There is a big world out there
Raising the g-fee might have been good advice in 2005-2006. Doing it now would help recapitalize the GSEs, but recapitalization of the GSEs isn't the primary policy concern for the administration in the housing market. As I see it, there are (at least) three problems with this proposed solution:(1) raising the guarantee fee increases the cost of mortgages, which runs contrary to the government's myriad policies aimed at restarting the housing market (e.g., first time homebuyer tax credit). (2) the GSE's have already raised their prices. You won't see this in the basic g-fee. Instead, there is a .25 point (not basis point) charge on all mortgages and a "loan level pricing adjustment" of up to 3 points (not basis points) depending on the risk profile of the loan (this includes refis). Most borrowers don't have the cash to pay up to 3.25 points up front, so these points are getting rolled into the interest rate, which has greatly increased the cost of mortgages. That's why there's now a huge spread between the federal funds rate and the mortgage rate. (3) antitrust issues.
Antitrust: Non issue. The whole point of this is to raise prices to the point where the GSEs can't compete. There is no anti-trust between the private sector companies. Raising the price of mortgages: Key issue. The subsidy keeps mortgages cheap. That is why getting out of the GSEs is difficult. Solution - do it slowly. Moreover the policy is reversible - if the housing market cracks you can explicitly put 5bps back in.Sure the GSE fee has been raised a little - but not to the point where there is no subsidy. If 3 points keeps the GSEs in place do 6pts etc.And it is not just about the G-Fee. You could also increase the expected spread at which mortgaes will be purchased. The GSEs have a model which says "buy mortgages when spread hits X". So use their internal model - but make it X plus 5bps. Then X plus 10bps.The initial reaction of the market will be that market spreads go up. Eventually though it becomes profitable for private sector participants. They fill the void and Fannie and Freddie shrink.J
i was under the impression -- from your previous series and subsequent posts -- that the revenue line depended mostly on the interest rate spread as applied to the held portfolio and that the guarantee fee is only a small percentage of their revenues at this point; because of that i thought that the revenue line would have collapsed just because the interest rate spread flattened for a while.
I like the idea, but the fantasy about "competition" arising is the most graphic allusion ever.
What if "competition arising" is a fantasy - and the government can raise spreads by 50bps without substantial private sector compensation.Then you would need to make an argument that the mortgage market deserved or warranted that 50bps of subsidy. 50bps on 6 trillion dollars is 30 billion per annum. More than enough to bail out the GSEs. But if it is 50bps then you need to ask why should taxpayers be subsidizing that amount. And if competition does arise - oh well - mortgages wind up 30-40bps more expensive without the GSEs.You have to do this on both the guarantee book AND the owned portfolio.J
One major issue which wasn't brought to light much was mortgages to minorities, and in the US, the word 'racism' was thrown around so much in 2000-2007 in regards to mortgage denials. I'd say it's a fine thing to get rid of Fannie/Freddie, but it wouldn't happen...one main reason being this alleged 'racism'.
I just can't imagine that Wall Street Banks and the certain Republicans that are bankrolled by them still think they can get away with grifting the taxpayers yet again. So they took us all for morons with the toxic mortgage crap several years ago. How do they have the gull to propose that they should be given all the reins to the US mortgage industry on the cheap? Are you kidding me? Is it really possible they can pull all this off and make the general public believe they are doing them a favor? This is the part in the low grade movie where everyone calls BS and says this type of thing is not realistic and could not happen in the real world. Is there a cigar room somewhere, where all the people orchestrating this grift job hang out and laugh about getting over on the financially ignorant American public? Can we all be duped as a Nation again by the Wall Street end around?Please Washington, do the right thing and at least get our money back for us before handing the business off to Wall Street. Enough time has gone by. The story is soon to be made official that Frannie weren't the main culprit in the crisis. Do the right thing for us and you got my vote in 2012.I'm just your average college educated IT guy, coaching my kids soccer team. If I can understand the real story behind all of this, please have faith that the rest of America can do so as well.
to add some colour: in the Netherlands a similar entity (NHG/ 'the Dutch Mortgage Guarantee') charges 55 bp. and no competition in sight. of course, rules may differ here and there, but in essence it is the same construction.there are voices saying 55bp might not be enough (and if my memory serves me well it was 80bp some years ago) to fund the coming correction. so F&F charge just half???
Another minor reason to jack the rates:Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.http://www.nytimes.com/2011/01/24/business/24fees.html
Last year was kinda a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.
Aussie New Mortgage Share of Gross Household Median Income ::Sydney :57 %Melbourne : 50 %Adelaide : 47 %Brisbane : 43 %Perth : 43 %
From your keyboard to God's ears: http://www.marketwatch.com/story/republican-calls-for-fannie-freddie-to-hike-fees-2011-01-24?reflink=MW_news_stmpSeems to me though that the mission of Freddie and Fannie (and FHA too) - subdize mortgage rates and lend to borrowers who might not qualify in a purely private environment - is exactly what this country needs right now. Maybe in ten years we can have the policy debate of whether the government should encourage homeownership, but the last thing we need to do is chase potential buyers out of the market.
What are your thoughts on the AEI proposal? It doesn't seem that far away from your proposal.
An elegant, fair, and simple proposal? No way that will be adopted. . .Seriously, though, I'm glad you brought this up--at least the idea is out there in the blogosphere, and from what I gather the Treasury is reading. . .
Good post, but the key as some of the comments point out is that our policy makers don't want to do anything that leads to further weakening home prices and that is what this would do. The Fed has pursued QE2 to specifically keep long rates low and that is the only thing keeping housing from totally mean reverting at this point. So, although the idea is good to fix the GSEs, it would further weaken the housing market, cause further write downs at banks, more capital raises, etc etc. I am not saying that it is not the right thing to do but it is clear policy makers would not want this outcome. - Adrian Meli
John, an update on your freddie models would be greatly appreciated. Some of us are eager to see an update if you could take the time. Do you believe Freddie is over reserved?
John Gapper, op-ed staffer in the Financial Times 27 Jan 2011, calls for 'getting out' of Fannie and Freddie on the basis that mortgage guarantees are unjustified. This, he says, is because the percentage of owner/occupiers in housing in a European state without guarantees is much the same as in the USA.Apparently to the Financial Times the difference in inequality, and the difference between the conventional mortgage terms in the USA and elsewhere, don't rate a mention.
I wrote a paper a few months ago called Like Public Utilities Regulating Fannie and Freddie. You can google the title and ask for a copy. Anyway, there are some ways to implement your proposal that would pass muster from a public policy perspective. The details would matter. I may have some additional comments later.
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