vicarz | (no subject)

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?

Threaded | Flat

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.

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

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...

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.

[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.

(deleted comment) (Show 1 comment)

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.~~

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

Sorry about that.