Government Guarantees and Mortgage Loans
http://thedianerehmshow.org/shows/2010-08-17/government-guarantees-and-mortgage-loans
Economists, mortgage industry executives and government officials are meeting today to discuss the future of Fannie Mae and Freddie Mac. Diane and guests explore the debate over the government's role in the U.S. housing market.
Guests
Douglas Holtz-Eakin
chief economist, director, Congressional Budget Office from 2003 to 2006, and senior domestic policy adviser to the McCain Campaign and a member of the Financial Crisis Inquiry Commission.
Linda Couch
senior vice president for policy,
National Low Income Housing Coalition
Sarah Rosen Wartell
executive vice president, Center for American Progress
Comments
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As young marrieds, (1960s) we rented an apt. for many years, even after starting our family. It never occurred to us that the government OWED us a house! We worked hard, saved enough for a reasonable down payment, and then bought our very modest 1st house -- the old fashioned way, with banks offering rates determined by the market. We were making only average salary.
A housing bubble was never created UNTIL the gov. (Barney frank etc.) said poor people deserve a house -- courtesy of the government!!!
Then, the whole economy got distorted (unrealistically gov. mandated low interested rates), and we now reap the results.
I wonder if you take/took your home mortgage interest write-off every year. Guess who put that into place-The Government!! So, those of you who think that you're not getting anything from the government think again. The government doesn't give folks the money to pay for the house, they guarantee the mortgages.
The bubble wouldn't have happened if over all the presidencies of the past 2 decades they didn't keep eating away at the laws. And if folks would stop being greedy at all costs. Guess what all those banks and investment banks get - tax breaks.
So stop blaming the poor, they are not the ones writing the laws, nor do they benefit that much.
How did the lenders lose sight of the ability to pay to change toward getting people to take a particular type of loan and then give them the closing cost?
They knew that they were handing people a time bomb, while the realtor was there saying that they could get their home with a smaller payment.
How often where people diverted from standard mortgages into these loans?
How will the incentive system be reoriented toward a long term view?
In the early 1970's I worked as a mortgage closer. We closed a lot of mortgages for first time buyers who had no down payments and whose closing costs were bundled into the mortgage amount. (FHA 234) These buyers had to have squeaky clean credit credit and low income. Their payments, including taxes and insurance, were limited to 25% of their income. Those payments were reviewed on a regular basis and adjusted as their incomes increased. There were very few foreclosures.
During that same period of time, the Department of Agriculture had a program for those who were buying in small towns or rural areas. Again, there was no down payment, but buyers had to pay closing costs of $ 500. If the property needed repairs, the sale price was reduced by the amount of the repairs. As in the first instance, buyers had to have clean credit histories.
Mortgagees who purchased homes on these programs had to live in those homes. If they moved out, they had to sell the property or foreclosure would result. This was in the mortgage documents and was carefully explained to each mortgagee.
Would not a return to these programs help to solve the housing crisis in affordable housing?
Could you please ask your guest how he balances the fact that private label mortgages were twice as likely to default as the GSE-backed mortgages as well as his claim that the private market will take care of the mortgage market in the face of the fact that the private market was heavily in the mortgage market right up until we pumped hundreds of billions into those private banks and, since then, the private market has not stepped up. Imagine the economy the past two years without the 97% of mortgages that Fannie and Freddie underwrote. His argument is exactly contrary to facts.
Sorry my last comment was incomplete and should be discarded.
The relationship between the price of a home and household income has skyrocketed in the past 60 years. This change has been permitted by changing the rules from 50% down payment to around zero % down payment. the effect is to create artificial prices of homes.
Sorry my last comment was incomplete and should be discarded.
The relationship between the price of a home and household income has skyrocketed in the past 60 years. This change has been permitted by changing the rules from 50% down payment to around zero % down payment. the effect is to create artificial prices of homes.
Please discuss what we can do to keep housing prices more realistic. Worse, our system is going around the world.
The phrase "business model" troubles me when it's used as a kind of gold standard for successful programs.
I think we need a competing -- and cooperating -- team consisting of both "business model" and "social value model" for just about any enterprise I can think of in America, not least of which would be housing and minimum wages.
One without the other is destructive.
Interesting caller that associated the Great Depression with 1907. I love callers who blame everything on Dems like Clinton while ignoring the role of Repub. Phil Gramm in passing disastrous legislation on this subject.
Since the 1930s, there has not been a strictly "free" or "private" market for housing. The era's refomrs (FHLLB, HOLC, FHA, FNMA, and later the VA) made the government a major force in the so-called private housing market. These programs actively subsidized homeownership (and, by the way, restricted it mostly to white people AND promoted segregation until the 1970s and beyond).
Another revolution occured in the 70s and 80s--a dramatic de-regulation of the market, coupled, ironically, with a new committment to equal opportunity in housing. During this era, a far riskier market was created--again with federal help--that led, eventually, to the current bubbles (and that helps explain why lower-income and minority borrowers have a less secure foothold in housing wealth).
