Fannie Mae and Freddie Mac will create a common platform for issuing mortgage-backed securities as they wind down operations and plan for a future in which the two companies no longer exist, their regulator said today.
I must have been absent the day they announced that Edward J. DeMarco was going to settle the fate of the housing finance system going forward. Not that I have a problem with it. I just thought that the Administration was more interested in kicking the can down the road.
By the way, my online course on the American housing finance system is proceeding. We will try a live video chat this Friday at 1 PM eastern time.
Meanwhile, Michael Barr reports on the recommendations of a group called The Bipartisan Policy Center’s Housing Commission. The recommendations include,
The 30-year fixed rate mortgage is an important option for American families. American homeowners are not the best bearers of interest-rate risk in our economy. To have a robust and liquid market for such mortgages for most households, there needs to be a government guarantee.
I disagree with this, and with nearly everything else in this group’s recommendations. So I Googled to see who they were. They represent all sides of the issue, if by all sides you mean left-wingers and housing industry lobbyists. My guess is that these folks representing all sides of the issue will not make life easy for Mr. DeMarco.
In other news, Peter J. Wallison and Edward J. Pinto write,
Despite the claim that it is “protecting consumers from irresponsible mortgage lenders,” the new Qualified Mortgage rule finalized in January by the Consumer Financial Protection Bureau turns out to be simply another and more direct way for the government to keep mortgage underwriting standards low.
Sounds like the Qualified Mortgage rule was shaped by the folks representing all sides of the issue.
The only appeal of the 30-year mortgage is the monthly payments. Otherwise, it strikes me as a loser for both the lender and the debtor. The lender faces the risk of collecting low rates on mortgages while paying out high rates on savings. That’s what started the S&L crisis. As a result, the lender’s best option is getting the mortgages off the books, which many (including Dr. Kling) view as a main cause of the latest financial crisis. For the debtor, they are locked into a long-term financial commitment.
Correct me if I’m wrong, but as a practical matter, I believe that mortgage borrowers are only “locked into a long-term financial commitment” if their loan document includes a prepayment penalty provision. If it doesn’t, then the only drawback to the 30-year for the borrower is that the interest is typically front-loaded and if he pays it off in the early years he’s paid down very little on the principal. OTOH, with no prepayment penalty, the borrower can ratchet down the loan rate by refinancing, while the lender has no such option, which means the lender must build interest-rate risk into his initial loan terms.
I wonder what rates would look like if mortgages were written for, say, a 10 year initial term, renewable for two additional terms of 10 years each, with some reasonable cap (up AND down) on rate adjustment…..
The interest rate can be reduced, but the principal remains static. That has been one of the issues during this downturn. Even if your paying a lower rate, you still owe the same principal even if the underlying asset has dropped in price by 25 percent or more. Part of the problem is a fairly modern belief that a house in an appreciating asset.
I am a Canadian who lived and bought a house in the US before returning to Canada. Here, I have a 5-year floating rate deal with a bank. (Could have gotten 5-yr fixed.) You cannot get longer-term rates than 5 yrs, and I don’t see anyone around us pulling out their hair. Required down payments are higher than in the US, but still probably too low. We are planning on 15 years to pay off the principal. It seems the maximum (if you want to get CMHC insurance) is 25 yrs, although some people have arranged 30- or even 40-yr deals with banks. I believe Canadian authorities are trying to discourage anything above 25 yrs but I am not an expert in the matter.
http://www.cbc.ca/news/business/story/2012/06/21/flaherty-mortgage-cmhc.html
I have thought for a long time that the Canadian mortgage system is better than ours.
Thanks for noticing the makeup of this Bipartisan Housing Commission — the retired head of Trammell Crow developers and the head of La Raza!
That’s the same high-low coalition against the middle that got us into the last mess, but nobody except you and me ever noticed.