The 30-year fixed rate mortgage should be retired — for good. Despite continued proof that it fails to build up wealth for the most disadvantaged Americans, and that mortgage debt should not be a burden as homeowners approach their 50s and 60s, misguided advocates maintain that the 30-year fixed rate mortgage should be at the core of the U.S. housing finance system.
I have been telling friends that the tragedy of this year’s election is that in my opinion this is a time when we need to change course in many ways, and the Trump phenomenon reduces the probability of that happening. One example is housing finance policy, where Democrats are always looking for an excuse for government to intervene, and I think any reasonable evaluation of history would say that it would be better to go in the opposite direction.
I am willing to claim that the whole financial crisis of 2008 could have been prevented with just one innocuous reform: take away any government subsidies for investor loans.
Subsequent research has confirmed that in the regions with the most pronounced price cycles, significant shares of home purchases were by non-owner-occupants. Their mortgages were eligible for purchase by Freddie and Fannie. They were eligible to receive favorable capital treatment when packaged into securities that were rated as safe by rating agencies.
Investor loans do nothing to promote the goal of home ownership. They are riskier than loans to owner-occupants. Why did regulators allow Freddie and Fannie to buy them, and why did they allow them to be eligible for favorable capital treatment? Probably because the powerful mortgage lobby was at work behind the scenes.
Speaking of the mortgage lobby, Pinto is probably correct that we do not need the 30-year fixed-rate mortgage. Canada does fine without it. But don’t hold your breath waiting for any reform that might be guided by his point of view. That is one example of what the Trumplosion of the Republican Party has made impossible.
Just as form fillers made up whatever income amounts were necessary to justify loans, they also made up they were owner occupants for the best rates, and since loans must be granted in order to purchase, who is to say it wasn’t? And since owner to investor is only a move away, it is pointless.
Canada does do fine, but it also requires other laws to make this work like guaranteed renewal that I don’t hear advocates making. We also have a perfectly good example where this wasn’t a problem, Texas. Why is the real estate industry so powerless there?
Texas is growing so I’d look at land, owner occupancy, and the economy. I think Texas has a steady economy so job losses would be low. If you bid up real estate someone doesn’t have to go far to get a cheaper price, making it quite unlike San Francisco in that respect. And who is going to invest in non-owner occupied homes in Texas under those and all the other circumstances?!
‘Trumplosion’ is funny. But I’m pretty confused about what the logic of that argument might be. It seems to be a stretch to me.
It is just that Trump is sure to lose, and cause huge GOP losses across the board, and so the power base for reform-sympathetic politicians will evaporate?
I don’t think that makes much sense. When the GOP was at the very peak of their power they showed zero inclination to actually tighten up these standards; quite the contrary (e.g. here’s Bush in 2002). I also see zero sign that they have had an epiphany, learning experience, of sincere change of heart since the financial crisis.
Or perhaps something about Trump, his real-estate background and/or lack of Cruz-like steadfast commitment to conservative ideological principles will change the GOP median position on such matters. But again, their revealed preferences on these matters can hardly be distinguished from that of the Democrats except when it comes to touchy racial subjects.
So why not go with the null hypothesis that the GOP is simply bought and paid for by the various housing lobbies, was never going to enact any of these reforms, and the ‘Trumplosion’ doesn’t make a bit of difference?
People forget that Fannie Mae had big accounting problems in early 2000s and the Republicans were actually pushing for reforms but were stopped by Barney Frank. Here are the hearings in 2004 when Republicans called for some sensible reforms of housing market finance. This is the moment that Barney Frank will never live down.
http://hotair.com/archives/2008/09/29/video-democrats-insist-nothing-wrong-at-fannie-mae-freddie-mac-in-2004/
Geez.
Amazing that the words of a House Rep in the minority party with a sitting President from the opposite party had such power.
Course, anyone with any knowledge of how the legislative branch knows that such a Rep has absolutely no power to do anything at all.
But is sure sounds good to those without any knowledge at all.
The GOP simply see housing booms and busts as money making opportunities so no, they aren’t going to do anything that might stop them. If anything they would like to see them larger. A sucker born every minute is too good to pass up.
This does illustrate the problem of a Trump win. He would be dealing with the same hacks as usual so how will he change anything?
Agreed. If one were to agree with Arnold’s analysis of the 30 year mortgage, how would one vote? Doesn’t seem like a priority for either party.
You’d have to be the kind of person who gave a fuck about random strangers operating in a less efficient housing market enough to overcome institutional inertia and special interests to make this change. Does the current Republican party strike anyone as being described that way?
At best you could describe them as pharisees on issues like this. Whatever hand wringing over doctrine pharisees go through, they don’t really care enough to change their actions.
It is a Trumplosion, but remember that a not insignificant motivator of Trump supporters are tired of Republican political theater in front of the public and rapacious extraction behind the curtain.
Is the theory that with the status quo the wonks could make progress behind the scenes?
Btw, the commenter on the previous post suggested Pinto was intellectually inconsistent.
But I think one can argue that not enough is being done to help port owner occupants even if and possibly because of subsidies to investors and financialization driven price increases (see healthcare for example).
But, you had better make such an argument very carefully.
Port = poor, not “to the left”
What’s funny is if someone on the left proposes to help the poor with pecuniary externalities, everybody knows their goal isn’t for general prices to rise and further price people out.
