Apparently, the Obama administration is going to propose killing off Fannie Mae and Freddie Mac:The Obama administration will issue a proposal later this week recommending the gradual elimination of government-sponsored mortgage backers Fannie Mae and Freddie Mac, a White House official said Wednesday.What will we do without the government subsidizing home buying? Oh, wait, there's still the home mortgage tax deduction.
The highly-anticipated "white paper," which is expected to be released Friday, will include three different options for reducing the role government plays in the mortgage market, the official said.
While the paper would mark an important development in the debate over what to do with Fannie and Freddie, a final decision by Congress is not expected any time soon.
After being rescued by the government in 2008, Fannie and Freddie have presented a major conundrum for policymakers in Washington.
The problem is that phasing out the two publicly traded companies could raise borrowing costs for homeowners and jeopardize the fragile housing market.
At the same time, Fannie and Freddie represent a major liability for taxpayers, who are on the hook for about $150 billion in federal aid the two institutions have received.
Anybody want to start the bidding on a pretty nice piece of Washington, DC real estate? It's probably not a good time to go job hunting there, though.
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You must realize that Fannie and Freddie have been nothing but a vehicle to deliver the common citizen's debt to Wall Street in the form of poorly laundered money. If we kill off Fannie and Freddie, one of Wall Street's primary sources of money will dry up. I think it's a good thing to stop the transformation of the common person's debt into the money of Wall Street, especially as it reduces the banker's ability to get the money either way (via debt payment or bailouts from taxpayer money).
ReplyDeleteWell, it is probably time to make some adjustments here, and it's hard to know what will happen until the details of a final deal are revealed, but a few quick predictions:
ReplyDelete- The cost of housing for consumers will go up, significantly. Get ready for the low-down, 30yr fixed to disappear and be replaced with 10 or 15 year ARM products, along with substantially larger down payments - imagine 50%. This isn't apocalyptic fantasy, it's the norm in modern western economies where GSE-like entities do not exist.
- The "free" private market - composed of a barely regulated for profit oligopoly with monopoly over the market - will milk the consumer for a great deal more than the GSEs (who are limited by statute) for a LOT more cash than the current system.
- The nominal price of housing will drop since demand will decrease considerably. Buyers will be either coughing up a dramatically larger percentage of their income, or prices will have to go way down - most likely both.
- Do this precipitously, and you'll bring on GD-II. The FHA and GSEs combined make up >95% of the lending currently going on; this will have to be phased in gradually. This will clobber residential development as it will put a permanent damper on long term demand.
- Rents will rise (as will apartment complexes) - the number of renters will increase proportionately, driving rental demand way up. Eventually, sure, we'll catch up with supply...but this is a huge win for REITs and Landlords.
- We will return to more dramatic boom/bust cycles in real estate (and, given how closely tied our post WW-II economy is to residential investment), the broader economy - just like we had before GD-I and the GSEs. Does anyone remember what floriduh was like in the 20s? Of course not, otherwise they'd never be snookered into this idiocy.
- @h4x354x0r is a WallSt/GOP stooge/troll/shill - the Street and the editorial page of the WSJ have been agitating for years to kill off the GSEs: they want the GSE market share without the GSE rates as a shadow competitor. The GSEs are not and never have been a way of 'laundering' taxypayer or consumer dollars for the street. They've acted to force the street to trim it's "vig" to less usorious rates. This is precisely why they've wanted to get rid of them for years.
I'm SOOOO glad I own a rental unit outright and my mortgage will be paid off in about five years. We're going to see what "Ownership Society" really means: the top 20% own the store, and the remaining 80% are forced to buy from it...from the company store.
