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Home Publications Blogs Beat the Press WAPO Confronts "Political Reality" When It's Enforced by Seniors, Bows to It When Enforcers Are Bankers

WAPO Confronts "Political Reality" When It's Enforced by Seniors, Bows to It When Enforcers Are Bankers

Monday, 01 July 2013 04:49

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.

Comments (3)Add Comment
Nice try to promote tiny changes as big
written by Jennifer, July 01, 2013 10:04
It was interesting that a teaser for this piece was "Farewell to Fannie and Freddie" and early in the article there was the line "The time to start unwinding and replacing them is now." It would appear that the changes proposed are pretty small, and do not in any way put the programs on a path to ending. But the best is towards the end when the writers themselves admit that
". . . over time the new corporation would come under heavy pressure to reduce its fees or relax its standards, or both, in the name of promoting homeownership or some other worthy cause. A system like the one Messrs. Warner and Corker propose could succeed only if it includes abundant checks and balances against that danger." (emphasis mine)
Because everybody knows a government program that's heavily tied to the financial industry really knows how to manage the checks and balances thing.
People & Security
written by James, July 03, 2013 1:33
You asked what's so great about 30-yr fixed rate. You are right in that people often end up paying more with that option.

But people like security, i.e., expect the same monthly payment regardless any rise in rate. They pay a premium for that. They also think they are covered if the rate starts to decline bc could refinance though with cost.

People also like annuity and would liquidate their 401K to buy an annuity.

I don't think that's why the government is promoting 30-year mortgages...
written by Alex Bollinger, July 03, 2013 6:52
@james: I always thought that these sorts of supports for long-term mortgages were about subsidizing the banks. Guaranteeing them and providing tax incentives to take them on increases profits for one specific sector of the economy, a sector with a whole lot of power over the government. It's not a huge leap of logic.

The explanation that requires a larger (though not impossible) leap of logic is that debt reduces freedom, and getting young people just starting families in a 30-year mortgage keeps them from getting too uppity.

but I don't think that the government promotes 30-year mortgages because people want them. People like lots of things that the government has no interest in subsidizing.

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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.