If someone on the right does it, well obviously they are hypocritical corrupt schemes in the pocket of Wall Street.
No, I did not say Pinto was “intellectually inconsistent”( I said Wallison was). What I said about Pinto was that his cherry picked and mislabeled data was wrong; he knew it was wrong; and he(evidently) still knows it is wrong.
Any serious discussion of the US mortgage market should not include anything that Pinto or Wallison say. Besides being driven totally by ideology, they are snakes:
“3. For additional fun, the fact that we now know that Wallison leaked the critique of Pinto’s work creates an important timeline. From Leonard Architect:
“I get this memo criticizing Pinto’s data — what was I supposed to do?” [Wallison] told Huffington Post. “Pinto should be the one to respond to criticism of his data.”
Pinto got the opportunity, but he offered no response. He delivered three additional memos, here, here, and here. But he never responded to core criticism in the FCIC staff memo, which identified the fatal flaw in Pinto’s misguided labeling scheme.
From the oversight report, we know that Wallison leaked the FCIC memo to Pinto so he could address the arguments between August 9th and August 14th, 2010. The three additional memos Pinto submitted to the FCIC linked in the Architect piece above were draft date August 14th, October 10th, and November 4th, 2010. And evidently they didn’t address the argument at all.”
https://rortybomb.wordpress.com/2011/07/15/three-additional-points-on-the-gses-aei-and-fcic-report/
You sure keep bringing them up.
Fannie and Freddie came late to the party, but they came, they came big because they are big. Luckily for them, shortly after they came was the crash. So, they get to almost plausibly claim they didnt start the fire. But I would not be as interested in percentages as I would be in sums.
With an implicit bailout and lower capital costs you can cherry pick the best credit risks and eat the alpha gap, but that doesn’t really mean anything necessarily. Not anything good.
And they came late to the party(and less than 30%) not because of any government housing policy, but for the usual reason, money.
They had lost 40% of market share during the bubble, and this was how they dealt with it. I would never say the GSEs were innocent, but they were not directed by government policy. IMHO, Mudd at Fannie should have been indicted for his lack of due diligence.
Meanwhile, the bailout of the GSEs certainly helped them(while saving our mortgage market) bit it also saved the investment banks, all of whom had committed fraud in the reps and warranties on the loans they sold to the GSEs. That is plainly shown in the FCIC report.
oops, less than 40% Sorry.
Amazing that Pinto’s extensive research(sic) never mentions:
“There is no data anywhere to cast doubt on the vastly superior loan performance of the GSEs. Year after year, decade after decade, before, during and after the housing crash, GSE loan performance has consistently been two-to-six times better than that of any other segment of the market. The numbers are irrefutable, and they show that the entire case against GSE underwriting standards, and their role in the financial crisis, is based on social stereotyping, smoke and mirrors, and little else.
Consider Fannie Mae’s historical loan performance, reported each year by the Federal Housing Finance Agency in its Annual Report to Congress. Over a span of 37 years, from 1971 through 2007, Fannie’s average annual loss rate on its mortgage book was about four basis points. Losses were disproportionately worse during the crisis years, 2008 through 2011, when Fannie’s average annual loss rate was 52 basis points. Freddie Mac’s results are comparable.
By way of contrast, during the 1991–2007 period, commercial banks’ average annual loss rate on single family mortgages was about 15 basis points. During the 2008-2011 period, annual losses were 184 basis points.
Or check out the FHFA study that compares, on an apples-to-apples basis, GSEs loan originations with those for private label securitizations. The study segments loans four ways, by ARMs-versus-fixed-rate, as well as by vintage, by FICO score and by loan-to-value ratio. In almost every one of 1800 different comparisons covering years 2001 through 2008, GSE loan performance was exponentially better. On average, GSE fixed-rate loans performed four times better, and GSE ARMs performed five times better.
Mortgage analyst Laurie Goodman estimated that private label securitizations issued during 2005-2007 incurred a loss rate of 24%, whereas the GSE loss rate for 2005-2007 vintage loans was closer to 4%.”
http://www.americanbanker.com/bankthink/gse-critics-ignore-loan-performance-1059187-1.html
And strangely enough there was strong federal government intervention that was a major reason for the housing bubble. But it somehow is never mentioned. Probably because it was the federal government removing state government from banking regulation.
Course this was done when the Reps held the legislature and the presidency, and the OCC forbid state governments from regulating national banks. The Supreme Court agreed with the OCC, and now the big boys got into the market in a big way and the rest was history.
Somehow we get speeches from a powerless congressman as a reason for a problem yet ignore facts like this. Powerful bubble you got there.
http://www.forbes.com/2007/04/17/scotus-banks-wachovia-biz-wallst-cx_lm_0417scotus.html
Owner-occupant only getting the tax break/ subsidy is a good start.
I’d prefer to change from interest deduction to flat 30% credit on house payment, with a lifetime maximum (of 10 x median taxpayer income ~50k now, so $500k, as well as an annual limit of that same median $50k income).
It was the desire to maximize the tax deduction that helped drive normal folk into the equity loan market — use it or lose it – lower cost money.
It’s actually pretty great for society when most 50+ year old folk own their own homes; but this means at least 51% of equity is theirs, not the unpaid balance.
Whether it’s 10, 15, 20, or 30 year loans is far less important than the other policies around debt, interest, and owner-occupancy.
IMHO Still making car payments after 35 = bad. Still making home payments after 45 = bad