The lumpen-proletariat "conservatives" who've been hoodwinked into brining us this might, in a decade or two, come to realize the "good old days" they've been clinging to so desperately are in fact a liberal post-depression vision of America. After we get rid of this pesky government intervention and "privatize" the MBS market - basically giving Wall St further free reign to milk the main street economy, the happy hard-money, first principles, Austrian-school (ie, Beck) crowd will get "change" sling-shotted up their asses so hard and fast they won't know what hit 'em. This will mark a return to the classic literal meaning of Rentier Economy...I'm so happy I'm an owner and a landlord. It's good to be part of the economic aristocracy.
Very enjoyable post, Montp! I'm troubled by some of what I've read about the corruption that Fannie and Freddie have caused in Washington, with staffers and members jumping over to them as lobbyists or other positions and making heaps of money. For that reason, I'm happy to see the GSEs go away...it's going to be very tricky to transition to a post-GSE real estate market, however, and for American consumers to figure out how to build up enough money for a big down payment will be a challenge. In the short term, I think you may be right that class divisions will become more stark.
ReplyDeleteBut should the prospect of this transition make me more or less eager to buy a house in Petworth (with English basement)?
"But should the prospect of this transition make me more or less eager to buy a house in Petworth (with English basement)?"
ReplyDeleteConsider the hellish commute caused by recent snow. Now imagine the aftermath of a biological/chemical attack on the Metro. (Have you seen the stainless steel biochem monitoring devices at Gallery Place?)
Yes, you'll be able to walk home rather than get caught up in the commute. But, at what price?
I agree with Montpellier about the lumpen-proletariat "conservatives". They are more likely to attack DC than Islamic fundamentalists.
@JAC - here's the thing about the "corruption" at FNM and FRE: what is the source of the greater societal harm, the costs of FNM and FRE corruption, or the costs of outright legal usury from Wall St.? It reminds me of the argument that says, "well, bad things happened - and they happened because the regulations didn't work, so clearly, the solution is to just eliminate the regulations". Sure, you can fix your lousy crime statistics by legalizing everything...but does that really fix the harm to society?
ReplyDeleteSitting in a transitional place like Petworth (right as I type this) in my gentrifying-girlfriend's "manse", I have to say, it really depends.
If we do a slow transition, sure, go ahead and buy. Otherwise - if we kill off the GSEs in a single blow, well, no, wait for the fallout. I mean: keep your powder dry; once you're hooked on debt, it's very hard to get off - see my references to the company store.
I have no crystal ball, but to the extent that the GSEs really represent an inefficient distortion of the market (and I don't really believe they do), unwinding the baked-in price inflation from 70+ years of them will be very very rocky.
When the crash hit in 2008, the private-label MBS market disappeared. What on earth persuades people that somehow moving to an exclusive private-label market is safe now, just two years later, is a mystery. Rather, it's evidence of just how good the Faux/WallSt. propaganda is and how utterly duped the lumpen-proletariat are. They have clearly been able to pin this on things like the CRA and the GSEs. The domestic fundamentalists are indeed a much greater threat to DC than the foreign ones.
What makes Petworth and the public-transportation accessible properties desireable is the price of oil.
Ok, one final rant about this.
ReplyDeleteIn a way, as a member of the landed gentry, and an eco-nut I'm not sad to see this - it's going to accomplish far far more to stop the sprawl and encourage dense development than just about any regulatory conservation scheme do-gooders like me could ever cook up.
I just lurvs lurvs lurvs them unintended con-si-quences.
MRIS reports are out. Immunington median price is up (again)
ReplyDeletehttp://173.203.83.133/get_report.php?action=pdf&loc_type=4&loc_id=51013&time_period=201101
Same thing with Immundria
http://173.203.83.133/get_report.php?action=pdf&loc_type=4&loc_id=51510&time_period=201101
Imagine how terrible it must be on the bears - those who have been waiting patiently on the sidlines for Immunozones to collapse since early 09. Back then when the data turned positive they were shouting at the top of their lungs "WE ARE NOWHERE NEAR THE BOTTOM".
Sure they put on a brave face - trotting out this or that house on redfin that was overpriced and will sell for a loss - apparently as "proof" that the whole immunozone will see widespread historic collapse soon.
