(no subject)

[vicarz]

Let's do some big-people talk here.

A decent conversation from Cramer though he whines at the end for being mocked for being wrong about some of his predictions. Um, dood, your entire income is based on your accuracy and arrogance in predictions - if you fail, you can hardly complain about having that failure shoved back at your when your schtick is selling your predictive abilities. He says that the intervention will stave off a bank crisis, as all investment is related to the banking industry - and the mortgage crisis had the potential to topple that as their base is made up of residential mortgages.

Fannie/Freddie have mission statements of "making mortgages cheaper." Well, there is an argument that they have failed in that mission - not that they failed to make mortgages available, or even create a stable financial market (which is the issue now, but not their mission), but by making the mortgages so cheap that everyone could get one they made the actual mortgage amounts more expensive. In basic economic theory, when prices go down there is higher demand for those low-priced mortgages, and Fannie/Freddie made supply more abundant. The number of homes was relatively constant (inelastic demand) so the price of those homes went up. So while mortgages were cheaper to get PER AMOUNT, they became far more expensive overall because the price of housing skyrocketed. Fannie/Freddie failed at their stated mission through too much success at a sub-goal. Cheaper mortgages != cheaper housing.

Ran into some really neat arguments this weekend about whether mortgages should be tax-deductible or not. My interpretation and take-aways:
Yes - ingrained in our culture; a built-in investment/retirement plan; stable communities tend to have less crime, encourage participation in the community (a big deal with democracy), and foster investment as housing and people are secure investments (similar to issues of well defined property rights inspiring greater capital investment and long-term growth)
No - penalizes renters making it harder to cross socio-economic classes until you enter the realm of home ownership, reduces freedom of movement that is so heavily relied upon in economic theory (less abuse of workers if people in Detroit can just up and move to Chicago), culture not that related to stability of the community, artificially inflates cost of renting vs. owning, home ownership makes you essentially an indentured servant with ill-defined master,

Around there I lose track - I don't claim to be an expert. I think this intervention is probably more a good idea in the short term to ensure (or assure, but not insure you grammar word-usage bastards) some level of economic stability in the markets in general. I am not so convinced that government intervention of this form is a good idea in the long-term. Rather, this problem was exasperated through government intervention already (with I will say the most admirable of intentions) and this intervention will put burden back on the taxpayers. Because the mortgage-bond holders seem to be majority in China, with whom we also have a trade deficit, the taxpayer is essentially insuring China's investments; or, the US is further taxing the taxpayers to solidify China's investment in US debt which is partially being used to purchase Chinese products. Further, this intervention in the market already has increased the cost of the housing it was supposed to lower - so overall this only continues to make housing less accessible to the public.

Questions I have are: what has happened to the per capita % of home ownership since Freddie/Fannie? Has there been an income bracket shift in ownership? What effects would come from moving away from government intervention in the mortgage business (many times deregulation has led to disaster - such as the related S&L crisis)? What effects might come from a slow change of not allowing for the deduction of mortgage interest?

Comments

[samaritan1975.livejournal.com]

Part of the issue is due to the nature of many loans that have been put out there- namely, those that were granted people who couldn't live up the requirements once ARMs and so on reset.

When Countrywide nearly went under with the sub-prime crisis, we were in a bind to start providing liquidity to a market that was freezing up faster than we could melt it.

Thing is, Fannie/Freddie don't regulate anybody. Their mission is to provide liquidity to the market (which in turn makes things cheaper). This crisis isn't really their *fault* (that would fall to the lenders who prompted the loans that eventually went to foreclosure because of their lax credit requirements), but unfortunately, it's essentially their job to remedy it. There was just too much going on for them to handle, necessitating the prop up.

[vicar.livejournal.com]

Is their mission to provide liquidity, or is that the sub-goal that has led to this trap? I don't disagree on the sub-prime issues, but I'm curious about the idea that Fan/Fred failed in their mission by getting stuck in the liquidity issue as sub-goal which surplanted the actual mission statement.

