Financial Regulation

Massive Taxpayer Liability or Somewhat More Expensive Mortgages For Everyone? Hmm, I'll Have to Think About That…

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Head scratcher!

Policymakers in Washington held a confab yesterday over the head-scratching question of what to do about government-owned mortgage giants Fannie Mae and Freddie Mac. Discussions like these can sometimes be wonky and impenetrable, but, as this brief passage from The Washington Post's summary of the conference shows, the heart of the debate is actually fairly easy to grasp:

Bill Gross, who runs the world's biggest bond firm, Pimco, argued that the mortgage market should be completely nationalized…Gross's proposal could ensure that mortgages remain affordable for home buyers. That's because the government, which would borrow money to finance the mortgages, faces a relatively low interest rate in the markets. The downside is that taxpayers would be on the line for losses.

By contrast, Alex J. Pollock, a fellow at the American Enterprise Institute, suggested the government not play any role supporting housing finance, except narrow programs run out of HUD to provide funding to low-income people.

"You can either, in my view, be a private company or a government agency—one or the other, but not both," he said. "There is a verse in the book of Proverbs which addresses guarantees . . . and it goes like this: 'He who stands a surety for the debts of another shall smart for it.'

Pollock's proposal would protect taxpayers. But on the other hand, banks and other private lenders might charge more than borrowers are used to for a 30-year fixed-rate mortgage. [bold added throughout]

That's it. Right there. That's the crux of the debate. Do we use the federal government to create massive moral hazard and expose taxpayers to huge fiscal risks that would otherwise be situated in the private sector in order to make sure that anyone with change in their pockets and a photocopy of last week's pay stub can afford to buy a nice, big house without their pulse rising? Or do we protect taxpayers from liability at the price of somewhat more expensive mortgages?

See, it's free money…but it's a trap!

Too much of the debate over the government's role in housing finance seems to assume that any American who can hold down a job has a Founder-given right to a fixed-rate, 30-year mortgage, preferably with less money down than it costs to buy a decent big-screen TV. Yet the track record for government intervention in the housing market is pretty dismal, and we're already stuck with a lot of expensive past mistakes to sort out. As The Post notes, "it will take years for the government to absorb the hundreds of billions of dollars in bad loans Fannie and Freddie already guarantee." At this point in history, then, the debate over whether or not to permanently increase the government's involvement in mortgage finance should be finished. Instead, the question ought to be how to reduce the government's influence without causing too much shock to the markets. For an answer to that question, read this letter to Treasury Secretary Timothy Geithner from the Reason Foundation's Anthony Randazzo.

*Post updated for clarity.

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  1. A house in every pot!

    1. Pot in every house!

  2. Speaking of why we’re broke, I was standing on the street today when a bright shiny H2 drove by me. Nothing notable about that, except that emblazoned on the side were the words “STRONGSVILLE D.A.R.E.”

    So I took a look at the interwebs and found this.

    NOW, THEREFORE, BE IT ORDAINED BY THE COUNCIL OF THE CITY OF STRONGSVILLE, COUNTY OF CUYAHOGA AND STATE OF OHIO:

    Section 1. That this Council hereby authorizes the Mayor to request authority in the name of the City of Strongsville to participate in teh United States General Services Administration contract(s), through the Ohio Department of Public Safety and its Auto Choice Program, for the purchase of a 2007 Hummer H2 vehicle for use by the Strongsville Police Department D.A.R.E. officers in a total amount not to exceed $45,551.00, which the Department has entered into pursuant to law.

    Section 4. That the funds for the purposes of this Ordinance have been appropriated and shall be paid from the DWI/DUI Fund.

    Section 6. That this Ordinance is hereby declared to be an emergency measure necessary for the immediate preservation of the public peace, property, health, safety and welfare,…

    The economy needs to keep on crashing until these fucks think there’s better things to spend their stolen money on than DARE hummers. Fucking christ.

    1. Ohio really sucks at the fiscal solvency thing.

      1. I am really distraught over the use of this planet-killing testosterone-wagon. This particular Hummer may well be the straw that breaks the back of the climate once and for all.

        1. I love being spoofed. It proves you love me.

          1. Stop spoofing me. I haven’t even commented on this thread yet.

            1. I once gave some good hummer on a dare.

              Okay, maybe more than once.

