July 01, 2013
That’s what readers of its editorial on reforming Fannie Mae and Freddie Mac learned today. This is quite literally what the paper said in its partial endorsement of a complex hybrid proposal for a new system of guarantees for mortgage backed securities proposed by Senators Mark Warner and Bob Corker, describing the plan as “an obvious bow to political reality.”
It’s touching that the Post feels the need to bow to the financial industry’s power rather than pushing for more economically efficient systems of mortgage finance. We know that the government can efficiently create a secondary mortgage market as it did with the original Fannie Mae. This was a government owned company that bought and held mortgages.
There were no mortgage backed securities, just mortgages. Why add complexity to the system? If the government is guaranteeing the mortgage it is already on the line for the credit risk involved. Packaging the mortgages into securities allows the government to pass off interest rate risk, but if there is any entity in the world that can bear interest rate risk (i.e. that higher interest rates will reduce the market price of mortgages) it is the federal government, which has no problem holding mortgages until maturity.
But if this route, or simply keeping Fannie and Freddie in their current form as essentially government-owned companies, is off limits, why not just leave it to the private sector. The WAPO warns of less liquidity in the mortgage market and the precarious existence of the 30-year mortgage.
In reference to the first complaint, so what? Why is it an important public policy goal to make it possible for banks to be able to quickly sell 30-year mortgages? If the mortgage market was somewhat less liquid, then that would raise their price somewhat.
This brings us to the second point, that 30-year mortgages have long survived in markets without government support, specifically the jumbo mortgage market. These mortgages are too large to be purchased by Fannie or Freddie. They have typically carried interest rates that are 0.25-0.75 percentage points higher than on the conforming mortgages that Fannie and Freddie can purchase. As an alternative to creating a whole new financial network to lower mortgage rates modestly (by comparison, they have risen by more than a full percentage point in the last three months), why not just make the mortgage deduction more generous for moderate and middle income homeowners?
There also is the other isssue of what’s so great about 30-year mortgages? Presumably the goal of housing policy is make homeownership more affordable, not to promote 30-year mortgages. As Alan Greenspan famously advertised back in 2003, when interest rates on 30-year fixed rate mortgages were near a then 50-year low (thereby helping to foster the boom in exotic adjustable rate mortgages), most homebuyers end up as losers by getting 30-year fixed rate mortgages. They would be better off getting adjustable rate mortgages. This is especially true of people who stay in their home for shorter periods of time, who are likely to be more moderate income homeowners.
So in other words, the Post wants us to bow to political reality to create a whole new system of mortgage guarantees with the idea that we will make it easier for millions of moderate and middle income home-buyers to take out 30-year mortgages that will end up being a waste of money. Apparently it is much easier for a major national newspaper to beat up tens of millions of seniors and current workers and call for cuts to Social Security and Medicare than to throw a little common sense in the face of the financial industry.
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