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Home Publications Blogs Beat the Press President Obama Comes Out for Subsidizing Mortgage Backed Securities

President Obama Comes Out for Subsidizing Mortgage Backed Securities

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Tuesday, 06 August 2013 04:51

President Obama is going to announce a plan whose main goal appears to be subsidizing mortgage backed securities. Unfortunately the readers of the Washington Post article on the piece probably would not realize this fact.

The article simply repeats the Obama administration's assertion that government backing is needed for 30-year mortgages to exist, which it asserted are the backbone of home ownership.

"Traveling to Phoenix on Tuesday, Obama is planning to call for a new system, built in part on government backing, that will enable wide access to 30-year mortgages, which are a rarity in other countries. That will require, officials said, some form of government guarantee that means lenders will be reimbursed by taxpayers in the event of a housing catastrophe like the one that occurred several years ago."

In fact, government backing is not necessary for 30-year mortgages, as is shown by the existence of the 30-year jumbo mortgages which are too large to be eligible for government guarantees. The interest rate on these mortgages is typically 0.25-0.50 percentage points higher than the interest rate on conforming loans that can be purchased by Fannie Mae and Freddie Mac.

So the story here is not really about the existence of 30-year mortgages, but rather the price. The program being pushed by President Obama effectively subsidizes mortgage interest rates by subsidizing mortgage backed securities. If the goal to make homeownership more affordable for moderate income people, this is an extremely inefficient way of doing so.

Under the Obama administration's proposal the vast majority of the subsidy would go to higher income homeowners since there will be a bigger subsidy for people who take out bigger mortgages. It is also not clear that a 30-year mortgage is always the best financing instrument.

Alan Greenspan famously noted that many homeowners lose money by taking a 30-year mortgage when a shorter-term mortgage would often involve lower fees. (Unfortunately he did this at a time when the housing bubble was taking off and homeowners were increasingly diving into adjustment rate mortgages, often with teaser rates.) This is especially likely to be the case for lower income homebuyers who move more frequently. In such cases, the government will be costing homeowners money by encouraging them to take out a 30-year mortgage.

It would have been appropriate to include the views of an expert who could have made these points to readers.

 

Comments (18)Add Comment
..
written by jerry, August 06, 2013 7:19
Think Bezos will have any effect on the quality of WaPo reporting??
jerry
written by pete, August 06, 2013 7:53
At last a paper not controlled by wall street. Wow. Look for increased pressure on drug legalization, less war mongering, more scrutiny of the NSA, etc. I.e., something the dems and republicans will hate. Maybe a constrained federal reserve in the offing?

Regarding subsidized mortgages, Dean is spot on. Fannie and Freddie lobbied hard and got what they wanted in less regulation, and expanded ability to lend. As the least cost lender, they beat the hell out of wall street, making rates so low that home ownership went far beyond susttainability. They didnt get all the loans, that is not the proper measure of their impact. Instead they set the price, and the lower regulations.

Home ownership was lauded by folks like Jack Kemp as an alternative to section 8 lending. Fannie and Freddie said great...but lets get the poor to buy houses they can't afford...and they got their wish. F&F bought mortgages from Countrywide etc. (they did not compete as Krugman said). They were complicit. I think it is called receiving stolen property. Get rid of them and anything like them. Bravo Dean.
Loan Limits
written by Common Sense, August 06, 2013 8:35
You say, "Under the Obama administration's proposal the vast majority of the subsidy would go to higher income homeowners since there will be a bigger subsidy for people who take out bigger mortgages."

The conforming loan limit is around $425,000. This would get you a two bedroom apartment in Queens. The subsidy may go to "higher income homeowners" in the sense that people owning a home are making more than $20K a year. But this is not a giveaway to the 1%.

I would appreciate your addressing who exactly this homeowner subsidy helps.
"higher income", not 1%
written by Dennis, August 06, 2013 9:25
@Common Sense, Dean said "higher income", not the 1% you are putting in his mouth. Most certainly, the vast majority of the subsidy goes to the top 20%.