    2. I love section 6. “If we don’t have this hummer right now, people will DIE/REVOLT/FEEL ICKY!”.

      1. Hells yeah! Strongsville, eh – thanks for the warning. I’ll stay out Avon way and avoid Teh Monstar Truck.

      2. Have not read the whole thread so hope I am not repeating something but I wonder if the reasoning here is that they need to have cool Hummers since that is what the drug dealers drive??

    3. I wonder if the Ohio LP or the Tea Party had a rep at this meeting to stand up and protest?
      Guess I know the answer. [National LP once held a convention in Strongsville but it’s too much to hope that ever led to a sustainable local chapter that could do something useful like monitoring the local political crooks.]

    4. Here in Oakdale, Minnesota, my fianc?e and I were walking past the city hall (it’s only a block from the apartment) when I noticed the police chief’s car. It’s a Corvette. A fucking Corvette. Not to mention that the regular cops all drive Chargers. This in a city of 25,000.

    5. The really cool thing would be to have it all pimped out with spinners, mudflaps, ground-effect lights and shit like some dealer’s ride.

      1. Oh, it’s all pimped out with flames and eagles and shit. Plus, there’s this.

        North Olmsted Sound and Performance Display

        A display from North Olmsted Sound and Performance, a Division of Mercedes-Benz of North Olmsted, will feature “Cars of the Stars”, some of the most expensive vehicles at the show. They include:

        2007 Hummer H2 Strongsville Dare (42″ High Def screen & JL Audio System, completely paid for by seized drug dealer assets)

        1. Warty… it could be worse… I could forward over the lovely mailings from Kucinich’s office that explain how much he’s helping me by spending my money better then I can…

        2. completely paid for by seized drug dealer assets

          God forbid they use their ill gotten gains to keep the lights in the station on, or pay for anything else they have to tax us to pay for on a regular basis.

          No no, that’s fine, you just keep taxing us so your extra cash is free for fun stuff.

        3. Well, smarty, you tell me how they’re supposed to stop drugs from killing kids without a 42″ HD TV. Plus they need a Hummer for all the rough terrain they have to get through. They’re doing God’s work.

  3. This is like watching a freight train loaded with explosives racing towards a fleet of school buses parked on the track.

    There is NO WAY ON EARTH that the pols are going to resist the temptation to “guarantee affordable housing.”

  4. So, the head of a huge bond fund wants the government to gin up more bond issues? I’m shocked.

  5. I was actually somewhat surprised (in a good way) by Gietner’s moderating – he definitelly gave more time to those who want to lesssen (or eliminate) Fannie/Freddie and even got one of the HUD representatives to say that helping lower income and minority borrowers attain housing wasn’t dependent on the existence of the GSEs.

    An aside, Pollock, in addition to supporting certain HUD programs also supported certain FHA programs.

  6. Nice “free money” trap pic.

    I don’t suppose Bill Gross’ enthusiasm for perpetual ZIRP* has anything to do with the price of bonds currently in his portfolio.

    I didn’t think so.

    *Zero Interest Rate Policy

    1. ZIRP is what Keynes suggested.

  7. Pollock’s proposal would protect taxpayers. But on the other hand, banks and other private lenders might charge more than borrowers are used to for a 30-year fixed-rate mortgage.

    IOW, they might actually have to pay the real cost of the loan.

  8. Maybe if we stopped using the tax law to fuck renters and stopped taxing saving interest and artificially holding interest rates too low, it wouldn’t be such a big deal if poor people didn’t own houses. Just a thought.

    1. Agreed. They’ve done everything in their power to make saving unattractive and borrowing attractive, then wonder why nobody has money for a down payment or retirement.

      1. And they have made home ownership the only way most people can get a tax break or accumulate any wealth. Then they act shocked when there was a housing bubble.

      2. I’m old enough to remember banks having little “kiddy accounts” where a child could deposit their allowance and watch it grow through the miracle of interest! With the current interest rates and numerous hidden fees, my savings account usually loses money each month.
        If I had kids I’d tell ’em to either blow their allowance before the g’mint takes it away, or keep it in a shoebox under the bed.

        1. They’re introducing a “shoebox fee”.

  9. “Fannie Mae and Freddie Mac] should be abolished,” Frank said in an interview on Fox Business, when asked whether the mortgage giants should be elements in housing market reform. “They only question is what do you put in their place,” Frank said.

    Frank also was critical of public policy that promoted homeownership at any cost. He also said the federal government should not be a “backstop” in guaranteeing mortgages.

