Advertised as a way to stabilize the housing market, government-backed mortgage securitization ended up distorting and destabilizing it. The resulting misallocation of resources – evident not only in today’s massive bailout of Fannie and Freddie but also in the vast quantities of land, water and energy wasted on suburban sprawl from Las Vegas to Fort Lauderdale – is a true American tragedy. Today’s housing crisis is an opportunity to make sure nothing like it ever happens again.
Damn straight. This is the Post, so the solution proposed is still WelfareLite, but any movement away from Rotarian Socialism is a move in the right direction.
Brian Brady says:
>Damn straight. This is the Post, so the solution proposed is still WelfareLite,
To wit:
“But we prefer the potential risks of privatization to the proven risks of government-backed mortgage securitization. Indeed, no one is suggesting a pure “free market” approach. There should still be not only tough underwriting rules but also requirements that loan securitizers maintain adequate capital and retain some of the mortgages they securitize on their own books.”
>but any movement away from Rotarian Socialism is a move in the right direction.
This might distort markets even more. I really believe the best approach to lending, on an asset which defines its price performance to be subject to local economic factors, is localized lending, without any government intervention.
The problem with “welfare-lite” is that it focuses on “national standards” for securitization: capital retention, standardized guidelines and fees, and useless oversight. Risk analysis is best done by those who intend to hold and service mortgages (the ultimate investor).
Here’s the trick: the American homeowner is still a good bet…sort of. Local market performance is influencing default rates now. Steep declines in California are causing what we usually considered to be gibraltars to be skaters while marginal borrowers in Kansas, with generational ties to the heartland, become safe bets.
There is something to be said about the Bailey Building & Loan approach to lending. An egoist can see that a borrower might see it in his best interest, to avoid default at all costs, to salvage his reputation in the community. Recent immigrants might want to establish a reputation in a community by appearing to be committed and stable. Both borrowers present unique risks, opportunities, and motivations to loan performance.
How then might we deal with the secondary mortgage market? We don’t. Investors will find ways to quantify geographical risk, communicate the paper they want to buy, and establish channels of distribution to purchase the paper.
The path to a robust mortgage market lies in complete deregulation. Unfortunately, the National Association of Realtors, keeps lobbying for welfare-lite to the peril of its members and customers.
February 7, 2011 — 1:18 pm
Greg Swann says:
> The path to a robust mortgage market lies in complete deregulation.
I agree with this, of course, though it’s always fun to find myself, even temporarily, to anyone’s left.
I had talked a while ago about credit reporting and how useless it has turned out to be now, in the age of the buy-and-bail buyer and the jingle-mailer. The real deal for lenders, going forward, would be the kind of rich database marketing that is, by now, so easy to do. With a thoroughgoing profile of each potential borrower, the investor will be able to price his risk down to the penny — for that particular borrower. Why don’t banks do this now? Why do they still run IBM 360s in their back offices? Why doesn’t someone disintermediate the beehotches?
How cool everything could be if Prometheus were unchained at last…
February 7, 2011 — 10:01 pm
Brian Brady says:
“I agree with this, of course, though it’s always fun to find myself, even temporarily, to anyone’s left.”
I know you do and I think your focus these past few years has really defined me more as a regulatory abolitionist.
“but any movement away from Rotarian Socialism is a move in the right direction.”
Roger that. The housing “industry” is so skewed right now that any loosening of the binds should have a positive effect. What we really need to “reform” housing is to remove implicit and explicit government guarantees on banking. These guarantees are distorting risk pricing and crowding out opportunities for risk taking.
I’ve talked about how PACE wrecked a nifty little niche I developed, to finance solar improvements, last year. FHFA refused to subordinate to PACE liens and (then) CA Atty Gen Jerry Brown sued FHFA. The result? An entire industry, favored by beltway elites, came screeching to a halt in California.
Consumers want solar panels and contractors want (need) the work. How do you finance these at 9%, over five years, when a 3.5%, 15-year loan option looms? The mere hope of the publicly-financed construction halted the decision. Smart contractors hiked the price of the project, internally financed, and sold the notes at a steep discount. Who cares about the price hike? The federal government is giving a tax credit, until 2016, and everybody loves the idea of free ice cream today, with or without cones. Today, some of those sharp contractors face claims of “profiteering”.
Greg, if cannibalism weren’t such a horrific practice, we could laugh about it. Here’s the sad part of it all: in California, solar pencils out and is self-funding, with or without tax credits and/or state-subsidized home equity loans. If the greenies would let the original green (money) motivate these decisions, they could get all the green they want.
February 8, 2011 — 8:55 am