Still, imagine their pain and anguish in their private hours at home. Looking out the window at late at night, praying with their creator "why god, WHY!!! Ok, OK, I was wrong about the bottom... but please, PLEASE, MAKE THE GAINS STOP!!!)
How sad...
Freddy and Fanny have been a massive drain on the whole economy for years. They have spent millions of dollars protecting their leaders from fraud. This was money they took from Americans. Now we the tax payers are paying his legal fees. For some reason this does not make sense. This person commits fraud, is caught, bankrupts his company, then the people he took advantage of in the first place are paying his court fees.
ReplyDeleteYes, what makes DC vulnerable to violent revolt is indeed, the price of oil.
ReplyDeleteRemember when the truckers "invaded" downtown DC in 2008? I do. It was a mess.
The housing market is about to receive another blow...higher mortgage rates are arriving just in time for the spring selling season. This will put pressure on home prices.
ReplyDeleteI'm not so confident about the "usury" claims against Wall Street, and a little disappointed in your crime analogy. They deserve crucifixion for any number of things, but this argument will require a bit more support. There is a difference between "Wall Street" and "banks." There are local banks and internet banks (Lending Tree) that offer mortgages... Further, if interest rates are high, that doesn't necessarily make them usurious, that determination would rely on the monetary policy context. And so, I think I still prefer to stamp out the corruption (and I'd like to see some people prosecuted and light shed on those members traditionally cozy with the GSEs).
ReplyDeleteSeriously, a manse? Like, where a minister used to live?
In a city with traffic as bad and time-erasing as DC, I'm not sure the price of oil is the only factor. Price goes down, traffic goes up, commute--->infinity.
Yes, keeping the lights, the heat, and the air conditioning on (not to mention keeping the Metro and its escalators running) in a major city like Washington is a "GREEN" activity.
ReplyDeleteAll that power will come from pixie dust and solar panels.
No really; keeping major cities running at status quo is anything but "GREEN".
@JAC - I admit, I'm taking the big securitizers - the private label MBS folks (MS, LEH, GS, JPM, CIT) and lumping them together with everything else on "Wall Street". You might as well include AIG, and the three ratings agencies, which are part of the financial infrastructure - the private "free-market" infrastructure - we are both utterly dependent upon (see Paulson & Shrub's capitulation to BAILOUTS, post LEH) and subject to. That infrastructure is what we call "Wall Street". The common usage calls the "Street" the FIRE economy infrastructure, not the individual companies traded on the various exchanges. In this sense, I think there's precious little difference between the "banks" and "the street".
ReplyDeleteThe other smaller banks - Lending Tree is a fine example of a non-brick-and-mortar bank - and "the street" is that the former are simply middle-men - a delivery conduit - to connect the big back end securitizers (FNM, FRE, LEH, GS, JPM, et al) to retail customers. These guys are nothing but middle men taking a fee. They are also hardly
It is very clear that the Private Label MBSes were far far more toxic than the GSE MBSes. This has been demonstrated over and over. This is also the crap, while we're talking about bailouts and taxypayer dollars - that the fed allowed the big banks to swap - at par - for US Treasuries. People quite conveniently forget about that - about the TALF - when they scream and bitch about FNM and FRE.
I contend that packaging doo-doo sandwiches in CDOs is a measure of the theft/corruption - not the statutory stuff. Sure, the private label folks appear to have been acting just inside the law while carrying out the same activities (economic harm) the GSEs carried out (on a substantially smaller scale). Please do not forget that FNM and FRE were the last into the sub-prime game, not first. The private label folks led the way with the notion of profiting from lending to the non-credit-worthy and they in fact bragged about their ingenious "innovation" and it's superiority to regulation as a means of accomplishing this feat. They only quit bragging and started blaming the GSEs when the wheels came off.