    “There were people in this society who for economic and, frankly, social reasons can’t and shouldn’t be homeowners,” Frank said. “I think we should, particularly, stop this assumption that you put everybody into homeownership.”

    http://wcollier.blogspot.com/2…..-with.html

    Barney Frank is saying intelligent things. WTF?

    1. No, he’s not. We should abolish Fannie Mae and Freddie Mac and put a new, different, improved government program in place! That’s not intelligent, that’s the same tired BS.

      1. That wasn’t the part I was talking about. I meant more this

        “There were people in this society who for economic and, frankly, social reasons can’t and shouldn’t be homeowners,” Frank said. “I think we should, particularly, stop this assumption that you put everybody into homeownership.”

        Yeah. Barney is still an idiot. But the above part is at least some progress.

        1. True enough. Can we work on the idea that not everybody should go to college next?

    2. He does not get the benefit of the doubt. He’s a lying cockweasel who will say whatever is politically advantageous regardless of the merits of the statement itself.

      I agree with the statement you quoted, but I can’t give Barney the benefit of the doubt considering what he’s said and legislated for in the past. Let’s take a look at some-

      House Financial Services Committee hearing, Sept. 25, 2003:

      Rep. Frank: “I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .”

      November 2006 PBS-

      GERSH: “You’re going to have jurisdiction over many industries in the financial services sector: insurance, banking, housing. What’s your top priority?

      FRANK: Affordable housing is the single biggest one. We have a terrible housing crisis in this country and I think we now understand that housing is not simply a social good, but it’s an economic practice (ph). The biggest difference people will see when we take over from the Republicans is we will reverse their policy of basically letting any affordable housing stock dwindle and not building any new stock. A related issue there is the question of predatory lending. We now have data from the Home Mortgage Disclosure Act that my former colleague Joe Kennedy worked so hard to enact. And now it’s pretty clear. If you are African- American or Hispanic, you have less chance of getting a mortgage. And if you get one, you have a high chance of paying more even with other factors being equal for some reason. I think that has got to be a very high priority. ”

      Barney needs to retire.

    3. If he had been put in charge of the gambling and pot committee, Frank wouldn’t be bad at all.

  10. Goddammit, I still want my housing subsidy! Failing my vacation home on the moon, y’all should pony up to build me a Fortress of Solitude at the Mountains of Madness. It should be slightly cheaper than a Manhattan condo, and you’re subsidizing those.

  11. Whenever I read about someone in the private sphere taking part in a government hearing I’m reminded of this:

    And finally, Marxists are also correct in noticing the close association between the state and business, especially the banking element, even though the exploitation is faulty. The reason is not that the bourgeois establishment sees and supports the state as a guarantor of private property rights and contractualism. On the contrary, the establishment correctly perceives the state the very antithesis to private property that it is, and takes a close interest in it for this reason. The more successful a business, the larger the potential danger of governmental exploitation, but the larger also the potential gains that can be achieved if it can come under government’s special protection, and is exempt from the full weight of capitalist competition. This is why the business establishment is interested in the state and its infiltration.

    1. Not sure of the specific Marxist that the quote refers to, but Marx himself had some pretty shrewd observations about capitalism. He just had no conception of what the failings of socialism would be.

  12. Like most everything else the government is involved in, it’s all about deliberatly redistributing wealth.

    Redistributing it via below free market loan rates to buyers and from the taxpayers who are on the hook to guarantee those loans.

    There is nothing in the Constitution about the federal government being delegated any authority to be trying to engineer specific economic outcomes for selected groups of individuals at the expense of other groups of individuals.

    1. GENERAL WELFARE!

      1. Sorry, the password is:

        “Commerce Clause”

        1. I’m sorry, we were looking for is “Necessary and Proper.”

          Necessary and Proper.

    2. The Constitution is a living document, and it means whatever we want it to mean.

  13. Here’s another issue where I largely agree with you guys. Fannie and Fredie need to be phased out, and the government needs to get out of the mortgage business (other than standard regulatory issues). There are no particular market failures to address here.

    1. Eventually, life will force you to grow out of your fondness for liberal ideals that have a proven track record of failure and you’ll probably turn in to Matt Welch or Jesse Walker.

      So you’ve got that going for you, which is nice.

      1. I know some old unrepentant liberals. Some people never learn.

        1. I’m giving him the benefit of the doubt since he’s seen the light in terms of government involvement in the housing market. Eventually he might realize why this principle is universal in terms of markets in general, but that may be getting ahead of myself.

  14. Can we work on the idea that not everybody should go to college next?

    Are you nuts?