It reminds me of working for Chi-Chis, oddly. They were being destroyed top-down by managers seeking promtions by showing their improvement in the company. One jackass had his performance measured by money spent per patron/table. He focussed on getting deserts to the customers - which waiters hated (they made the things). For $5 for about every 2-3 people, the customers sat at tables for an extra 20-40 minutes - losing another $40-100 table. He increased per unit sales, at the loss of sheer volume of sales, but I'm sure he got paid handsomely for achieving his performance meter.

Ok, that was a HUGE tangent...but I'm big on people getting stuck on sub-goals. See also, money.

[samaritan1975.livejournal.com]

Verbatim, the mission statement is: "Freddie Mac's mission is to provide liquidity, stability and affordability to the housing market." (I work at Freddie Mac, so got this from the intranet site).

So, 'providing liquidity' (by buying mortgages up and thus granting lenders more cash to lend) is not so much a sub-goal as it is a means to achieve the mission.

[vicar.livejournal.com]

Wow, liquidity AND affordability is the mission. They seem like conflicting goals! Set up for failure?

[samaritan1975.livejournal.com]

Not necessarily conflicting, but difficult to maintain both in the expected timeframe.

Liquidity is easy to explain as to why it's useful. Affordability doesn't necessarily parse from that unless you watch the movement of interest rates (rates drop as money becomes more readily available to lenders). It really only works outright for new homebuyers; those with existing mortgages don't feel the benefits unless they go to, say, refinance and the difference in rates is significant. With me, personally, the issue isn't the rate, it's the drop in home value, which is where this prop-up is getting it's steam.

As rates drop, new homebuyers enter the market more easily (and, ideally, without entering a loan that is more than they can handle). This puts a run on real estate (not to the degree we saw over the last several years), boosting home values. That in turn helps those who are currently upside-down (in negative equity, like myself). The further impacts from that are a little outside my realm, but I believe there are implications in terms of the local/municipal economies that benefit by way of property taxes as well. This all sounds great, of course, until you realize that this isn't going to happen overnight.

[caligaridc.livejournal.com]

Hi. I work for Freddie Mac as well.

The (former) regulator, as well as congress, held the GSEs (Fannie and Freddie) to the standard and mission statement to provide affordability to the mortgage market. For Freddie, this included programs that were exclusive to customers of Freddie that allowed borrowers with not-so-perfect credit, as well as low to mid incomes purchase homes. Although the default rates for those particular loans are higher than the average loans purchased by Freddie Mac - traditionally the default rates were lower in comparison to the sub-prime loans on the primary markets.

Freddie and Fannie did purchase SOME Alt-A loans, which was in direct response to market demands and pressure to achieve higher levels of profitability to answer to shareholders... Fannie and Freddie are not directly responsible for the mortgage crisis, but it's easier for the government to put a show of strength in place versus actually applying regulatory standards to all mortgage originators. It's easy to pull one over on the consumer, as most people aren't aware of what Freddie and Fannie do, that a secondary mortgage market exists, or how it will affect the world economy.

[samaritan1975.livejournal.com]

Wow, odds of meeting another Freddie Mac-er here on LJ are... well, I guess not that astronomical. It *is* the innarnetz, after all. :)

As for the meat of your post, yes. Freddie & Fannie are odd beasts to quite a few folks who think that 1) we directly regulate lenders, and 2) actually lend money directly to prospective homebuyers. Right about the Alt-A loans; but I thought that they had been so small a percentage as to be essentially non-material in terms of the issues the market is having.

[empressmiaka.livejournal.com]

I have always wondered why mortgage interest was tax deductible. Is this the same reason that credit card interest used to be tax deductible?

[vicar.livejournal.com]

The policy as I understand it (and this not really my area) is to encourage home ownership under the assumption that home ownership = good for USia. Credit card interest deductions were also to "help the economy" through encouraging people to buy things on credit - i.e. spend more. Of course, this led to a disaster of people who bought what they couldn't afford, resulting in higher bankruptcies etc which increased the cost of borrowing to everyone else as the big morons went broke. Now us so-so morons pay more for every credit purchase and the banks give us less interest...trickle down in the real world (expenses trickle down, profits do not).

Ugh, this revival of coded trickle-down talk is why I don't like the McCain tax plan. It's freedom to the upper classes is essentially based on a re-worded trickle-down assumption about the economy, which has been disproven repeatedly.

