Title of an Economist editorial. The Economist thinks America has too much home owner ship, and that the $26 trillion dollars of US mortgages outstanding are at risk of default. $26 trillion in losses will shake the soundest bank. They admit that real estate prices have perked up. Used to be 25% of mortgages were underwater and now that is down to 10%.
The real problem in the US mortgage market is all the special favors the real estate industry (realtors, home builders, municipal boosters, appliance makers) are getting from long suffering taxpayers. It's pressure from this widespread special interest that caused Uncle to create Fannie Mae and Freddie Mac to run the secondary mortgage market. And FHA to guarantee home mortgages. And the mortgage interest deduction on federal income tax. And federal flood insurance. And a bunch of other expensive things.
A good mortgage is a very sound investment. Good means a borrower who earns enough income to carry the mortgage payments and a property with a market value greater than the amount of the mortgage. Preferably a borrower who is married, which gives him that much more incentive to avoid foreclosure. It's hard to explain to the spouse why the family is out in the street.
A bad mortgage is a default waiting the happen. The borrower doesn't earn enough to make the payments, he isn't married, he is a house flipper. The value of the property is way less than the mortgage. It's a sucker's mortgage with an escalator clause that jacks up the payments after a few months.
Only the officer who originates the loan can tell good from bad. He needs to interview the borrower, he needs to contact the borrower's employer to verify income, he needs to inspect the property to ascertain it's market value. He has to know the real estate market in his area to form a valid estimate of value. He has to be local to do all this. The officer will be deligent in his duties, if and only if, he has some skin in the game, like his bank is going to hold this mortgage to maturity. If the bank plans to dump the mortgage on the secondary mortgage market (Fannie Mae), then the officer doesn't care. In fact, he wants to process as many mortgages as he can to rake in the fees he gets from doing a mortgage. Dump it on Fannie before it defaults and all is well.
A broker on Wall St, or a banker in Germany have no idea how credit worthy any borrower is or what the value of a single family home in Kansas might be. So the secondary mortgage buyers don't really know what they are buying. Which caused Great Depression 2.0 in 2007. The sucker investors wised up to the crud they were being asked to finance and refused to buy any more of it.
The real answer to the problem is to shut down the secondary mortgage market. We could do this with a simple law that declares a mortgage non transferable. The borrower is only obligated to make payments to the guy who originated his mortgage. He can stop payments, and keep his house, if the mortgage is sold to anyone.
Showing posts with label Fannie Mae. Show all posts
Showing posts with label Fannie Mae. Show all posts
Saturday, August 20, 2016
Monday, February 29, 2016
Uncle wants to revive Mortgage Backed Securities.
Mortgage backed securities used to be a $ trillion dollar a year market, up until 2007 that is. Since 2007 nobody will touch them. The Journal shows a bar graph of sales over the years and zero sales in any year after 2007.
Many people think that mortgage backed securities caused Great Depression 2.0 In the go-go real estate bubble back in the aughts, banks and mortgage lenders needed more money to do mortgages with. Someone had the bright idea of creating a security, essentially a company IOU, which was "backed" by mortgages held by the bank. These IOU's were sold to gullible investors, by promises of high yield, and the proceeds used to write more mortgages. Trouble was, the "backing" didn't mean anything, the IOU holders did not get the right to repossess the properties when the borrowers stopped paying. And when the borrowers stopped paying, the investors stopped getting paid too. Investors wised up in 2007 and no more mortgage backed securities have been sold.
So banks can do mortgages using their own money, of which they never have enough, or by getting FHA or Fanny Mae or Freddy Mac or VA to put up the money. But, these government agencies, still suffering huge losses from 2007, all have pretty stiff rules about what kind of mortgage they will accept. Unless the borrower has a real clean credit record, no deal, no mortgage.
