Could the Agencies actually privatize?

[alebrewer]

So when the GSEs function as the dominant players in the secondary market and they're not allowed to fail that enables them to do things in their policies that they wouldn't be so quick to do if it was their own cash on the line.

Not only does it 'allow' them to be less risk averse, but affordable housing is actually one of F&F's goals. Per FHFA, the agencies are explicitly required to purchase a certain percentage of loans to: (1) low income families, (2) very low income families, and (3) families in low income areas. If they didn't have the safety net, they would not purchase loans made to this segment of the population - at least not with the favorable terms that are offered today.

I think Fannie and Freddie can proceed without the crutch of the favorable terms.

Of course they can, but they no longer would be willing to make those kinds of loans. AND, should that repository for those loans dry up, that would most likely create a glut of housing (as effective demand would now have been diminished), resulting in another significant downturn in the economy, plummeting home values, etc. Not saying that I'm opposed to the agencies privatizing - just be prepared for the unintended consequences...

 

[alebrewer]

but chastises the Fed for even considering rate increases.

How does the FED change rates? By changing the money supply. And how do they do that? By purchasing or selling securities from member banks. And why do they do that? Myriad reasons, but one of which is to offset inflation - which is currently at ~ 2.3% +/-. Why would they raise rates when inflation is so low?

 

[Mr Rex]

When do you raise rates? When the economy will absorb it.

 

[George Hatch]

Not only does it 'allow' them to be less risk averse, but affordable housing is actually one of F&F's goals. Per FHFA, the agencies are explicitly required to purchase a certain percentage of loans to: (1) low income families, (2) very low income families, and (3) families in low income areas. If they didn't have the safety net, they would not purchase loans made to this segment of the population - at least not with the favorable terms that are offered today.

As I see it, those are the proper roles for the FHA financing programs. Not commerce. We have fair housing and fair lending programs in place so that borrowers get treated fairly and equally. Moreover, if we are going to provide the entitlement on the basis of income we shouldn't be extending it to everyone without regard for their income - that defeats the stated purpose of the social entitlement.

And yes, allowing the mortgage interest rates to float at the market rate without having to compete directly with the govt or its pet GSE probably will detract from the equity positions of everyone who financed under the subsidized terms. Because that's who will actually "pay" the price of a market-based mtg interest rate. IRL most homeowners buy the payment, not the price, so when the costs of funds floats at the market rate that will have the corresponding effect on the price. Borrowers who profited off the unearned entitlement will simply lose those proceeds.

Meanwhile, we have taxpayers who are buyers being subsidized by taxpayers who are renters. That makes for another a moral hazard besides the TBTF problem we have with the big box banks and the GSEs.

 

[alebrewer]

When do you raise rates? When the economy will absorb it.

But why then? Just because the economy 'can' absorb higher rates, doesn't mean it's prudent to do so... remember that means that borrowing is now more expensive, now there's a stronger dollar (which isn't necessarily a good thing), and it could result in liquidity issues in the corporate world. Not saying I'm opposed to rate hikes per se - just that there should be legitimate reasoning for doing so.

 

[Mr Rex]

The taxpayers are too big to fail. What a sad state of affairs and mind set of our "leaders".

 

[alebrewer]

Meanwhile, we have taxpayers who are buyers being subsidized by taxpayers who are renters.

This would be the case even if rates were at 'market' levels, would it not?

And yes - you could make the argument that affordable housing wouldn't be 'significantly' affected because there is still an outlet (FHA), but wouldn't that just be robbing Peter to pay Paul? You're just shifting the risk to FHA instead of F&F. Taxpayers are still on the hook...

 

[alebrewer]

The taxpayers are too big to fail. What a sad state of affairs and mind set of our "leaders".

I don't disagree with that AT ALL. In fact, I may now change what I had planned to have inscribed on my tombstone...

 

[George Hatch]

This entire tangent is moot because it will never happen. But the point I'm trying to drive at is the *advantage* of favorable financing that we want to extend to the poor isn't an advantage when almost everyone else also has access to the same benefit. The difference is that the cumulative costs of subsidizing 30% or more of the buyers in the presumably lower pricing ranges is less than the costs of subsidizing 90% or more of the buyers across most price ranges.

I would go so far as to say that the longer the govt intervenes in the interest rates the worse the effects will be if/when the govt withdraws from that role.

People forget that the era of a sub-7% mortgage interest rate is a relatively recent contrivance.

 

[Mr Rex]

But why then? Just because the economy 'can' absorb higher rates, doesn't mean it's prudent to do so... remember that means that borrowing is now more expensive, now there's a stronger dollar (which isn't necessarily a good thing), and it could result in liquidity issues in the corporate world. Not saying I'm opposed to rate hikes per se - just that there should be legitimate reasoning for doing so.

Are years of artificially low rates not a legitimate reason? Artificially low rates have created a non sustainable economy on the back of RE. At the first opportunity of a non RE centric economy interest rates must return to "market values". The stock market has gone off the charts but interest rates on mortgages remain artificially low. There is a disconnect that even Greenspan or Helicopter Ben could not ignore.