[empressmiaka.livejournal.com]

My husband was complaining about how much we pay in taxes. I did a guesstimate on our taxes, and figured we have about 52k in writeoffs. Those writeoffs, in the end, have us paying less than 15% in taxes. He grudgingly allowed me to say that that really wasn't much at all. I pointed out that the tax code kinda really does favor the upper incomes because they're the ones who can afford to buy/invest in these writeoffs. How many people can afford two mortgages? Or moving expenses?

[vicar.livejournal.com]

Exactly the point. It's odd that on a % basis while the tax code shows increasing rates of taxation, but the number of deductions increases as you go up. This is why the flat tax, sales tax only, and all those ideas fail over and over - they're based on income, which is an institute of the poor rather than the wealthy who make money from investments.

It's a battle - you want to encourage investment, but you also don't want to penalize folks for working for their money either!

[empressmiaka.livejournal.com]

lol one of the reasons I wouldn't mind a flat tax, though, is that it would eliminate a huge money waster: the IRS. lol Or at least pare it down quite a bit.

[vicar.livejournal.com]

Wrong again? Enforcement by the IRS is extremely cheap when you have a record of the income from centralized computer system. However, with distrubuted sales - there is a HUGE incentive to cheat, both by buyers and sellers. Enforcement is extremely expensive on that sales stuff - far more than the IRS - and of course the enforcement does exactly waht hte anti-gov people hate - intrude more and more into the daily aspects of your life. So, the anti-gov people are asking the IRS to get out of their lives on a once-a-year basis, and instead sit there with enforcement officers seeing your life 3 times or more a day!

[transentient.livejournal.com]

I was thinking the other day about how, as I understand it, Fannie and Freddie were created to allow lenders lend more money. The customer-facing lenders make loans for houses, and then Fannie and Freddie use tax dollars to buy those loans, so the retail lenders can lend more money.

Seems like that essentially created a huge amount of wealth in the form of real estate value. If there were no Fannie and Freddie, then it would take those retail lenders a longer span of time before they could lend after writing a loan because their risk would be greater. There'd be less they could lend. They've been operating for a long time now so if they hadn't been around all this time, I think we'd see real estate values MUCH lower than they are now - because the bottom line of value is what the buyer will/can pay and what the seller will accept.

Could you imagine what would it would be like if the $500-750k homes in your area were actually selling for more like $25k? I mean it would be very different. Maybe it would be worse, maybe it would be better.

Anyway, there were some of the New Right libertarian people proposing to let Fannie and Freddie die a couple weeks ago, and I think if that had happened, the adjustment period would have been extremely painful and long-lasting.

Now whether or not we're going to enter what is basically an even longer, 100+ years period of adjustment as we put public money into maintaining a public bubble, I dunno, but they seem to get by okay in Japan...

[samaritan1975.livejournal.com]

"I was thinking the other day about how, as I understand it, Fannie and Freddie were created to allow lenders lend more money. The customer-facing lenders make loans for houses, and then Fannie and Freddie use tax dollars to buy those loans, so the retail lenders can lend more money."

This is exactly what they do, as a matter of fact, except for the source of Fannie/Freddie money. When they buy up mortgages, they securitize (package) them for investment from other entities. This investment capital is then used for other operations, including putting more money back on the market (they also raise money via investment in overnight commercial paper, asset backed securities, getting their spreads from the euro/fed funds markets, and so on). Freddie/Fannie also sometimes get seller/servicer (administrative) fees if they're the ones dealing with the payment/escrow for loans/a batch of loans.

[samaritan1975.livejournal.com]

Which it to say, they're privately owned, not funded by the government until... today, in fact.

[transentient.livejournal.com]

I thought it was all propped up by tax-payer dollars though.

[samaritan1975.livejournal.com]

With this turn of events, technically, yes. Treasury's trying to minimize that part of it. Essentially, the government's been cleared to invest via preferred stock to help out, among other means. There's a transcript with the heads of Treasury and FHFA talking about next steps out there on the net... I'll see if I can find it.

[vicar.livejournal.com]

The real interesting issue is this takeover - do they do what they say, prevent a temporary shock to the economy, but then release them back to the controls of the free market later? Or does this become another federal program indefinitely?