However, I am not really persuaded by Dean's argument about Jumbo mortgages. The fact that banks are willing to make 30 year loans to the well-off without federal subsidy implies nothing about their willingness to do so to lower income people.
no subsidy for $425,000 house...please....
written by pete, August 06, 2013 9:38
This is insanity. That should be an income of like $150,000 a year. I doubt that is the median income in New York. Way too high to need scarce housing assistance resources. Prefer those $$ spent at the lower end for sure. Just like education. The subsidy drives up the cost. Remove the subsidy for the fat cats, certainly take away the interest deduction for something of that size, and watch the market adjust. Help the bottom 20% before helping the 20-80%... There are people on the street for god sake.
quick comments
written by Dean, August 06, 2013 9:59
Pete,
Fannie and Freddie contributed to the bubble for which I criticized them at the time (unlike the right, which complained about them being too tight with loans), but the worst loans were securitized by Goldman, Citigroup and the other Wall Stree banks, not F&F.

Common Sense,
a $500k home puts you in the top 25 percent or so of homes even in the NY area -- nationally it would be around the top 5 percent. so yes, these are higher income people.

Dennis,

Banks are willing to make 30-year jumbo loans because they are profitable. Is there some reason that we would think a $500k loan is profitable but a $200k loan isn't?
...
written by freebird, August 06, 2013 10:37
If the goal to make homeownership more affordable for moderate income people, this is an extremely inefficient way of doing so.

I have to ask what do you think would be the best way to accomplish this? Would it be aiming for a smoothly inverted yield curve based on mortgage size? Or by changes on the income tax deductability side? Or do you think that the goal itself is misplaced? If your group has already published a paper on this topic, a link would be greatly appreciated.
500K vs. 200K loans
written by Dennis, August 06, 2013 12:06
Dean, I assume that default rates rise as you go lower on the income scale, so loans to poorer people are riskier? Perhaps I am wrong about that, though.

If it is true, then rates to poorer people would have to be higher to compensate (not to mention, fixed costs of servicing the loans are a bigger percentage of the smaller loan.)

Higher rates will mean fewer can afford to buy. But I understand your point: should the government be interfering in the market in a way that allows more low income people to buy than would otherwise be able to?

I don't know the answer to that; but it IS part of the American Dream (tm).
...
written by urban legend, August 06, 2013 1:35
I don't see jumbo mortgages as having any predictive value for mortgages for people struggling to decide whether they can afford a home three times or less of their annual incomes. Same with how the housing market operates in other countries. We have a complex structure that without major crisis until 2007-2008 has served a host of functions and values. It collapsed in those years due to causes that had nothing to do with government encouragement and support of 30-year mortgages but instead was driven by Republican government interference with the states' enforcement of their anti-fraud laws and bipartisan deregulation of the banking industry. We should think very carefully before applying major surgery to a complex system, and certainly should not do it applying inappropriate comparisons.
for fun
written by Peter K., August 06, 2013 2:27
Bezos should hire Mr. Baker and run his commentary alongside Will's and Samuelson's columns.
...
written by Kat, August 06, 2013 3:11
The WaPo story is a model of clarity compared to this one. It leads you to believe that the government won't be providing any subsidies.
http://www.nytimes.com/2013/08...c.html?hp

...
written by Kat, August 06, 2013 3:17
...
written by skeptonomist, August 06, 2013 3:41
The fact that 30-year jumbo mortgages are available to rich buyers certainly does not guarantee that 30-year mortgages, or indeed any kind of mortgages, would continue to be available to low-income buyers without government support. Actually some kind of direct support is far better for helping low-income people than the tax deduction, which benefits high-income people.

I agree with Dean that several aspects of the proposal look fishy, and the 30-year mortgage itself is not necessarily something that has to be preserved. But cutting off federal support for low-income housing while retaining the tax deduction would be a step in the wrong direction, making housing policy regressive.

Of course it should be asked whether home ownership has reached a natural limit, given the real financial constraints on lower-income people - 50-60 years ago their prospects for increasing income were much better. The home ownership rate is much higher now (65%) than it was before WW II (45%).