Although I personally agree with your feelings and subjective judgment about commute times, nearly three decades of evidence suggest that people will happily drive from places like Berryville, VA in pursuit of non-Urban living and 'cheap' housing. The limiting factor is not the commute time - that was through the roof years before the RE bubble - the limiting factor is the price of oil.
@Techno Triumphalism - I do not make my comments about sprawl or density or oil on the basis that one is more "green" than the other. I love to drive. I just think open fields and undeveloped countryside are more aesthetically pleasing than Daly-City stapled up shitboxes and divided highways with bumper-to-bumper crawl.
At the end - as I all to briefly said in my original comment - it's time to reform FRE/FNM. The whole privatize-the-profits/socialize-the-losses business (thank you LBJ) is completely unacceptable. Private investors - not just "corrupt officials" - have been getting fat off of very safe (us gov't. guaranteed) debt from the GSEs. That includes officials, Wall St. Banks, Sovereign funds and small retail investors. Those are not the people eating the losses - the taxpayer is. However, this "kill them off now" is a load of manure. FNM and FRE are not now and never have been a "drain on the economy" - they've operated at a profit - and they've enabled the massive post-GD-I and even more the post-WW-II residential-development-driven expansion of our economy. They are a vital piece of infrastructure no less than the highway system and performed a role that the private sector neither could nor would perform.
Well, it is probably time to make some adjustments here, and it's hard to know what will happen until the details of a final deal are revealed, but a few quick predictions:
ReplyDelete- The cost of housing for consumers will go up, significantly. Get ready for the low-down, 30yr fixed to disappear and be replaced with 10 or 15 year ARM products, along with substantially larger down payments - imagine 50%. This isn't apocalyptic fantasy, it's the norm in modern western economies where GSE-like entities do not exist.
- The "free" private market - composed of a barely regulated for profit oligopoly with monopoly over the market - will milk the consumer for a great deal more than the GSEs (who are limited by statute) for a LOT more cash than the current system.
- The nominal price of housing will drop since demand will decrease considerably. Buyers will be either coughing up a dramatically larger percentage of their income, or prices will have to go way down - most likely both.
- Do this precipitously, and you'll bring on GD-II. The FHA and GSEs combined make up >95% of the lending currently going on; this will have to be phased in gradually. This will clobber residential development as it will put a permanent damper on long term demand.
- Rents will rise (as will apartment complexes) - the number of renters will increase proportionately, driving rental demand way up. Eventually, sure, we'll catch up with supply...but this is a huge win for REITs and Landlords.
- We will return to more dramatic boom/bust cycles in real estate (and, given how closely tied our post WW-II economy is to residential investment), the broader economy - just like we had before GD-I and the GSEs. Does anyone remember what floriduh was like in the 20s? Of course not, otherwise they'd never be snookered into this idiocy.
- @h4x354x0r is a WallSt/GOP stooge/troll/shill - the Street and the editorial page of the WSJ have been agitating for years to kill off the GSEs: they want the GSE market share without the GSE rates as a shadow competitor. The GSEs are not and never have been a way of 'laundering' taxypayer or consumer dollars for the street. They've acted to force the street to trim it's "vig" to less usorious rates. This is precisely why they've wanted to get rid of them for years.
I'm SOOOO glad I own a rental unit outright and my mortgage will be paid off in about five years. We're going to see what "Ownership Society" really means: the top 20% own the store, and the remaining 80% are forced to buy from it...from the company store.
The lumpen-proletariat "conservatives" who've been hoodwinked into brining us this might, in a decade or two, come to realize the "good old days" they've been clinging to so desperately are in fact a liberal post-depression vision of America. After we get rid of this pesky government intervention and "privatize" the MBS market - basically giving Wall St further free reign to milk the main street economy, the happy hard-money, first principles, Austrian-school (ie, Beck) crowd will get "change" sling-shotted up their asses so hard and fast they won't know what hit 'em. This will mark a return to the classic literal meaning of Rentier Economy...I'm so happy I'm an owner and a landlord. It's good to be part of the economic aristocracy.