What Will Happen with Fannie & Freddie?
Though this topic has been put through the wringer many times, I am still not satisfied with the results.
Two government sponsored entities, which have de facto defaulted and gone bankrupt already...own ~97% of the mortgages in the U.S. outright.
One of my favorite econ profs in the country, Laurence Kotlikoff suggests a three step fix to the mortgage crisis.
The Federal Housing Finance Agency places Freddie and Fannie's losses at $300 million though industry experts point to a real figure of $700 million. Add in that many are expecting another 20% drop in prices, figure losses could wind up at a nice round billion.
Luckily, with a budget deficit hovering at the $14,000,000,000,000 mark, what's a billion?
I'd like to get some input on Kotlikoff's plan.
Is he just another economiser playing Monday Morning Quarterback? Or...does the man have a point?
Kotlikoff's Three Steps
1) Establish a new government agency which will hire only contractors to verify, rate, appraise and disclose mortgage applications. Liar loans and no-doc loans would end.
2) Limit buyers of home loans to doing so only through closed-end mortgage mutual funds, this way mortgage defaults can never again lead to financial sector collapse.
3) Establish an electronic mortgage auction and require mutual funds to purchase loans at this market so borrowers receive the best price (lowest interest rate).
...
I'm speechless, really...how simple is this?
Anyone care to explain why this course of action hasn't been taken?
Even better...why the status quo remains?
Make no mistake about it boys, the economy will stay in the shitter until the housing mess is resolved.
We can talk about other issues all we want...but this 800 lb gorilla ain't gettin' a parachute bonus...it ain't goin' away.
A wave of defaults could trigger redemptions in the mortgage mutual funds, leaving them with a ton of securities they need to unload but no one to unload to if the redemptions were sector-wide, resulting in a cash crunch. But I guess there isn't this issue with current closed-end bond funds so I'm not sure how much of an issue this is.
Maybe I missed it as I was skimming the article, but there isn't a mention of government backing of the loans. The current situation has a lot to do with those mortgages having the implied full faith and credit of the US treasury. If you remove that and the government is simply functioning as the auction block there are a couple problems:
(1) While the government is not going to endorse the ratings they presumably will design at least the categories and at most the decision science behind them, what will that look like?
(2) Will jumbo type mortgages not get screened through the new system?
(3) How will the uncertainty that comes with a brand new system effect housing prices, mortgage rates and will those changes fundamentally alter demand for home ownership of the existing housing stock?
I fully believe that the US government needs to get out of the housing business and the notion that home ownership is an integral part of the American dream. The above issues however I think need to be thought through before any major change can be made to essentially liquidate Fannie and Freddie.
As a side note, these jokers are desperate for guys with consumer credit risk experience but the uncertainty is so high nobody is biting. Not sure they ever had "talent," but they sure as hell aren't getting it now.
I like the plan, but it is a very far cry from the current system and you can bet the financial industry will heavily lobby against something that would curtail securitization possibilities, regardless of how destructive those opportunities have proved to be. If firms currently holding loans are forced to shift them into closed-ended funds, who's going to buy these things until the market actually rebounds? It's a solid idea but more pain will have to work through the current system before it's actually politically feasible and attractive to would-be investors.
Government should get out of the home ownership business. Owning a home as te American dream is propaganda. People should live closer to cities and urban environments. This allows for mass transportation, flexibilty of work, and less time wasted commuting. Renting is much more flexible and forgiving if you have to move for work, etc.
All I can think about is all the people in Detroit who should be relocating to places with a growth potential, but don't because of houses they cannot sell.
I just came back from London and that is a fine example of effective mass transport. The other problem with urban sprawl is oil prices having a greater impact on transport costs.
Future cities should be judged on the effectiveness of their mass transit systems
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