    1. I’d really rather you didn’t. Until 20% of the US population has received a “degree” in culinary arts and/or criminal justice, we are at risk of losing the war for intellectual dominance. Plus, Uncle Stupid is paying for it, anyway.

  15. I’m hearing more and more rumblings that there will be the October surprise Obama throws out there to try to pull the Dem’s bacon out of the fire, and that it won’t just be guaranteed low interest loans going forward, it will be massive refinancing of current loans to lower rates using federal guarantees.

    Of course, the bonds that are currently backed with mortgages will be blown up. But this wouldn’t be the first time the Obamatrons have fucked them some bondholders. I suspect some of those bonds are held by the Chinese, who might not take it too kindly.

    And, of course, ultimately the taxpayers will take it in the pooper when the guarantees have to pay out.

    It may be too late for this kind of ploy to buy votes this year (it will take a long time to refi that many loans). It will be interesting to see if the TPers allow their principles (rage over another give-away) to prevail over their self-interest (simpering gratitude at receiving a low-interest refi).

    1. If he tries that he is dumber than even I think he is. Most people in this country are not underwater on their mortgage. Most people in this country pay their bills. And most of them are going to pissed if they see the government bail out a bunch a homeowners. If he does that, the shit will hit the fan and Democrats will lose in places they never dreamed they could lose.

      1. The sad thing is that it’s probably what McCain would be pulling out of his bag of tricks. The GOP would only be against it because it would be politically unpopular.

        1. Actually, McCain was the author and sponsor of the amendment during this Congress to:

          To provide for enhanced regulation of, and to establish a term certain for the conservatorships of Fannie Mae and Freddie Mac, to provide conditions for continued operation of such enterprises, to provide for the wind down of such operations and the dissolution of such enterprises, and to address budgetary treatment of such enterprises.

          I can’t say for sure that McCain wouldn’t try plans like that to try to win votes, but at least in this Congress, he authored the amendment to wind down Fannie and Freddie.

  16. I’m guessing that the Democrats will attempt to finish nationalizing the mortgage market and squeeze out the few private loans currently being made.

    I mean, the alternative is to have less governmental power, and since when have Democrats supported that for any fiscal issue?

  17. Some day, those loans are going to have to be marked to market. Whether that happens over time as the properties are sold (at a loss) or all at once is the only question.

    1. Why? That whole mark-to-market is what Forbes and others put the blame on for the 2008 near implosion of the banking system.

      1. Because *eventually* houses go on the market. As P Brooks says, without a mark-to-market accounting system, you still end up valuing the home at the market price when it’s actually sold.

        So there’s the question of whether you show the apparent swings in valuation before people sell the loans (with possible extra volatility), or you simply take enormous “unexpected” losses when they’re sold.

        1. Sorry…thought he was talking about mortgage loans in general, and not the difficulty in unwinding the F&F fiasco. The big mistake in 2007 was forcing mark-to-market on banks, particularly banks which kept most of their loan portfolio in house for the life of the loan.

          1. The big mistake in 2007 was forcing mark-to-market on banks, particularly banks which kept most of their loan portfolio in house for the life of the loan.

            I’m not convinced that mark-to-market did anything other than force the bubble to pop earlier. That may have been even better in the long run.

            After all, if the temporarily down valuations are really a “mistake” that everyone or at least the smart money knows about, then there’s a lot of money to be had in extending liquidity to cover those banks whose loans temporarily look underwater.

            OTOH, if the lower valuations really are going to stick, then mark to market just makes the banks deal with it sooner.

  18. It’s a common derangement of causation:

    Responsible people are home owners =/= Making people into homeowners makes people responsible.

  19. Anyone else notice that this either-or choice is mixed up? The choice is cheap mortgages AND massive taxpayer liability… OR… more expensive mortgages and taxpayer protection.

    Peter has it backwards in the title and in the first paragraph after the quote.

  20. The dumb part of this is that the easy loans make the prices rise, making it necessary for more people to get assistance.

    Government can’t simultaneously “prop up housing prices” and “make housing more affordable for everyone.” It can possibly prop up housing prices while making housing more affordable for the poor only, but not for the poor AND middle class.

  21. Anna and Charlie Reynolds of St. George, Utah, were worried about losing their home to foreclosure last year. Then they got a lucky break?from an unlikely savior.

