Trump Treasury Pick Wants To Privatize Fannie, Freddie

[timd354]

If interest rates are kept low, no investor will want to buy mbs and there will not have to be a bailout.

You don't seem to understand that private investors (including the big banks, public and private pension funds, etc) are buying mbs, it is just that they are buying mbs issued by Fannie and Freddie. The reason that private investors buy these GSE issued mbs at such low interest rates is because of the implicit government guarantee. Without a government guarantee (which puts taxpayes on the hook if another bubble pops), these investors are not going to buy mbs that yield such low rates...no implicit government guarantee = more risk and investors will require a higher yield due to that increased risk.

 

[hastalavista]

While this article is slightly dated, the issues impeding growth of private label RMBS still remain

http://www.sifma.org/blog/us-private-label-mbs-market-2015/

In order to obtain the suggested goal of reducing and/or eliminating the GSEs, these issues need to be addressed

The PDF attached to the article, which is a letter SIFMA submitted to Treasury, is a bit more detail, but the article summarizes the big points.

IMO, all of the challenges identified in the article do not require a Herculean effort to resolve except: (a) the policy risk (an ever-changing regulatory environment); (b) uncertainty with how contracts are enforced and who is liable (the letter indicates it will take litigation to settle that)- this includes what should be standard legal proceedings such as foreclosures (is there something "new" in the foreclosure law universe? That process has been around for a long time and should have a small element of uncertainty); and (c) what I would call second-tier jurisdictions who may make claims by way of eminent domain on mortgages (such as municipalities claiming the right to take mortgages as part of their public policy objectives).

The remainder are transparency issues and the assurance that stronger underwriting standards are maintained.

The letter also notes PLS industry can do nothing by itself to change the favorable position that the GSEs have...

...the private market cannot remove the advantages conferred on government programs such as FHA/Ginnie Mae or the GSEs through the presence of a guarantee, favorable capital treatment, and so on.

(my emphasis)
and the letter then summarizes...

The government sponsored side of the mortgage market grew during the crisis, due both to the retreat of private capital and a literal expansion of its footprint through increased loan limits. Other securitization asset classes are not competing against government funding (except student loans), and do not face this competition from government pricing advantages.

(my emphasis)

So if the private label industry is to expand into the space where the GSEs now dominate, the GSE advantage is going to have to be addressed (which I think is the reason behind the idea of privatizing it).

I spoke to Howard off-forum and he raised what I think is the real elephant in the room: The assurance of liquidity in the mortgage market. Right now, the GSEs are the agency for liquidity and the FED is the bank that makes sure there is a market if all other buyers sit-it-out.
It seems a bit of a chicken-or-egg problem: The PLS market isn't large enough or consists of enough certainty in the rules to grow, and without a larger PLS market, it cannot provide the liquidity that the GSEs do.

 

[djd09]

Should the government be in business and compete with private entities? That is a thorny question.

It is not thorny. It is not in the constitution. So it is unconstitutional.

 

[TRESinc]

It is not thorny. It is not in the constitution. So it is unconstitutional.

like normal your post is asinine.

 

[Eli]

The PDF attached to the article, which is a letter SIFMA submitted to Treasury, is a bit more detail, but the article summarizes the big points.

IMO, all of the challenges identified in the article do not require a Herculean effort to resolve except: (a) the policy risk (an ever-changing regulatory environment); (b) uncertainty with how contracts are enforced and who is liable (the letter indicates it will take litigation to settle that)- this includes what should be standard legal proceedings such as foreclosures (is there something "new" in the foreclosure law universe? That process has been around for a long time and should have a small element of uncertainty); and (c) what I would call second-tier jurisdictions who may make claims by way of eminent domain on mortgages (such as municipalities claiming the right to take mortgages as part of their public policy objectives).

The remainder are transparency issues and the assurance that stronger underwriting standards are maintained.

The letter also notes PLS industry can do nothing by itself to change the favorable position that the GSEs have...
(my emphasis)
and the letter then summarizes...
(my emphasis)

So if the private label industry is to expand into the space where the GSEs now dominate, the GSE advantage is going to have to be addressed (which I think is the reason behind the idea of privatizing it).

