Loan Modification

Feds rethink policies that encourage home ownership

By Implode-Explode Heavy Industries

A really good piece, in the vein of Meg McArdle, analyzing from a high-level perspective our country's housing policies (which contain significant pro-homeownership and pro-debtor bias, yet have faded almost entirely into the background of our collective consciousness) -

Until now, government policy has been lopsided in favor of putting people into houses of their own. The Congressional Budget Office reports that government subsidies for homeownership, including the mortgage interest deduction, reached $230 billion last year. That compares with $60 billion in tax breaks and federal spending programs supporting the rental market.

However we would do well to see quotes like this absent or properly debunked:

Freddie and Fannie, with their government backing, allowed the proliferation of 30-year, fixed-rate mortgages ? a product that lenders would otherwise shun. Reason: Long-term, fixed-rate loans struggle in any interest rate scenario. If rates rise, banks are squeezed, because their revenue remains fixed even though they have to pay more for deposits and other funding. If rates fall, homeowners refinance. "No rational market participant is going to bear that risk," Date says.

That is complete, scurrilous nonsense. The truth is, with any financial product, the question is at what price the risk is worth it. In the case of 30-year-fixed mortgages, the price for a "typical" middle-class credit risk provided by the private sector might be more like 8%, than today's standard rates nearly half that (with a smorgasbord of government backing).

What Date really means to say is "no one will extend these loans at an artificially-low price". Of course, that's an absurd observation on its face, so no one making this argument says it out loud.

Now, we know we will hear counter-arguments to the effect that the 30-year-fixed mortgage did not exist historically without government backing. This argument misses two important points: (1) the government doesn't make the risk go away just by subsidizing it; indeed, it usually provides for the under-estimation of risk, and then socializes the larger-than-expected costs, and (2) we now have a very robust non-bank financial sector (including private equity and hedge funds) that would be more than happy to make these loans for the right price (indeed, many are already stepping into the fray, to buy distressed debt).

In fact, it isn't even provable that we need the GSEs or FHA simply to have 30-year-fixed mortgages anymore, especially with the subsequent advent of securitization and other financial tools to deal with mass quantities of consumer loans more abstractly than in the "bad old days" (yet without TOO much abstraction, e.g., in "CDO-squareds").

At any rate, this is a key, important set of issues, and whether our society can solve them meaningfully will say a lot about the viability of our economic regime in the next few decades. This is comparable in importance to, e.g., entitlements reform. So give the full article a read! We'll close with some quotes from the article pointing out that excessively-high home ownership rates actually have economic detractors:

Full post as published by Mortgage Lender Implode-o-Meter on August 13, 2010 (boomark / email).