I get concerned when we prevent pain with government intervention too much...at what point does the market control for failure actually take place? Is the government really here simply to remove liability from business errors?

[samaritan1975.livejournal.com]

This is largely because the housing market was spiralling, and even Fannie/Freddie didn't have the capital means to recover it (thanks in part to the caps being placed on them, and their already high leverage because of the singularity of the market they serve). This may be long-term (in relation to other investments), but I doubt it's permanent.

[samaritan1975.livejournal.com]

As for business errors, the consensus is that letting F/F fail would be tantamount to wrecking what's left of the economy. I agree to an extent; a friend suggests it's partly political, that no candidate in their right mind would want to deal with something like that during election season.

[(Anonymous)]

One of my questions is how much pain did they prevent, or did they just prevent a perception of pain. Personally I'm not a fan of the takeover, but I wasn't a fan of the government mandate (and capital requirement exceptions) before then either. Neither company is very humble....looking at salaries, buildings, bloat, etc...yet they had great advantages such as lower requirements, exemptions from taxes, etc - but were a private company.

Now they have conflicting missions as a company with public stock they have a fiduciary duty to their shareholders, but as a government entity they have a fiduciary duty to taxpayers and their government mission. Have lots of comments on the above, but don't have time during the workday for these long online conversations.

[translucent-eye.livejournal.com]

Oh...and that was me.

[samaritan1975.livejournal.com]

I guess it would come down to a matter of how heavily involved they are in the market.

Between Fannie and Freddie, they own and/or underwrite about 50% of the nations' mortgage debt, which answers the above question with a single word: very.

Were they to go under, it's not hard to imagine that the housing collapse would be virtually complete. Now, that's not to say it couldn't recover through other means, but right now, I don't think that's a scenario anybody's prepared to deal with.

[translucent-eye.livejournal.com]

But that is assuming that they were under capitalized and that they could not sell MBS to the general market anymore. The question I put out there is whether or not they really needed the capital. I don't believe that Fannie Mae did...I'm not so sure about Freddie Mac - but then again...maybe they should have thought about that before building that Class A+ buildings out in Tysons.

[samaritan1975.livejournal.com]

You mean the one I work in? Yeah. ;)

It wasn't so much that they didn't have MBS to sell, per se, it's that investors were looking for returns that they couldn't provide on an ongoing basis (there was a pretty large spread being demanded between that and Treasuries... almost 3%, I think?). Capitalization was bending pretty hard at the end; and I think both were already fairly heavily leveraged.

[translucent-eye.livejournal.com]

Then you can easily agree that the companies were far from humble while accepting advantages from the government that were not privy to other private companies. And having dozens of friends over at Fannie, I can assure you that they aren't humble either.

Keep in mind that a lot of the Fannie restatement was from trying to keep returns DOWN to span them over the years. I don't think this was investor driven....if a company can't return, then investors sell. This was a mixture of bad market decisions, with some bad corporate decisions - partially brought about by government missions to fund in any market, and a decent amount of corporate bloat.

[samaritan1975.livejournal.com]

Oh, I can't deny that there were... poorly guided decisions (can't speak to advantages, since to be honest, I'm not sure off-hand what they enjoyed other than the already-implied backing). But I also don't think they would've perfectly weathered this storm had they been healthier- they would've just lasted longer is all.

Freddie had a similar restatement issue- spreading a period of high growth over a span of time to appear stable. I was overseas when that came to light, so I wasn't around for part of it.

[translucent-eye.livejournal.com]

Well - for starters the lower capitalization costs that only these two companies enjoy means that the firms have to spend less money to back the loans they make and to buy insurance on those amounts. Of course, maybe if this wasn't they case they would have been sheltered from some of the downside.

An example of other benefits:
"Congress exempts embassies, non-profits, and certain other organizations from taxation. For example, Fannie Mae receives a Congressional tax exemption that results in a loss to DC of $450 million annually. "

http://standupfordemocracy.org/commuter_tax.html

[vicar.livejournal.com]

If the savings on the taxes weren't directly huge, the reduction in related accounting and filing certainly could be?