I spoke to Howard off-forum and he raised what I think is the real elephant in the room: The assurance of liquidity in the mortgage market. Right now, the GSEs are the agency for liquidity and the FED is the bank that makes sure there is a market if all other buyers sit-it-out.
It seems a bit of a chicken-or-egg problem: The PLS market isn't large enough or consists of enough certainty in the rules to grow, and without a larger PLS market, it cannot provide the liquidity that the GSEs do.

In essence privatization would say you are on your own. If the TBTF would not have been bailed out, we still would have recovered.

They were not too big for the US to fail. Imo, it would have taken longer but some really weak links would have been gone because they would have been bought out.

Imo, the govt needs to own Fannie . They bought them. They should own them.

 

[djd09]

Oh, and while the King was looking down, the Jester stole his Thorny Crown.

 

[Gregory Beck]

A significant increase in mortgage interest rates often correlates to a significant decrease in RE values.

In the past I have not seen it that way house prices were rising fixed rates were at 16% Everyone took adjustable rates. Back then you could buy house for $35,000.

 

[J Grant]

In the past I have not seen it that way house prices were rising fixed rates were at 16% Everyone took adjustable rates. Back then you could buy house for $35,000.

Then that's your answer. Back then you could buy a house for 35k, so an adjustable rate, which still would not have been great being that the fixed was 16%, made sense. Now housing prices are high in many areas, which means they would take a huge hit downward unless interest rates are kept low ( imo low means under 5%).

I predict deregulation will usher in a new (old) suite of predatory lending practices..aka teaser rates, adjustable with balloons, loosening of credit, all the good/bad stuff we had before to make it possible for people to buy more house than they can afford and/or buy properties at all, and invite in flipping on a rising tide of price. We saw where it led to before as eventually the higher adjusted rate kicks in and suddenly the house is not affordable , and there comes a point where there is no more price appreciation and owners are underwater. Rents are drawn from the real world of cash and income, not financed, so rents get capped while carrying costs rise, meaning owning the property as an investment results in a negative cash flow. In the last crash, investors were the first to start selling off properties and it will be the same in the next one.

 

[Michael S]

By implicitly (or explicitly) back Fannie and Freddie the government has pushed down yields on mortgage backed securities which in turn has made it possible for homebuyers to borrow money at lower interest rates. The majority of homebuyers are looking at how much house they can afford on a 30-year fixed rate mortgage with whatever down payment they may have. For first time home buyers this will probably be relatively small at 5-10% while for people selling an existing home they may be able to put 50% down.

If we assume an average house costs $200,000 and can be purchased with 10% down on a 30-year fixed mortgage at 4.25% we get a monthly payment of $885.49. Say another $250/month for taxes and insurance and you’re at $1,135 per month which means you would typically need a monthly income of just over $4,000 (@ 28% of gross income), or $48,000 per year. Pretty typical for most Americans.

Now if we re-run that same scenario and change the interest rate up to 6.0% the payment becomes $1,079.19, or $1,329 with taxes and insurance which increases the annual income requirement to almost $57,000. Many people will still be able to afford that but some won’t. Eventually sellers are going to run out of willing buyers who can afford a house with the increased borrowing costs. They’ll be forced to either wait longer to sell their home to someone who has some equity from a previous sale, or maybe who takes out an adjustable rate mortgage so they can squeak into a house they can’t really afford, or lower the price.

At that same monthly payment from the first example you would need to decrease the amount borrowed from $180,000 to $147,693 to keep the payment the same from a 4.25% interest rate to a 6.0% interest rate. Assuming the same $20,000 down that would imply a home price of $167,692.

I don’t think home prices will fall that dramatically when interest rates rise, either because of the Fed or true privatization of the MBS market. However, it should lower home prices in the long run and for most people that would be a good thing. Who doesn’t like cheaper stuff?

 

[djd09]

I predict

I hope this not like an Al Goracle prediction. The earth is melting. lol