Tag: mortgage

Ed DeMarco Deserves a Medal

The same people who helped create the $180 billion bailout of Fannie Mae and Freddie Mac are now demanding the head of Ed DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac. Some commentators have gone as far to say that the “single largest obstacle to meaningful economic recovery is a man who most Americans have probably never heard of, Edward J. DeMarco.” Of course, such a statement shows a stunning lack of understanding of both the mortgage market and the economy in general.

Why are so many upset with Mr.DeMarco? One simple reason: he is following the law. Some believe that broadly writing down the mortgages of underwater borrowers would turn the economy around, regardless of the cost to the taxpayer. While that assumption itself is highly questionable, it doesn’t matter. As I’ve detailed elsewhere, the current statutory language governing FHFA limits Mr. Demarco from doing so. Yes, some proponents have found language elsewhere in the statute they believe allows sticking it to the taxpayer for another $100 billion. But their argument relies on general introductory sections of the statute, not the powers and duties of FHFA as a conservator. Statutory interpretation 101 is that more specific sections trump general introductory sections. General sections have “no power to give what the text of the statute takes away” (Demore v. Kim, 538 U.S. 510, 535). One would expect senior members of Congress to understand that.

Of course, if some members of Congress believe we should spend $100 billion bailing out deadbeats, then why don’t they simply offer a bill on the floors of the House and Senate doing so? I’m sure House leadership would be happy to have a vote on the issue. The notion, instead, that an unelected, un-appointed, acting agency head should, in the absence of clear authority to do so, spend $100 billion is simply offensive to our system of government. Not to mention it probably violates the Anti-Deficiency Act, and would be hence subject to criminal prosecution.

Unfortunately, one of the common themes of the financial crisis was outright unlawful behavior by the financial regulators, such as the FDIC broad guarantee of bank debt, which lacked any statutory basis. Mr. DeMarco is to be commended for staying within the letter of the law. If Congress had wanted Fannie and Freddie to bailout underwater borrowers, they could have simply written that into the statute. Congress didn’t, regardless of whatever spin any current members of Congress might want to place on the issue.

Do Forced Mortgage Writedowns Create Wealth?

Matt Yglesias recently added his voice to the long running calls for principal reductions on underwater mortgages.  His argument is that such would create additional spending.  Or as he puts it, “I think that if people in Phoenix got a principal writedown on their mortgages, they’d have more disposable income and might go to the bar more.”

What Matt, and others calling for forced principal reductions, miss, or choose to ignore, is that while a mortgage represents a liability to the borrower, it is an asset to someone else.  Matt’s logic, which I agree with here, is that an increase in one’s net wealth (via a reduction in one’s liabilities) should increase one’s consumption.  To complete the analysis, however, we must extend that same logic to the holders of the asset, so that a reduction in the value of their asset (the mortgage) should reduce their spending.  Taking x from A and giving x to B is not going to increase A+B.  To assert otherwise is to engage in Enron-style social accounting.

Now if you want to argue that the borrower has a higher marginal propensity to consume than the investor (say, a retiree living off a pension) then provide some support for that position.  It is just as likely that those on the losing end will take efforts to protect themselves from this loss, decreasing overall social wealth.  So what one has to show is that the marginal propensity to consume for the borrower is so much larger than that for the investor that it offsets any costs from the investor trying to protect his investment from theft.

Now if you simply favor redistribution of wealth for its own sake, just say so.  If you hate investors and love defaulting borrowers, then just say so.  Personally, I don’t believe the role of government should be to take from A to give to B.  I just ask that we stop pretending, in the absence of compelling evidence, that redistribution of wealth is the same as wealth creation.

Do We Need China to Fund Our Mortgage Market?

Earlier this week I repeatedly heard the claim that if the federal government does not guarantee credit risk in the mortgage market, foreigners won’t buy U.S. mortgage-related debt.  Before we test whether that claim is true, let’s first determine just how important are foreign investors in the U.S. mortgage market.

