Tag: fannie mae

Homeownership Myths

In a recent Washington Post op-ed, Professor Joseph Gyourko, chair of the Wharton School’s Real Estate Department, lists what he sees as the five biggest myths about homeownership. Given the central role of federal housing policy, particularly Fannie Mae and Freddie Mac, in our recent financial crisis, it is worth following Professor Gyourko’s suggestion and question whether a national policy of ownership, all the time for everyone, really makes sense.

Professor Gyourko’s five myths:

1.  Housing is a great long-term investment.

2.  The homebuyer tax credit makes buying a house more affordable.

3.  Homeowners are better citizens.

4.  It’s safe to buy a house with a very low downpayment.

5.  Owning is always cheaper than renting.

You’ll have to read the op-ed to see his explanations.  An important qualification on his analysis is that in many cases what can be good for the buyer, such as putting no money down, may not be good for the economy if it results in additional foreclosures.

The Week in Government Failure

Over at Downsizing Government, we focused on failures in the following departments and agencies this week:

Also, in addition to losing more money, Fannie Mae and Freddie Mac lose their inspector general.

Government Housing Adventures

The Wall Street Journal is reporting that Fannie Mae and Freddie Mac, which have already consumed $112 billion in taxpayer bailouts, may have additional losses if they can’t recoup claims from struggling private mortgage insurers.

From the Journal:

Fannie Mae has about $109.5 billion of mortgage-insurance coverage in force, which represents 4 percent of all single-family home loans it owns or guarantees. Freddie Mac had $63.4 billion in mortgage insurance and $12.2 billion in bond insurance. Private mortgage insurance is required for any home loan with less than a 20 percent down payment, and the policies typically cover 12 percent to 35 percent of losses in the event of a default, according to HSH Associates, a financial publisher. Mortgage insurers have been forced to pay up as loan defaults escalate.

Escalating loan defaults are also likely to bite taxpayers through the Federal Housing Administration, which covers 100 percent of losses. The FHA is in deep trouble:

The reduction in private insurance coverage has contributed to the rise in the volume of loans backed by the Federal Housing Administration, a government mortgage insurer that backs loans with as little as 3.5 percent down payments. It could be required to ask for a federal subsidy for the first time in its 75-year history if the housing market deteriorates further.

Who is looking out for taxpayers here?

Ryan Grim at Huffington Post reports that the Federal Housing Finance Agency, which is in charge of Fannie and Freddie, has used a legal technicality to rid itself of its inspector general:

There is no independent auditor overseeing the federal agency responsible for some $6 trillion in home mortgages, because the Department of Justice’s Office of Legal Counsel ruled that the agency’s inspector general didn’t have authority to operate, according to internal memos obtained by the Huffington Post. The ruling came in response to a request from the Federal Housing Finance Agency itself — which means that a federal agency essentially succeeded in getting rid of its own inspector general.

The timing is curious:

Fannie and Freddie are burning through cash at a staggering rate. Fannie reported a loss of $18.9 billion in the third quarter of 2009, four billion more than it lost in the second quarter. FHFA requested $15 billion from Treasury to plug the hole. What’s it spending money on? “The company continued to concentrate on preventing foreclosures and providing liquidity to the mortgage market during the third quarter of 2009, with much of our effort focused on the Making Home Affordable Program,” boasts the press release accompanying the announcement of the massive loss. “As of September 30, 2009, approximately 189,000 Fannie Mae loans were in a trial period or a completed modification under the Home Affordable Modification Program.” Those are the precise programs that Kelley was looking into when his own agency shut him down.

See here for essays on the problems associated with the federal government’s housing market interventions. Also check out Johan Norberg’s book, Financial Fiasco: How America’s Infatuation with Homeownership and Easy Money Created the Economic Crisis.

Fed Opposed by Left and Right

On its front page today, the Washington Times reports that expanded powers for the Federal Reserve are being opposed by “odd allies.”  The Fed’s imperial over-reach for additional regulatory powers is being opposed by Democrats and Republicans, and liberals and conservatives alike.  As well it should be.  As Senator Shelby observed, “Anointing the Fed as the systemic-risk regulator will make what has proven to be a bad bank regulator even worse.”

The regulation of financial services failed conspicuously to prevent the worst financial crisis since the Great Depression.  The Fed failed most conspicuously as it was charged with oversight of all the major banks, including notably Citigroup and Bank of America. Bank regulation now functions to insulate banks from the consequences of their own bad acts.  The regulatory system enables banks to engage in excessive risk taking.

The Obama Administration and Chairman Barney Frank of the House Financial Services Committee propose that an expanded role for the Fed and generally more of the same will improve matters. Instead, the proposed legislation will worsen the situation by codifying the status of the major financial institutions as “too-big-to-fail.”  It would thereby provide them with special legal status.  We have all seen this movie and how it ends.  Fannie Mae and Freddie Mac had such a status and collapsed.  Do we need 20 more such disasters?

