bears all of the interest rate risk…” However, what part of the standard mortgage is guaranteed by the government and what form does the guarantee take?

I assume the guarantee is limited to certain borrowers and not a blanket guarantee. I’m also assuming that in a covered bond market, it is probably more difficult to financially engineer property bubbles.

Eisinger is an idiot. “Many thousands of insurance employees would loose their jobs”. So what! They are a reason the health insurance costs are so high. So what! they make their pay checks of the deaths of people.So this numbskull thinks we should pay higher premiums to keep people employed - that is not the purpose of healthcare insurance asshole Eisinger. Moving everyone to medicare is the answer and would not be disruptive Mr. Moron Eisnger, because studies show that Medicare is 6 times more efficient than private insurance; 60% less expensive than private insurance like Aetna, Cigna, Blue Cross, etc., and the head of Medicare is paid 200x less than the CEOs of private insurance; the stocks of the health insruacne companies are among the Hestia; Why???  The answer is in fact a Single Payer System and the termination of HMOs, PPOs, Eisinger, and healthcare insurance companies. F—K the employees, CEOs, and investors who have made their profits on the death of human beings.

Setting aside the abusive language, let’s focus on this assertion: “... because studies show that Medicare is 6 times more efficient than private insurance;...”

If you go to usdebtclock.org, you’ll notice that Medicare is $87.7 trillion in the hole. In addition, government debt currently runs at $17.134 trillion, a good deal of this is attributable to Medicare. If only the private sector had the ability to rack up debt like this, with no accountability. Medicare’s “success” is an illusion created by government’s legerdemain.

Moving everyone to Medicare would just rack up more debt, but should that ever happen (not all that improbable), be sure of one thing, Congress would be exempt. That’s how they do it in Washington, spend billions of dollars on the Department of Education and then send their kids to private schools. Good enough for thee, but not good enough for me.

As for “... the employees, CEOs, and investors who have made their profits on the death of human beings.” This is because we are operating in a plutocracy. The CEOs own Congress, the very people you think have your healthcare interest at heart. If you are an old geyser who still wants to play golf, you can buy a support girdle for about $250, or you can get it through Medicare at a cost to the taxpayer of $1,050.

I’m wholly against government intervention/subsidy/what-ever-you-want-to-call-it, but I’ll do a deal with the devil. Cut the defense budget to 2.0% of GDP and move us all over into universal (but not universal enough for Congress) healthcare. Healthcare over warfare if I have choice, but the defense contractors also own Washington, so just keep feeding the debt beast.

Jesse, this make seem petty, but I have trouble figuring out where your lede goes. “The one fix that…” . I could reread this article a number of times and still not figure out just what that one fix is. I do have my own ideas about what would fix the current mess (and there’s no real reason to detail my ideas, as they are mine only, I don’t run the economy), so I will leave it there.

“Many progressives would have preferred…Single-Payer…but that was politically impossible.”

B f’in S

The majority of Americans did and do prefer Single-Payer and Obamacare is only going to intensify this support and hasten its advent.

It is politically possible and will happen as soon as the people make it happen.

As my 5th grade teacher used to say: “Can’t Never Did.”

Everyone on single payer.  Congress, CEOs, EVERYONE.  That will fix it in a fast hurry.  Pay good people to go to medical school and be good doctors.  Make good food available to everyone so cheap junk food is not the only way to keep people from being hungry. We could solve all these problems if there was a will to do so.

The article unfortunately seems to dodge around the point, but I think the point it does make is very important:  Washington’s current focus is on protecting industries, not people.

Why the ACA instead of lowering costs or footing the bill?  Because insurance execs and plastic surgeons need their Beemers.  Why did we spend so much money floating the mortgage market instead of mortgage holders?  Because the banks would have to post a loss.  The government treats Hollywood, Silicon Valley, and every other major industry with the same compassion and leaves the rest of us hanging.

What I don’t understand is why critics always seem to call it socialism…

You know, I’m sick to death of know it all pundits telling me what is “politically impossible.” We don’t know what was possible because our misleaders never tried. Obama took single payer off the table before the discussion even began. And he dismantled his nationwide, precinct level organization, an organization that could have mobilized public opinion to pressure congress, the day after he was elected.

What made single payer impossible was the betrayal and misleadership of the Democratic Party/

AND ANOTHER THING\

You notice what ISN"T being talked about here? Doing away with Fannie and Freddie’s for-profit status. THAT is what led to the insane risk taking, the GSEs following wall st. down the subprime rat hole. No one’s talking about taking the GSEs back to their original form, as arms of the government like the Post Office.

OK so I should have finished reading the piece before I wrote that last post. It wasn’t just that Fannie and Freddie were traded on the stock market. It’s that their CEOs got the greed head fever and went after profit maximization in a Wall Street way. Funny how Eisinger doesn’t mention the P-word. Without challenging the incentive distorting nature of the profit motive, keeping the GSEs in public ownership wouldn’t necessarily solve the problem of inappropriate risk taking.

In fact I could see the GSEs turning into something like the Social Security Trust Fund, a big pile of money to be raided by lawmakers too chickenshit to raise taxes./

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)