[vicar.livejournal.com]

I tend to agree. I rather like the idea of that cheaper housing - I'd be ska-rewed, but I think it's a government-conspiracist's nightmare today because everyone is a slave. How do you get unpoor when it takes two incomes just to maintain basic household rent? I mean if you wanted to plot subservience, high priced housing, then expensive transportation which gets longer with lower cost (urban vs. rural, metro vs. bus) ... You wind up with people working all the time to pay rent and the less they have to pay for rent, the more additional time they spend commuting to the worksite. The poorer you are, the less energy you have for anything but survival BUT you can survive, just barely, so you don't rise up in revolution.

Maybe...

Japan is a good comparison. I still think it would be better for everyone if we had reasonably priced housing. I had no problem with the prior model that a fair price for housing would be 2-3 years of your full salary. That made mortgages reasonable at 30 year mark, and of course it made rent a similar price to that 30 year mortgage based on that price.

[samaritan1975.livejournal.com]

Oh, I'd love that. What prompted the explosion was that everybody and their mother qualified for a loan (this wasn't just the sub-prime issue; it's sad that they both hit around the same time). Then came the 10/1 ARMS, and there was a decade or so of rejoicing (other economic downturns notwithstanding), and more buyers than available property, and the belief that things would only get better. Then... crash of housing value, leaving those still paying with a house worth a large chuck less than what they paid.

The nastiness here is that the those who make less don't really benefit from the lowered rates because of the hard-nosed credit standards (partly based on income).

If I knew more about other markets, I might take a crack trying to come up with scenarios to help the situation just for shits and giggles.

[vicar.livejournal.com]

See I've always had problems with these things - I loathe living paycheck to paycheck. I used to make $12 / hr, and I saved up over 10k living with roommates, driving a crap car, and eating beans and rice. I've always lived beneath my means and think that anyone who doesn't is being irresponsible. I've heard too many stories about "Everything was fine before the
car crash
sickness / cancer
lost job
kid / divorce
family crisis

I mean...one of those things happens to everyone at least once every ten years - what's the surprise? So it's irresponsible to live paycheck to paycheck, irresponsible to pay for a house without putting down 20% on equity...now when the house falls 30-40% I see a major problem sure...

Interesting point about the lower credit folks - BUT if they start with high interest and make the payemnts, then they'll be elligible for a good rate if they refinance with their improved credit.

[elvenfrost.livejournal.com]

The Fannie/Freddie take over actually puts a little fear in me for reasons I don't have time to go into here. I just hope I'm wrong and things will will have a happy ending. :) Optimistic.

[doc-quixote.livejournal.com]

[T]he taxpayer is essentially insuring China's investments

My view: The taxpayer is essentially ensuring China's (continued) investments. If the feds left the Chinese holding roughly $1T in bad debt, the Chinese might take it personally and stop buying American debt.

[vicar.livejournal.com]

I like to think that everyone realizes this is needed in the short term, but we can't lose sight of the fact that in the long term we need to end the trend.

I'm 100% anti debt, even to the horrific point of wanting an increase in taxes (better, decrease spending)

[doc-quixote.livejournal.com]

[I]n the long term we need to end the trend.

In the long term, this trend will end. If aggressive action isn't taken soon to get our dirty little "borrowing" habit under control, our dealers creditors are eventually going to cut us off. Only reason they're still loaning us money at this point is the massive, massive amount we already owe, and the realization that if we get cut off, cold turkey, at this point, our outstanding debt gets written off.

There's a saying from long ago: When you owe the bank a thousand dollars, you have a problem. When you owe the bank a million dollars, the bank has a problem.

[vicar.livejournal.com]

Oh that is a nice one. Fool me once...

Re: A few articles that woke me up

[vicar.livejournal.com]

See, finally someone is recycling?

[fractalwoman.livejournal.com]

From the economic community:

U.S. Treasury Secretary Henry Paulson named Herbert Allison, former head of TIAA-CREF, new chief executive officer at Fannie Mae. Carlyle Group executive David Moffett is now CEO of Freddie Mac.

This is the Carlysle Group. Past presidents now own this company and have control of a monster that they created.

and for hilarity.

[fractalwoman.livejournal.com]

Ok - here was the last linky link: http://www.cnbc.com/id/26603489/

Sorry about that.