    Selene Residential Mortgage Opportunity Fund, an investment fund managed by veteran mortgage-bond trader Lewis Ranieri, acquired the loan at a deep discount and renegotiated the terms with the Reynolds. The balance due was cut to $243,182 from $421,731, and the interest rate was lowered. That reduced the monthly payment to $1,573 from $3,464, allowing the family to stay in their home despite a drop in Mr. Reynolds’ income as a real-estate agent. “It was a miracle,” says Ms. Reynolds.

    Mr. Ranieri’s Selene is the sole owner of its loans and has a servicing affiliate that can negotiate directly with borrowers. “Every case is individual,” Mr. Ranieri says. “There’s no template.”

    But the main reason Mr. Ranieri can strike deals with borrowers is that his firm buys loans, mostly from banks, at steep discounts to the balance due. If his fund pays $50,000 for a loan with a $100,000 balance due, for example, it can make a profit even if the borrower ends up paying back only $70,000.

    WSJ

    This is how it’s supposed to work.

    1. And that drop in balance also represents approximately how much less that house should be worth on the open market, correct?

  22. From the same article:

    One reason Selene has the leeway to help borrowers is that it generally bypasses the federal government’s $50 billion Home Affordable Modification Program, or HAMP. The program offers financial incentives to lenders and servicers to modify loans. When President Barack Obama announced HAMP 18 months ago, the program raised hopes among millions of borrowers. As of June 30, however, only about 389,000 households were benefiting from long-term reductions in payments under that program, and 364,000 were in “trial” periods, trying to qualify by showing they could make reduced payments.

    Critics say the program is overly complex, unwieldy and revised so often that servicers have a hard time keeping up with the latest requirements for modifications. The Treasury Department blames servicers. They “have done a terrible job of making sure that they are doing everything they can to meet the needs of their customers who are facing the possibility of losing their home,” Treasury Secretary Timothy Geithner told a congressional panel in June.

  23. thought he was talking about mortgage loans in general

    I am. At some point, every underwater loan is going to have to be put on the bank’s (or whoever owns it) books at market value. Maybe that will happen when the “million dollar” house sells for two hundred grand, or maybe it will be when the bank examiner starts demanding believable appraisals.

    Would you buy a business without knowing the real value of its inventory and investments?

    1. 30-year mortgages that are currently underwater won’t necessarily be underwater forever. Why should a bank’s capital ratio be bound to the projected costs of the immediate unwinding of long-term portfolios? An unwinding that would never occur even if the bank was sold.

      1. Why should a bank’s capital ratio be bound to the projected costs of the immediate unwinding of long-term portfolios? An unwinding that would never occur even if the bank was sold.

        Really? Even with the last few years you find it impossible that banks would suddenly be faced with lots of foreclosures or otherwise sudden sales? Sounds too similar to the logic saying that simultaneous steep price declines nationally never occurs.

        But hey, maybe you’re right, maybe there is no chance of this occurring. In which case hedge funds and others should fall over themselves trying to cover those risks and extend liquidity.

      2. Why should I as a tax-payer be on the hook for all of a banks insured deposits because they were optimistic about this being a “temporary” situation? How many 30 year mortgages mature in 30 years without being sold or refinanced? Either an asset has a real worth that can only be assessed well now or we’re off into the arbitrary land of computer models about how valuations in areas will trend.

  24. Why should a bank’s capital ratio be bound to the projected costs of the immediate unwinding of long-term portfolios?

    The obvious riposte – Why should a bank’s capital ratio be based on asset values that are not actually, you know, real?

    That said, one problem with mark-to-market for individual loans is that its really hard/expensive to (re)value those loans every year. I suspect that a decent valuation is probably more practical for large loan pools/MBSs.

    But its a real problem. In a way, we are trying to pick between two really crappy valuations – mark-to-“market”, and mark-to-fantasy.

  25. we were just shafted with taxpayer paying off the banks-wall street and banks etc, if they got their loses back, why did’t you say something about this, pay us back. gm has and everyone was crying the unions are killing us, what a slight of hand as we were looted by wall street. ironically the american public -the middle class-small business need help and now you are worried about taxpayers footing the bill….in the previous 8 years, the largest deficit, the largest government expansion, no-bid contracts paid with taxpayer money to companies that had offshore hqters. and accounts . gas has doubled in price, so where is the taxpayers getting hosed and your outrage that was needed in the last 8 years. americans need help, don’t blow them off because they are not a corporation or big-time donors or pretend they are more patriotic than anyone else because the wave a flag and bible in your face..a crook is a crook is a crook…call it as it is and do sometime to have the looters pay back the american taxpayers

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