Amid all the tough talk about the need to wind down Fannie Mae and Freddie Mac and privatize mortgage underwriting, even many of the tough-talkers say that the existing system still offers a variety of loan products well worth guaranteeing, and a few other products at least worth preserving in formaldehyde.
In a recent essay published by The Weekly Standard, Arnold Kling, an adjunct scholar at the libertarian Cato Institute and member of the Mercatus Center at George Mason University, doesn’t advocate banning adjustable-rate loans, for example, but he says there is no reason for the government to provide backing for them. Rather, guarantees should be limited to the original meat and potatoes of the mortgage market: 15- and 30-year loans whose customers have put down 20% or more, or have at least purchased private mortgage insurance if their down payments are under 20%.
Of course, Kling says that loans whose contrivances constitute the “booze of dubious lending practices” – those which greatly accelerated overborrowing – should forever be ineligible for government guarantees: loans to non-owner-occupied borrowers; loans offered on down payments of less than 10%; cash-out refinances; negative amortization agreements; and, basically, any loan agreement with ridiculously lenient terms.
About that excess inventory …
Fair enough. But even conservatives realize the need to proceed cautiously on this, since it will take time – years – to ramp up the private market while Fannie and Freddie phase out by, for example, raising their guarantee fees enough to allow private firms to compete, by gradually reducing the Fannie/Freddie market share, and by limiting the kinds of mortgages they can guarantee.
And yet even advocates of lending prudence and privatization will acknowledge an immediate housing-market problem that continues to itch like a hair shirt: foreclosures, whose persistence is aggravated by, of all things, tight credit.
Yes, the National Association of Home Builders’ favorite topic. But the subject has lots of other industry groups thinking hard about to deal with it, and maybe exploit it.
As noted this week in the Boston Globe’s Boston Real Estate Now blog, one of the pioneers of the private mortgage-backed securities market, former Salomon Brothers bond trader Lewis Ranieri, has been warning that the push toward privatization for mortgage guarantees and its accompanying credit strictures could tear the housing market “apart at the seams.” He suggests setting up special financing programs aimed at investors eager to snap up the backlog of bank-owned properties.
Of course, as the Globe points out, that sounds like a Wall Street guy calling for help with a nice little market-making project that probably would benefit Wall Street more than any other sector. To be honest, though, it wouldn’t be that surprising if Wall Street followed through on the idea, with or without the government’s help.
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Sounds like a standard "rape and pillage" scheme to me. Wall Street sees a new loophole where they can make an easy buck at the expense of the rest of the nation. They just don't learn. But with the frugal republican congress in office, 'daddy' might not be willing to give a second bailout. Everybody loses - better learn to speak chinese now (while you can afford it).
Personally I would rather the gov held my mortgage - they have the least to gain on my demise and they might as well, they own the property. What I mean is most people don't understand that you never REALLY own land; sure you own your house and everything inside it but in the long run you are just renting the land from the government. So why shouldn't the true owner of my land be the one who backs me financially to build and maintain a house on it?
Oh, and concerning Banks, Backlogs, and Real Estate Investors....
My grandmother, an account manager before retirement, was notoriously frugal. When I was young I she paid me to help her around the house - not quite min. wage but good for a 10 yr old. not to mention she made a great peanut butter sandwich for lunch. But she also kept the hours log and literally paid by the minute... 6hrs 26min less 34 min for lunch; that's $14.66 for the day to the penny. Once I helped her to have a garage sale. Her basement was packed with a life's worth of possessions that hadn't been touched or even looked at for many years. She would point at piles and I would lug the stuff up to the garage where she would dust it off and evaluate it; marking the price on little stickers. Well, the garage sale went horribly. She barely sold anything because her prices were too high and she wasn't willing to barter. Much of the stuff was junk anyway. Tupperware missing lids, single forks and spoons from a long gone set, old lady shoes from the 70's. "I paid $30 for these and only wore them twice", her reasoning would go. So, after the sale I lugged all that stuff back to the basement, never to be seen again.......that is until she DIED. Sad, but true it happens to everyone. And what did we do? We went to the basement saw all that stuff that couldn't sell at a garage sale and decided it was all junk to us. To the dumpster it went. Sorry grandma.
What does that mean? Well it was mostly just ramble but if you really think about it, these banks and these investors really need to realize that we aren't partying like it's 1999 and you can't sell snow in a snowstorm. For all their financial/economic education they can't come to terms with the fact that what they own isn't as valuable as it once was. The longer they neglect that fact, the less it's worth. Not only are there more and more of them, they are slowly rotting away as they sit season by season without occupancy. Eventually it will lose all it's value (aside from land value) and the investment will flop - maybe the bank goes bankrupt. Eventually someone who doesn't care what it USED to be worth will step in and grab the properties up (maybe the gov?) and sell them at rock bottom prices to finally get this market moving again.
I encourage you to read or listen to this to understand better:
http://www.npr.org/blogs/money/2011/02/28/134033237/what-a-coin-toss-has-to-do-with-the-housing-market
DC