But the main point: it is not possible to "go back" to an era of "private market" housing, unless you want to return to the era of 50% down, etc. I'm not saying that the post-1930 market was the right solution (indeed it created a lot of harm), but we need to acknowledge that the public-private alliance has shaped both wealth and poverty in housing markets for 80 years.
It seemed disgustingly easy for the program guests -- who undoubtedly own their homes -- to relegate numbers of their fellow citizens to a lifetime of rental housing. I find that abhorrent. It is not only an American value to own your own home, but it (generally) produces stability both in families, neighborhoods, communities, and the country as a whole. Why must we discard this bedrock American value because of mismanagement by private and pseudo-private entities? Perhaps it mean smaller homes, or more condos rather than houses, but why throw the home ownership baby out with the market mismanagement bathwater?
Really Great show today Diane. The American Dream should be afforded for all. The truth is there are many who break their back working low paying jobs while there are those making a lot that don’t do much. Does Holtz-Eakin suggest those who work hard only deserve to rent, while those with the fortune of better jobs, only deserve the higher subsidies? I surely hope he is wrong about November for that projection will erode what our country was built on. If you take away the dream to own a house, why would anyone want to break their back for someone else to benefit from their labors? Those with position need to have more respect for ALL of their fellow citizens, or maybe go live in a low income rental themselves. Again, there are many who work very hard and can’t afford a house, because trickle down is actually suck it all up, and that is abuse.
In the caller's defense, the US had a series of banking and financial services crises in the late 1800's and early 1900's finally culminating in the Great Depression. In this case he is likely referring to the panic of 1907 which resulted in a ton of reform, including the creation of the Federal Reserve.
The arguement that college is too expensive is, by and large, a straw man. Private colleges may be very expensive, but there are other options. A student can complete the first two years of a college education at a community college, and often get a better experience than at a 4-year public university. The classes generally are smaller, and they are taught by people whose primary focus is teaching, so the teaching tends to be better.
Students too often choose to attend a private institution that causes them to go into debt for reasons that have nothing to do with education. It's a foolish choice, but we need to remember that it is a choice they made.
On your program, you and your guests were surprisingly unfamiliar with Bucket Shop laws referenced by a caller (who was abruptly cut off). I would have been interested in hearing an answer to his question about the effect of their repeal by the Commodities Futures Modernization Act of 2000, and the resulting growth of credit default swaps and other financial derivatives. This was a good question that was simply dismissed. Disappointing...
Concerning bucket shops:
http://en.wikipedia.org/wiki/Bucket_shop_(stock_market)
Government loan guarantees are only a minor part of the story. The real weakness in housing is the mismatch between the type of housing buyers want and what has been getting built. We have acres of vacant luxury houses and condos, generally in far-flung new developments, while low-income buyers can't find smaller properties that they can afford. In theory the prices of all these units would adjust to what buyers could afford to pay, with developers of luxury homes taking a bath for misjudging the market and building too extravagantly. In practice, low-income homeowners can't buy those places because they can't afford the commuting or maintenance costs for far-flung, extravagant properties.
To the extent that government loan guarantees falsely allow buyers to meet the inflated sticker prices of those places, they're part of the problem, although private mortgage peddlers who sold unwitting buyers loans they couldn't afford created a much larger share of the problem and deserve much more of the blame. If government really wants to help struggling potential homebuyers, a much better way would be to create the kind of development patterns and infrastructure (smaller lots served by public transportation) that works best for low-income households.
As a 20 year commercial lender and a current 2 term board member of a CDFI, I was very interested in you show today. One personal observation that I believe has been missed about the sub prime collapse is that the sub prime product was an attempt, again my personal belief, to lease a home to people under the "scenario" of a mortgage and the false belief of home ownership and the "American Dream". When I was in high school and my father worked in Berlin, Germany, he asked me to look around downtown Berlin. He said " People live in apartment here-they don't own their own homes" I believe that with globalization and the reduction in incomes, cash flow and net worths of 80-90% of Americans (Concentration of wealth-statistical abstract of the U.S)) that people will no longer be owning their homes they will be leasing via either a direct lease or a disquised lease like the sub prime loans were-no hopes of home ownership.
On the professional level, the CDFI's have the nations lowest commercial loan default rates and many are using 40 year amortizations on their tax credit apartments. Standard commercial lending is prohibited from doing 40 year amortizations-a possible contributor to bank failures and economic collapse-I wonder?
Too bad the show didn't bring in any free market libertarian guests (Tom Woods, Peter Schiff) to offer some balance. Instead, all I heard was support for more interference and distortion of the housing market. Government intervention in the housing market is pushing prices artificially high - out of reach of the same low income Americans these well-intentioned guests want to help.
The best way to make American housing affordable is to eliminate all of the subsidies, tax breaks and government backing of mortgages. I happen to be a renter, and these subsidies are being paid out of my pocket.