Three cheers for all those opposing this destructive piece of legislation. End “too-big-to-fail” instead.

Government of Continual Failure

The Washington Post is full of so many stories about government failure these days, it’s hard to keep up.

Today, on page A19 we learn about a Small Business Administration subsidy program that has a 60-percent default rate. On the same page, we learn that the U.S. Postal Service will lose $7 billion this year.

Flipping over to page A20, we learn that former New York City Police Commissioner Bernard Kerik is a liar, a tax cheat, and thoroughly corrupt.

Then flip back to A15, and columnist Steve Pearlstein rightly lambastes the latest stimulus scheme from Congress: ”This $10 billion boondoggle is nothing more than a giveaway to the real estate industrial complex.”

Finally, on A14, we’ve got government-owned Fannie Mae losing a colossal $19 billion this year and asking the Treasury for another $15 billion taxpayer hand-out.

The federal government is a mess. Policymakers have no idea what the effects will be when they spend billions on scheme after scheme. Most of them don’t read the legislation, they don’t understand economics, and they never admit mistakes when their schemes almost inevitably fail. Fully 40 percent of the vast federal budget will be debt-fueled this year, but few policymakers seem to care. And public corruption seems never-ending. 

Isn’t it time to give libertarianism a chance?

Putting Private Insurance Out of Business

Over at Think Progress, Matt Yglesias takes me to task for saying that the so-called public option in the House’s health care bill “would all but eliminate private insurance and force millions of Americans into a government-run system.”

Yglesias apparently still buys into the myth that the public option is, well, an option.

For people who receive health insurance through their employers, which is to say the vast majority of the Americans who currently have health insurance, the House bill would change very little. Or, rather, the biggest change would simply be the confidence that if, in the future, you cease to get health insurance from your employer (maybe you’ll lose your job or want to change jobs) that you’ll still be able to get health care. What’s more, of the minority of Americans who would be getting health care through the new “exchange,” the majority will probably sign up for private health insurance and everyone will have the option of doing so. If the government-run public plan is, for whatever reason, vastly more appealing than the private options then it will dominate. But if you believe the government can’t run health care well, there’s no reason to think that will happen. Whatever you think of that, though, the basic fact is that even if the public option does dominate the exchange most people will still have private employer-provided insurance.

That might be true if the new government-run program were going to compete on anything close to a level playing field.  But, because the public option is ultimately supported by the taxpayers, the playing field can never be level.   True, the bill does say that the new program is supposed to be self-sustaining, covering administrative and benefit costs entirely out of premium revenues.  But remember that Medicare Part B was originally supposed to support 50 percent of its costs through premiums.  That has shrunk to the point where premiums pay for less than 25 percent of the program’s cost.

And the government has a myriad of ways to prevent the true cost of the program from showing up in premium prices.  For example, the government-run plan will not have to pay state or federal taxes, and unlike private insurance plans, who can be sued in state courts, the government-run plan could only be sued in federal court.

At the very least, the program carries with it an implicit guarantee against future losses.  Suppose the public option prices its products too low and loses money.  Can you imagine that Congress is simply going to let it go bankrupt, go out of business?  Would a Congress that has bailed out banks and automobile companies because they are “too big to fail” resist subsidizing the government’s insurance plan if it began to lose money?   Even without the actual bailout, such an implicit guarantee has a value. For example, the implicit guarantees behind Fannie Mae and Freddie Mac were estimated to have saved those institutions $6 billion per year.

All of this means that the government-run plan would be significantly cheaper than private insurance, not because it would out-compete private insurance or because it was more efficient, but because it had unfair advantages.  The lower cost means that businesses, in particular, would have every incentive to dump workers from their current health insurance plan into the government plan.  And, if other provisions of the bill make insurance more expensive, as is likely, the incentive for employers to shift workers to the government plan would be even greater.   Estimates suggest that nearly 90 million workers could eventually be forced into the government plan.

As Robert Samuelson, dean of economic columnists, writes in the Washington Post, “a favored public plan would probably doom today’s private insurance.”

Samuelson is right.  There is nothing “optional” about a public option.  And that is just the way the Left wants it.

What Caused the Crisis?

Last night National Government Radio promoted a documentary on National Government TV about the financial crisis of 2008, which concludes that the problem was … not enough government.

If the “Frontline” episode mentioned any of the ways that government created the crisis – cheap money from the central bank, tax laws that encourage debt over equity, government regulation that pressured lenders to issue mortgages to borrowers who wouldn’t be able to pay them back – NPR didn’t mention it.

For information on those causes, take a look at this paper by Lawrence H. White or get the new book Financial Fiasco by Johan Norberg, which Amity Shlaes called “a masterwork in miniature.” Available in hardcover or immediately as an e-book. Or on Kindle!

And for a warning about the dangers lurking in Fannie Mae and Freddie Mac, see this 2004 paper by Lawrence J. White.