Posted: 17 Feb 2011 02:29 AM PST
The GSEs have strayed from their original mission, and now they are being used to support bloated house prices. They should be dissolved and their function turned over to private lenders.
Irvine Home Address ... 2 GLENOAKS Irvine, CA 92618
Should the government provide loan guarantees to subsidize home ownership? The arguments in favor of government subsidies all come down to putting people into homes they cannot afford in a free market. The theory is that homeowners care more for their properties and community and are less likely to cause social unrest. There is no real evidence to support this idea, but expanding home ownership has been the cornerstone of government policy since before the Great Depression. The arguments against are summarized below.
By ANTHONY RANDAZZO From the Reason Foundation -- February 9, 2011
This simple truth is inescapable, yet proponents deny this fact.
When people believe they have no risk, they behave in foolish ways. Why wouldn't people take out a $600,000 loan to speculate on real estate if they have no money in the deal. Its like getting the free spin or free bet at a Las Vegas casino.
It was private loan guarantees known as credit default swaps that caused so much money to flow into real estate and inflate The Great Housing Bubble.
Actually, the FHA has proven remarkably resistant to lowering its lending standards prior to the collapse of the bubble. The FHA has been around long enough to be a subprime lender -- a role it has been forced into since 2008.
Guarantees ensure more capital enters the housing market, but the secondary mortgage market is evolved enough now to exist without the GSEs to facilitate them.
Canada has no counterpart to the GSEs, they have no home mortgage interest deduction, and they have a higher home ownership rate than the United States. They either have better borrowers or better government policy.
This is the problem at the core of all loan insurance.
There is no guarantee the private sector could not provide assuming the risk can be quantified and valued.
Guarantees are not necessary to prevent a downward spiral in home prices because without guarantees, house prices would never become so elevated above fundamental valuations to cause worry about a downward spiral. The current downward spiral in real estate prices has required loan guarantees because prices were so elevated that the repricing of risk would have cut prices in half if not for the guarantees.
The FHA experience argues against this last point, but going forward, if we don't do something with the GSEs, reckless behavior will almost certainly take over because the government is backing all the losses. We know what we must do.
Treasury wants the company phased out but punts on how to do it.
FEBRUARY 14, 2011
This is a Wall Street Journal editorial, so the right-wing political posturing pervades the article. However, their point is true: it took a complete catastrophe for politicians to admit failure.
Under the Administration's proposals, Fan and Fred wind down over five to seven years. The two mortgage giants would, in effect, gradually price themselves out of the mortgage finance market by raising guarantee prices and down payment requirements, while lowering the size of the mortgages they could securitize and guarantee. This sounds like a plausible set of first steps to lure private capital back into the mortgage market, where some 92% of all new mortgages are currently underwritten or guaranteed by the government.
That is an excellent idea for phasing out these monsters. If you take away their margins, competitors will slowly emerge and take up the slack.
The political right must be ecstatic. They are getting everything they have every wanted with housing. Those two paragraphs from a government report summarize the situation better than I can.
Amen. Just as affordability products make prices unaffordable, subsidies create the market need for future supports and subsidies.
Can the GSEs Exist Outside of Government Conservatorship? No. they can't. If they try to keep it around, it will become a political Hydra. Each time we cut off its head, two more will grow in its place.
The conservatives are right on this issue. The GSEs need to be dismantled. The FHA can stay in its current form and continue to provide the emergency backstop market protection it always has. The GSEs are redundant, and their current form of private ownership with public guarantees on the losses is dangerous.
Walking away from $400,000
Today's featured property is not for sale. It is a recent closing in Oak Creek that sold at a loss of about $180,000 after commissions. At first glance this doesn't seem like a big loss, but when you factor in the $200,000 or more this owner spent on upgrades, this house turned into a money pit.
With current financing conditions, this property would cost about $3,500 per month to own. Would it rent for that? If I could afford it, I would pay $3,500 a month to live there. I wouild be delighted to show a deal like this and say I bought it. (I didn't.) Those buyers are as happy as anyone can be that just paid $815,000 for a beautiful tract home in a nice but somewhat noisy neighborhood. I could see spending many happy hours in that pool. I love this house. Isn't the three-car garage cool?
This is perhaps the nicest property I have seen transact at a price I thought was at rental parity.
Irvine Home Address ... 2 GLENOAKS Irvine, CA 92618
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