For the most part, foreign investors do not hold U.S. mortgages directly, but either hold Fannie and Freddie debt and mortgage-backed securities (MBS) or hold private-label MBS.  As the private-label securities lack a government guarantee, we can ignore that segment of the market.  The chart below depicts the percentage share of foreign ownership of these securities in recent years:

The chart illustrates that, at times (particularly around the peak of the recent housing bubble), foreign investors have been large providers of capital to the GSEs.  In 2007, over 20% of GSE debt was held outside the United States, double the percentage from only a few years earlier.  The increase was driven almost exclusively by purchases by foreign governments (mostly central banks for the purpose of currency manipulation).  In 2007, this amounted to just over $1.5 trillion. 

However, if we went back and looked at a year prior to the super-heated housing market — say 2003 — then this total is about $650 billion.  Given that U.S. commercial banks now have about $1 trillion in cash sitting on their balance sheets, it appears that domestic sources could completely fund the U.S. mortgage market without any foreign funds.

But let’s say we want to keep the option of living beyond our means and have the rest of the world fund a large part of our mortgage market.  Would they?  Given that foreign investors currently hold over $5.4 trillion in U.S. corporate bonds and equities (not all guaranteed by the U.S. taxpayer), I think it’s fair to assume that these foreign investors have some appetite for U.S.  assets. 

Now does that mean foreigners would buy the debt of massively leveraged, mismanaged mortgage companies subject to constant political-cronyism, without some guarantee?  Probably not.  But then, it strikes me that a better way to attract foreign investment into the U.S. mortgage market is to deal with those issues, rather than paper over those problems with a taxpayer-funded guarantee. 

It is also worth noting that when we most needed foreign support for the U.S. mortgage market, in 2008, foreign investors were dumping Fannie and Freddie debt in significant amounts.  And obviously I think we’d prefer that the Chinese Central Bank stop using the purchase of Fannie and Freddie debt to depress the value of their own currency.

Are Mortgages Cheaper in the U.S.?

As Congress and the White House continue to debate the future of Fannie Mae and Freddie Mac, one of the oft heard concerns is that if we eliminate all the various mortgage subsidies in our system, then the cost of a mortgage will increase.  There certainly is a basic logic to that concern.  After all, why have subsidies if they don’t lower the price of the subsidized good.  Of course some, if not all, of said subsidy could be eaten up by the providers/producers of that good.

All this begs the question, with all the subsidies we have for mortgage finance, are mortgages actually cheaper in the U.S.?  While not perfect, one way of answering that question is to look at mortgage rates in other countries.   Although every developed country has some sort of government intervention in their mortgage market, almost all have considerably less support then that provided by the U.S.  (For a useful comparison of international differences see Michael Lea’s paper).

The European Mortgage Federation regularly collects information on mortgage pricing by EU countries.   The latest complete annual data from the EMF’s Hypostat database is for 2009, with at least a decade of historical data.

A quick glance reveals that mortgage rates in most European countries are not all that different than rates in the U.S.  For instance in 2009, the U.S. 30 year mortgage rate was, on average, 5.04; whereas mortgages in France averaged 4.6 and those in Germany averaged 4.29.  In the UK, the average was 4.34.

Part of this difference is driven by product type.  For instance, in France, most mortgages tend to be 15 year, which one would expect to be cheaper than a 30 year.  But the French 15 year rate of 4.6 isn’t all that different from the current U.S. 15 year rate of 4.1.  As lending rates are usually bench-marked off the rate on government debt, part of the slightly higher rate in some European countries is due to their higher government borrowing rate.  If we instead measure mortgage costs as a spread over government funding costs (as reported by the OECD), then many European countries look more affordable than the U.S.  For instance, German mortgages price about 100 basis points over long-term German govt debt; whereas U.S. mortgages price about 140 basis points over long-term U.S. government debt.

I don’t expect these numbers to settle the debate.  A variety of other costs, such as points paid or required downpayments, differ dramatically across countries.  Unfortunately that data does not seem to be readily available.  What the preceding comparison does suggest, however, is that even without Fannie and Freddie, U.S. mortgage rates aren’t necessarily going to be a lot higher.