Now we have Monique Rollins, deputy assistant secretary in Obama's Treasury Dept saying "We do believe that a reformed asset class could responsibly broaden access for qualified buyers who are not being served today." Translation: Let's do mortgage backed securities to give the banks money to do any kind of mortgage they like." Which is what caused Great Depression 2.0. Not good. But the Obama administration is in favor.
Of course, Monique has not explained what she would do to get investors to touch the new model mortgage backed securities.
I wonder what a Trump administration would do?
Many people think that mortgage backed securities caused Great Depression 2.0 In the go-go real estate bubble back in the aughts, banks and mortgage lenders needed more money to do mortgages with. Someone had the bright idea of creating a security, essentially a company IOU, which was "backed" by mortgages held by the bank. These IOU's were sold to gullible investors, by promises of high yield, and the proceeds used to write more mortgages. Trouble was, the "backing" didn't mean anything, the IOU holders did not get the right to repossess the properties when the borrowers stopped paying. And when the borrowers stopped paying, the investors stopped getting paid too. Investors wised up in 2007 and no more mortgage backed securities have been sold.
So banks can do mortgages using their own money, of which they never have enough, or by getting FHA or Fanny Mae or Freddy Mac or VA to put up the money. But, these government agencies, still suffering huge losses from 2007, all have pretty stiff rules about what kind of mortgage they will accept. Unless the borrower has a real clean credit record, no deal, no mortgage.
Now we have Monique Rollins, deputy assistant secretary in Obama's Treasury Dept saying "We do believe that a reformed asset class could responsibly broaden access for qualified buyers who are not being served today." Translation: Let's do mortgage backed securities to give the banks money to do any kind of mortgage they like." Which is what caused Great Depression 2.0. Not good. But the Obama administration is in favor.
Of course, Monique has not explained what she would do to get investors to touch the new model mortgage backed securities.
I wonder what a Trump administration would do?
Friday, November 6, 2015
No bailouts, Let 'em sink. Nobody too big to fail
Dear old Uncle Sam has gotten into the habit of bailing out big companies that get into trouble. GM, Fannie Mae, Freddie Mac, and AIG are the most flagrant examples. The usual excuse is that allowing a big boy to go belly up will scare the market, causing a lot of other big boys to croak. Causing a lot of money to be lost.
And, we passed a law, Dodd-Frank, which makes bailouts policy. Dodd-Frank sets up which companies will get bailouts, how much.
The real problem with bailouts, is they urge on crazy behavior. In no-bailout world, company management is pretty careful about the risks it runs. If they do something really risky, and it fails, the company is toast, they and everyone in the company are out of work, the investors loose everything. All around badness.
But when Uncle Sam says he will bailout companies, all bets are off. Now management can do all those crazy things, and if they fail, the company survives, they keep their jobs, and the investors are untouched (mostly). No pain. And without pain, nobody learns anything. No pain, no gain.
We ought to repeal Dodd-Frank. We ought to make it real clear world wide that we don't bail out nobody, and we need to carry thru, and actually flush some loser down the drain, just to make the point.
To run a capitalist society, which has made us all rich, you need capital. We cannot afford to flush capital down the drain doing mortgage backed securities, credit default swaps, futures trading, derivatives trading, and all those other risky gambling games they run on Wall St.
And, we passed a law, Dodd-Frank, which makes bailouts policy. Dodd-Frank sets up which companies will get bailouts, how much.
The real problem with bailouts, is they urge on crazy behavior. In no-bailout world, company management is pretty careful about the risks it runs. If they do something really risky, and it fails, the company is toast, they and everyone in the company are out of work, the investors loose everything. All around badness.
But when Uncle Sam says he will bailout companies, all bets are off. Now management can do all those crazy things, and if they fail, the company survives, they keep their jobs, and the investors are untouched (mostly). No pain. And without pain, nobody learns anything. No pain, no gain.
We ought to repeal Dodd-Frank. We ought to make it real clear world wide that we don't bail out nobody, and we need to carry thru, and actually flush some loser down the drain, just to make the point.
