Peter J. Wallison and Edward J. Pinto write,
The Trump administration has finally turned its attention to housing policy. Unfortunately, the president’s Memorandum on Housing Finance Reform, issued last week, is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.
Friday’s WSJ reported that Mark Calabria has been confirmed as head of the Federal Housing Finance Administration. It will be interesting to see what he does.
In my opinion, what he ought to do is the following:
1. Coordinate the credit policy and marketing policy of Freddie Mac, Fannie Mae, and FHA. As it stands now, they are dealing with the same mortgage lenders on somewhat different terms. That situation is ripe for gaming by the mortgage lenders.
2. Get the government out of the business of subsidizing mortgage loans that do not contribute to saving through equity buildup in a primary residence. Stop guaranteeing loans for income properties and for second homes. Stop guaranteeing loans for second mortgages, home equity lines of credit, or cash-out refinances. Stop guaranteeing loans with negative amortization.
3. After that, it might be desirable to gradually reduce the agencies’ presence in mortgage markets. The most straightforward way to do this would be to slowly bring down the maximum size of a mortgage eligible for guarantees by agencies. But this really ought to be done through Congress.
I was under the impression that negative amortization loans very rarely have guarantees post crisis:
“Pursuant to the Enterprises’ seller/servicer requirements on ARM purchases after 2007 only a small fraction of ARMs purchased by the Enterprises during the review period contained nontraditional features. For example, roughly 0.1% ($95 million) were negative amortizing ARMs.6 Less than 0.1% ($62 million) were interest-only ARMs, all acquired by Fannie Mae from January to July 31, 2014.7 Our review of loan files found that the credit quality of ARMs purchased by the Enterprises during the review period was stronger than those of all single-family mortgages purchased by the Enterprises during the same period. For example, the loan files showed borrowers of ARMs purchased by the Enterprises during this period had higher down paymentsand higher credit scores.”
Federal Housing Finance Agency Office of Inspector General, Fannie Mae and Freddie Mac Purchases of Adjustable-Rate Mortgages
My guess is home finance is a bit like the Fed raising rates. The Party in power does not like to the right thing because he would slightly slow down the economy and make things slightly harder for average American. (Given Trump’s reaction to the Fed choices and submitting TV personalities, Moore & Cain, this is beyond obvious.)
1) I do tend agree that it might be wise the housing agency agencies be combined to avoid lenders learning to work the system. (I still find it completely ironic that FHA had one of the cleanest balance sheets in December 2008 and needed minimal bailouts unlike most large institutions.)
2) After consolidation, I wish they would be broken up in 12 pieces for the private markets. I am sure they will consolidate at some point like the railroads, airlines and banks, but might as well start each one smaller.
3) My guess this does slow down home ownership and long term family formation though.
4) I do find the mortgage market long term a bit like a prisoner’s dilemma. In which the bank can make the most money by buying the worst mortgages but it is really bad if they compete on loan quality. (Which is still my belief what happened during the 2000s that the banks competed on loan quality and all went bad.)
A smart administration would try to use the home finance policy changes by Kling as a countercyclical policy in conjunction with an unofficial policy of lobbying the Fed to slow down rate increases while the changes work their way through the system.
Um…This is:
1) Not long term administration. They have submitted two talking heads for the Fed this year. Moore is a bad choice but Herman Cain, basically a talk radio huckster. The good Professor here is much better choice than those two choices.
2) It will be a tough reelection next year one way or another. I think incumbents in good economies almost always win but this is not Reagan 84/Clinton 96 election.
Can you really get government guarantees for negative amortization loan? Oh lawd!
I really wish the 30 year mortgage didn’t exist. If you can’t afford a 15 year, you shouldn’t be paying that much for a house. If someone buys a house when they have small children it should be paid off by the time they are 18.
The trouble is it’s really hard to shift the equilibrium. If people use a “monthly payment we can afford” to bid up houses, then transitioning from 30 to 15 year mortgages at the same interest rates would cause a collapse in prices.
So, at 4%, if one can afford $2K a month in P&I, the price vs term is:
30 years: 420K
15 years: 270K: a decrease of 36%.
In other contexts, a country limiting access to credit markets so that yields for approved capital participants were higher would be called “credit repression” and it would be associated with undeveloped economies.
Maybe we should require property to be purchased with cash after getting a charter from the local magistrate.
Prices would come down to accommodate the new 15 year bidding power and everything would be more affordable. Thirty years are little more than a scam to drive prices higher so that we can compete in a zero sum game for who will in-debt oneself more. Nobody wins but the incumbent landowner.
The US has arguable been a real estate growth Ponzi scheme from the start. Just think of how the government used land in the Northwest Territories to payoff soldiers from the revolutionary war, or how Andrew Jackson and his cronies used Indian removal to grant themselves land in the southeast and then flip it for a profit. Then there is Texas and the Great Plains, and more recently, Southern California.
People live longer and work longer than they used to, so it’s not unusual that people are going more into debt earlier on, since they can spread the costs over a longer timeframe. There may also be also plenty of places in the US where the price/rent ratio is low enough that a 30 year mortgage is cheaper than paying rent.
There are many places in the world without the 30 year, or with far lower usage.
If a mortgage allows the spreading of construction costs over a long period of working life, then the increase in purchasing power of the 30 year can be a signal to the market to construct more housing.
However, construction costs are not the limiting factor in housing today. Most modern construction costs could be paid off with 15 years of earnings. The limiting factor in housing today is land, and the 30 year simply allows someone to place a higher bid for the same fixed amount of land. This increases the price of the land, making the incumbent landowner wealthier, but doesn’t produce any new housing. So buyers go into more debt to facilitate a zero sum gain for the incumbent owner.
The irony is that the new, central Big Magistrate is orders of magnitude more involved in details of real estate credit issuance and allocation than the local magistrate ever was.
So much so that I don’t think we even have a good idea what a free market-based financial equilibrium would put us in terms of prices, typical mortgage terms, and the degree of scrutiny and qualifications necessary to obtain access to these large loans.
The housing bubble was associated with a sharp increase in private deregulated lending. That would be strange if the market was being pumped up with the public mortgage conduits.
Two or three times through a government induced housing reversal and we should learn to keep a ‘government induced housing reversal’ hedge account in our home buying habits. Our friends and neighbors would be telling us, ‘Watch out, housing will suddenly drop in price’.
The International Monetary Fund says that US property prices are bloated, due to large and chronic foreign capital inflows borne of large and chronic trade deficits, usually with dirigiste economies.
A Hyman Minsky moment awaits.
US policy makers can make that moment happen—just pull out the rug dudes, just pull out the rug.
It would be a better fix to make the whole house payment a 30% tax credit, up to some median based maximum each year.
And whether equal credit, or rich-helping interest deduction, there should be a lifetime limit on how much private loans for housing can be used for tax reduction. Something like 10 * median prior year’s wage, which only slowly goes up with the median wage.
With interest, but not principal, deductible, there’s a big incentive to always borrow the maximum, so as to maximize the interest deductible.