Is Buying a House with Cash Bad?

The Washington Post reported today that the increase in January home sales was driven mainly by an increase in all-cash sales.  Whereas I would have thought increasing sales, especially driven by cash buyers, was a sign of market strength; the Post and the National Association of Realtors portrayed this as a bad thing.  NAR chief economist Lawrence Yun went so far as to call this portion of the market “unhealthy.”

Of course, what NAR and the rest of the real estate lobby were complaining about was that home sales and prices were not being driven by easy credit.  For the housing industry, it would seem that the “correct” house price is the price that is propped up by loose credit. 

Yun goes on to say that ”investors are taking the advantage of conditions to purchase undervalued homes.”  I used to work with Yun, he’s a smart guy, but I don’t think anyone is smart enough to say that the homes being sold are ”undervalued.”  Consider that most non-industry forecasters are projecting further price declines.

More cash sales actually means less future foreclosures, because the cash buyers start out with 100% equity from day one.  They are very unlikely to walk away, regardless of the future path of prices.  Cash buyers also pay prices that are closer to reflecting the fundamentals of supply and demand, which are ultimately driven by income and demographics. 

What the high percentage of cash borrowers, at 37 percent, says to me, is that there is a significant demand for housing that isn’t dependent upon massive taxpayer subsidies to the mortgage industry.

White House Right to Oppose Moratorium

With the recent discovery of “robo-signers” and other paperwork problems in the mortgage foreclosure process, several prominent congressional Democrats have called for a national moratorium on mortgage foreclosures.  At least one large lender has already started to implement one.  A moratorium, however, would be irresponsible and harmful. And the White House is correct to oppose it.

Whatever mistakes might have been made by lenders do not change the basic fact: most foreclosures are happening because the borrower is not paying the mortgage.  I recently talked to one large lender who said of their delinquent mortgages that over a fourth have not made a payment in over two years.  How exactly is someone who has been getting two years of free rent a victim?

Of course, in the small number of cases where a real mistake has been made and a foreclosure is moving forward against a borrower who is current on their mortgage, the courts have the ability to stop that from proceeding.  In judicial foreclosure states the easiest solution to this problem is for the judge to ask the borrower, “When was the last payment you made?”  If it has been awhile, say over six months, then the foreclosure should proceed, and proceed quickly.

Its been four years since the housing market peaked.  Government policy has continued to delay the needed correction in our housing market.  A moratorium on foreclosures only puts off a turnaround in the housing market.  And if we ever expect or hope to see private capital come back into the mortgage market, then government needs to stop threatening to steal away that capital once it’s invested.  The current efforts by states to use technical mistakes by lenders to allow borrowers to remain in homes without paying could ultimately undermine the very concept of a mortgage: that it is a loan secured by property.  Instead, we risk seeing mortgages turned into another form of unsecured lending, which would raise interest rates for everyone.

Obama Proposes Further Delay on Fannie & Freddie

President Obama seems to be slowly waking up to the fact that the American public has grown tired of the endless bailout of Fannie Mae and Freddie Mac.  The public has also rejected the talking point that Fannie and Freddie were simply victims of a 100 year storm in the housing market.  So what’s Obama’s response?  To ask for public comment and have public forums.

This strategy is clearly one of delaying and avoiding any reform of Fannie and Freddie while pretending to care about the issue.  Where was the public comment and forums on the Volcker rule?  Seemingly the standard is that fixing the real causes of the financial crisis should be delayed and debated while efforts like the Dodd bill, which do nothing to avoid future financial crises, should be rushed without debate or comment.

Even more disingenious is couching reform of Fannie and Freddie under the rubic of “fixing mortgage finance”.  This is no more than an attempt to take the focus away from Fannie and Freddie and shift it to “abusive lending” and other non-causes of the crisis.

This isn’t rocket science.  The role of Fannie and Freddie in the financial crisis is well understood.  The only thing missing is the willingness of Obama and Congress to stand up to the special interests and protect the taxpayer against future bailouts.

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