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Home Publications Blogs Beat the Press The New York Times Has Never Heard of Jumbo Mortgages

The New York Times Has Never Heard of Jumbo Mortgages

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Saturday, 12 February 2011 08:42

That is what we should conclude from an article on the Obama administration's proposal for dismantling Fannie Mae and Freddie Mac that told readers:

"Investors also may be reluctant to provide money for 30-year fixed-rate mortgages, a product that has never existed without government support."

Jumbo mortgages are mortgages whose size exceeds the maximum allowed for them to be purchased by Fannie Mae or Freddie Mac. They have been offered by the private sector at interest rates that were usually about 25 basis point (0.25 percentage points) higher than the rates charged on mortgages that could be purchased by Fannie and Freddie. Since the crisis, this spread has increased to around 75 basis points.

The article also bizarrely frames the discussion in a context where "the country could no longer afford to sustain its commitment to minting homeowners." It is absurd to say that in the past we could afford a commitment that we will not be able to afford in the future, since we are getting richer year by year. With productivity growing at a rate of about 2.5 percent a year, the country will be generating almost 30 percent more output for each hour of work in a decade, and over 60 percent more than we produced back in 2000. If we could afford a commitment to "minting homeowners" in 2000, then surely the country could afford it in 2020.

The more obvious question is whether it is good policy. Many moderate-income people were persuaded to buy homes at the peak of the bubble, losing whatever savings they had accumulated and ending up seriously underwater in their mortgages. Also, many people in unstable work or family situations, who will not be able to stay in a home for a long period of time, have wasted large amounts of money on realty fees, closing costs, and other transactions costs as a result of buying a home. This is why people who care about giving moderate- and low-income families good housing options and the opportunity to accumulate wealth do not push homeownership but focus on rental options instead.

Also, the government did not solve the moral hazard problem associated with the public/private mix in Fannie and Freddie. These institutions ended up bankrupting themselves because they were run by executives who received Wall Street type salaries in the tens of millions a year by virtue of generating large amounts of fees. This incentive structure encouraged them to take huge risks since they had a government guarantee standing behind them.

These policy issues loom as much larger concerns than whether the government can afford a commitment to homeownership, since it so obviously can.

Comments (6)Add Comment
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written by skeptonomist, February 12, 2011 9:45
So what was the normal term of mortgages before government support? Homer and Sylla (A History of Interest Rates, pp 419-424) give rates all through the 20th century and these don't show any real change when the government programs started. The term of the mortgages is not really the issue, it is whether lenders would be willing to provide mortgages of any kind to lower-income house buyers. Is the risk associated with these buyers really an impediment to lending? Lenders fell all over each other in lending to speculators as well as lower-income buyers during the late bubble. Probably what should be learned from recent history is that private lenders are just not good at assessing risk, and this might better be done by a stodgy bureaucracy.
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written by skeptonomist, February 12, 2011 10:02
FHA, Fannie and other government programs guaranteeing mortgages have been around for a long time, but didn't cause any problems - for example after WW II when there was a huge housing boom. The obvious critical ingredient in the late bubble was the change in private credit markets, especially the advent of unregulated CDS's. Somehow Geithner, Bernanke et al don't get this, or are determined to ignore it. They make ineffectual noises about regulation, but their real response seems to be to punish the middle class.
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written by PeonInChief, February 12, 2011 12:46
There also seems to be a conscious effort to conflate Fannie/Freddie with the FHA. Low and moderate-income buyers have been buying houses with FHA loans for a long time without much grief. (In fact FHA mortgages, which were common for first-time buyers pre-bubble almost disappeared during the bubble years, as buyers were shoveled into mortgages that were more profitable for the lenders.)

But in many cases it doesn't make sense for low-and moderate-income people to buy a house at all. They end up with houses that need a lot of expensive work and don't have the capacity to raise the money to pay for it. Further they get no tax advantage from buying.

But I think economists don't take into consideration the legal disabilities that come with renting, particularly no cause eviction, as moving can cost as much as the closing costs on a house. And it's hard to plan a budget when landlords can raise the rent on a whim.
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written by MB, February 12, 2011 2:07
This is the first time I've seen it described like this:

"Many moderate-income people were persuaded to buy homes at the peak of the bubble, losing whatever savings they had accumulated and ending up seriously underwater in their mortgages. Also, many people in unstable work or family situations, who will not be able to stay in a home for a long period of time, have wasted large amounts of money on realty fees, closing costs, and other transactions costs as a result of buying a home. This is why people who care about giving moderate income and low income families good housing options and the opportunity to accumulate wealth do not push homeownership but focus on rental options instead."

That is exactly what all "this" has been about over the last few years but even the PBS pledge-break guru's do not explicitly address the role of stability in family and work situations in making important financial decisions with hidden costs. Meaning, if all an ordinary person knows about their personal economics comes from popular culture and their interactions with retail financial institutions, it is entirely possible to have no real perspective or capacity for rational self-evaluation of their own personal situations.

Elizabeth Warren's group has a new website asking for suggestions from the public but the site has tight restrictions on word counts so I found it hard to participate there. But if they collect suggestions from other parts of the web I would encourage them to build on this concept about family and job stability exactly as you phrased it here. Too many financial consumers are like yo-yo dieters who truly don't understand the proportions of calories to nutritional values. So we need good, basic, ubiquitous, sensible rules-of-thumb about priorities for personal budgeting.

For example, this book has excellent rule-of-thumb guidelines for anticipating the costs of purchasing, maintaining, and renovating a home: http://www.amazon.com/Good-Hou...851&sr=8-1

He recommends budgeting at least 1% of the purchase price annually for basic maintenance; 2 to 3% for solid maintenance and continued improvements; a minimum of 10% cash on hand to prepare the house even before moving in. That kind of thing. But that type of sensibility is really not part of popular perceptions when, for example, first-time buyers equate buying a house as a rite of passage into adulthood but have to minimize the significance of their student loans in order to get there.

Though for some it is easier to budget for household expenses than for word counts when posting blog comments. :-)
Are the incessant rightwing talking points infiltrating the NYT?
written by mikeC, February 12, 2011 4:27
Perhaps the NYT is trying hard to stay current with the new rightwing economic intelligentsia that is taking control of congress. The Paul Family group think overwhelms intelligent thought through incessant yammering.
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written by Eric Laursen, February 18, 2011 7:47
The real issue here - as far as the pubic is concerned - is that Congress and the White House have decided that the federal government should no longer provide a facility for encouraging home ownership by making moderately priced mortgages widely available to working-class people. That's a policy decision that has nothing to do with Fannie and Freddie's foibles during the housing bubble. Both Republicans and Democrats in Washington seem to have decided that the 30-year mortgage and the blue-collar home owner are no longer policy outcomes they want to encourage. The question is, are they right, and what will the impact be on working people? What will people do instead to build up wealth? Could it be that Washington would prefer for them to put it in the stock market?

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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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