As far as preventing bubbles is concerned, reregulating banks and bringing them under control is more important than subsidies. The MBS market went wild because of financial malfeasance and CDS's, not government subsidies, which had been around since the 30's.
Peter K...
written by pete, August 06, 2013 6:25
more likely Nick Gillespi to be editor....a strong voice against over reaching government and against the dems and repbulicans embrace of crony capitalism
too tight with loans...fannie
written by pete, August 06, 2013 7:45
Fannie lobbied inner city congresspeople strongly, to support loosening the standards. Early 2000s there were calls to reign them in, but the likes of their buddies Frankendodd and Shumer fended off these attempts. They committed accounting fraud. Any other investment bank with their humongous leverage would have been paying much higher interest rates. As it was, their securitized loans did not even need to be registered with the SEC. If they were a horse they would be shot.

Think of what the Chinese would have done to the heads of Bare Sterns, or Lehmann, or Fannie and Freddie or Countrywide or wamu. We would never here of these guys again. Instead, they enjoyed the demopublican defense, and Obushma protected them as well. Sigh. Get the government out of the housing industry. Support the needy, indeed, not rich new yorkers buying $450,000 homes.
Obama warns against bubble after prices rise 66 percent?!!?
written by JayR, August 06, 2013 10:16
"...The housing market in Phoenix, as well as in many other parts of the country, has rebounded robustly, with prices in the southwestern city up 66 percent from the low point in 2011...." Source is azstarnet.com
Bammys has lost it
written by Jim, August 07, 2013 2:03
"Let’s put construction workers back to work repairing rundown homes and tearing down vacant properties"
Vacancies in AZ are half a percent above 99 levels. Construction jobs are 25k below 99 levels, but up 10 percent yoy. He cited housing stats earlier in his speech that painted a optimistic picture on the AZ housing market. So that equates to almost 1% of the az workforce. What other sectors are still down? Manufacturing and government. Obama promised us 1 million new jobs there and we have lost 14k. Maybe the strong dollar is to blame but we have added a whopping 330k (500k)non supervisory manufacturing jobs in....4 years! This is why I don't get this whole manufacturing renaissance that even has Krugman in a tizzy.

In regards to the more privatization Obama opined for in the housing market, why not give the shareholders back Fannie and Freddie. Why inject capital into banks, leave them as too big too fail and then let shareholders make a boatload? It's a total crock that the government chooses autos and banks but says no to Detroit or giving the GSEs back to private owners. First off, what he is suggesting would require a rewrite of Basel 3 because the banks are the only ones that could fill the vacuum and they have already sold off their servicing rights to the likes of Walter and Owens corning. Next, the taxpayers never bore a real potential for risk. It's the same nonsense of people suggesting central banks could go bankrupt. Fannie and Freddie took a bunch of paper losses on goodwill and threw a bucket of money into reserves that was never used. They are hugely profitable institutions that will return all of the 180 billion and God knows how much more if this stupid 2012 treasury amendment isn't struck down(fat chance). As a democrat, it's tough to be supportive of Obama. As a progressive, it's embarrassing how contradictory his decisions are on topics like suppressing the rights of the press, yet supporting gay marriage. This is once again picking winners and losers, yes more social rights but we will be listening to your calls. Obamacare is far from perfect, but is the most memorable part of his legacy, bar none.
Barney Frank was a minority of member of the House until 2007
written by Dean, August 08, 2013 3:32
Pete,

you're welcome to hate Barney Frank as much as you want, but anything that blames him for bad loans from Fannie and Freddie doesn't pass the laugh test. The Republicans controlled the House until January 2007. You have as much ability to influence F&F policy as a minority member of the House.
As a I said, the numbers are very clear, the worst actors were the Wall Street banks. The securitized the garbage F&F wouldn't touch. F&F were wreckless in not seeing the bubble, but the Rs controlled both houses of Congress and the WH in these years, so you have to go deep into unreality land to somehow blame Frank and the Dems.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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