The Obamanation plans to offer up three proposals to eliminate FannieMae and FreddieMac from the secondary mortgage marketplace. Expect to hear much mournful keening, in coming weeks, from the country’s best enemy of private property, the National Association of Realtors.
More than two years after the government seized Fannie Mae and Freddie Mac, the Obama administration will recommend phasing out the housing-finance giants and gradually reducing the government’s footprint in the mortgage market, according to people familiar with the matter.
The administration is expected to include three options for a post-Fannie and Freddie world when it releases a long-awaited proposal for the future of the nation’s $10.6 trillion mortgage market, which could come as soon as Friday. Together with federal agencies, Fannie and Freddie have accounted for nine of 10 new loan originations in the past year.
The White House’s “white paper” will begin what promises to be a prolonged and fiery debate about the future of how homes are financed across the U.S. Any wind-down of Fannie and Freddie would happen gradually to avoid roiling markets, and the central, unanswered question is what kind of federal function, if any, the administration and Congress will invent to take their place.
Steps to reduce the government role in the mortgage market likely would raise borrowing costs for home buyers, adding pressure on the still-fragile U.S. housing markets. Consequently, analysts believe any transition could take years and would be driven by the pace of the housing market’s recovery.
The fight over how to restructure the housing-finance system has roiled Washington, and yet both parties have been hesitant to propose detailed legislation.
For conservatives, Fannie and Freddie played a starring role in the financial crisis, and any solution that is viewed as replicating their function could face fierce opposition from some Republicans. But more moderate Republicans may resist such an approach and could join Democrats who have said a federal role is necessary to ensure broad access to home ownership.
While advancing one detailed plan risks providing fodder for partisan battles, offering multiple proposals may help the administration force those views into the open, said Michael Barr, a former assistant Treasury secretary in the Obama administration.
Brian Brady told us yesterday what actually should be done, to return rationality to the residential mortgage market:
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.
Brian offers this as a peroration:
Unfortunately, the National Association of Realtors, keeps lobbying for welfare-lite to the peril of its members and customers.
Too true, alas. The nature of a parasite is that it will continue to devour its host even when doing so will assure not just the death of that host but also its own destruction. There is no better way of understanding the rapacious Rotarian Socialism of the NAR: They don’t care how many lives they ruin — including their own.
Patsy Snyder says:
We cannot lose sight of the fact that the government will eventually mess up any program they participate in. Local lenders servicing their own paper is the way to go.
February 9, 2011 — 6:59 am
Elli Davis says:
Governments in general usually don’t realize that doing nothing can be a good thing. And usually is, in a market environment with a good set of rules that are working, decent regulatory mechanisms and statistics that aren’t manipulated. This should do for a healthy environment. Decentralization should work pretty well I guess…
February 9, 2011 — 8:58 am
Greg Swann says:
> a good set of rules that are working, decent regulatory mechanisms and statistics that aren’t manipulated.
Letting lenders solve their own problems at their own expense would work even better. All regulation exists to give an unearned advantage to politically-favored vendors, at the expense of their competitors. But all statute laws also outlaw human intelligence, with the long-term result being disaster: Valuable market signals are disguised or dismissed, and better ways of doing business die before they can be born. I agree completely that “doing nothing can be a good thing,” but the secret to doing nothing is to do nothing. Government regulation of all financial markets is nothing but welfare for the rich. It’s high time the rich people of America started paying their own way.
February 9, 2011 — 9:17 am
Brian Brady says:
Randazzo, from Reason, did a good piece in the WSJ today too. I’ll post that later here.
This, from Greg’s linked article, said by Lawrence Reed:
“The personal-computer revolution is a great example of spontaneous order.”
If the mortgage industry were permitted to be free, one can only infer the following things would have happened (from our experience in the tech sector these past 30 years):
1- many banks would have failed, costing the taxpayers nothing
2- many Americans would have gotten wealthy, investing in and/or working for successful banks
3- the price of home loans would keep getting less expensive and easier to obtain
4- a growing industry to help people obtain and manage home loans would develop and people would willingly hire those consultants because it would save them money. Some would just go it alone and do just fine.
5- The Chinese would copy everything we did and that would be just fine
6- a mortgage finance exposition would be held annually, in Vegas, during the same weekend as the AFN awards (well, one could only hope)
February 9, 2011 — 12:35 pm
chrisanthemama says:
“1- many banks would have failed, costing the taxpayers nothing”
Just eliminate that pesky FDIC insurance, and maybe that would be correct.
February 9, 2011 — 1:36 pm
Brian Brady says:
If we allowed housing finance to operate like the tech sector, there would be no “insurance” for suppliers (depositors to banks)
February 9, 2011 — 3:52 pm
Sean Purcell says:
All regulation exists to give an unearned advantage to politically-favored vendors
Cue the $7500 tax credit for purchasing an electric car, which President Obama just suggested be moved from a tax credit to a cash claim right at the dealership. Hmmm, wonder who benefits from the sale of these over-priced cars that nobody wants?
February 9, 2011 — 11:17 pm
Jim Klein says:
Insuring bank deposits in a free system is a trivial matter–much less than insuring cars, and way way less than insuring health care, in both absolute and percentage terms.
There have been a few bright signs this week, basically that markets remain stronger than even Govco itself, at least for the moment. One was this morning, that those markets failed to respond to the claim numbers, which common thinking would’ve been thrilled about.
The dark sign, of course, is that the looters have amassed enough power to effectively kill everyone. Even darker is the fact that for all practical purposes, this appears to be their goal.
February 10, 2011 — 7:31 am
Joe Salcedo says:
Perhaps we need to form a lobbyist vigilante to cajole the ears of our Lobbyists for NAR.
February 10, 2011 — 2:19 pm
Dan Sullivan says:
As usual, Brian Brady hits the nail right on the head here.
February 12, 2011 — 1:03 pm