(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]

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.