(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

[(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?