To run a capitalist society, which has made us all rich, you need capital. We cannot afford to flush capital down the drain doing mortgage backed securities, credit default swaps, futures trading, derivatives trading, and all those other risky gambling games they run on Wall St.
Tuesday, April 29, 2014
Get the Feds out of the Mortgage Business
The housing industry, realtors, builders, mortgage lenders, appliance makers, and others, back in Great Depression 1.0 persuaded Congress to give them a handout. They claimed a shortage of mortgage money was crimping the industry's wings, and housing was needed to provide jobs and "home ownership". And so our tax money was channeled into mortgages thru Fannie Mae. Actually, Fannie Mae made good money for many years. It borrowed at the low Federal T-bill rate because everyone believed that the US government would back up Fannie's bonds, and it loaned at the commercial mortgage rate, leaving a comfy profit margin. Fannie Mae even sold stock to private investors, with dividends paid out of the juicy profits. Fannie Mae (and its younger brother Freddie Mac) offered cushy jobs for retired politicians, and nice profits to investors.
In the 1980's Fannie got into, or started up, the "secondary mortgage market". In this deal, they would buy existing mortgages from the "primary" lenders, mostly banks. For a while this made money, but the side effects gave us Great Depression 2.0. The primary lenders found that they could make money on anything, do the mortgage, sock the buyer with hefty paperwork fees to do the deal, then sell the mortgage to Fannie. If the mortgage went bad, borrower skipped town, property wasn't worth the money in the mortgage, the primary lender didn't care. He made his money the minute Fannie bought the mortgage off him. And so the quality of the mortgages went down hill. Suddenly investors stopped loaning money to Fannie, and shortly after Great Depression 2.0 stalked the land, Fannie got taken over by the US treasury. $188 billion of your tax money was poured into Fannie to meet it's obligations.
With this sorry history, we ought to get the Federal government out of the mortgage business. There is plenty of private money to finance home buying. Remember, a mortgage is a VERY desirable deal for the lender. His loan is secured by real property, something tangible and salable. If the borrower defaults the bank gets the house. And, the borrower is highly motivated to make his payments. No spouse wants to explain to his partner why they and their children are getting pitched out into the street.
If private investors will buy US T-bills that only pay 3%, they will be happy to make an equally safe mortgage loan at 4.5%. They will be plenty of mortgage money if we give the mortgage business back to private banks. And we ought to forbid the selling of mortgages. When you make a mortgage you will own it til it's paid off. This will discourage doing mortgages that are bound to fail.
In the 1980's Fannie got into, or started up, the "secondary mortgage market". In this deal, they would buy existing mortgages from the "primary" lenders, mostly banks. For a while this made money, but the side effects gave us Great Depression 2.0. The primary lenders found that they could make money on anything, do the mortgage, sock the buyer with hefty paperwork fees to do the deal, then sell the mortgage to Fannie. If the mortgage went bad, borrower skipped town, property wasn't worth the money in the mortgage, the primary lender didn't care. He made his money the minute Fannie bought the mortgage off him. And so the quality of the mortgages went down hill. Suddenly investors stopped loaning money to Fannie, and shortly after Great Depression 2.0 stalked the land, Fannie got taken over by the US treasury. $188 billion of your tax money was poured into Fannie to meet it's obligations.
With this sorry history, we ought to get the Federal government out of the mortgage business. There is plenty of private money to finance home buying. Remember, a mortgage is a VERY desirable deal for the lender. His loan is secured by real property, something tangible and salable. If the borrower defaults the bank gets the house. And, the borrower is highly motivated to make his payments. No spouse wants to explain to his partner why they and their children are getting pitched out into the street.
If private investors will buy US T-bills that only pay 3%, they will be happy to make an equally safe mortgage loan at 4.5%. They will be plenty of mortgage money if we give the mortgage business back to private banks. And we ought to forbid the selling of mortgages. When you make a mortgage you will own it til it's paid off. This will discourage doing mortgages that are bound to fail.
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