Tuesday, April 29, 2014

A 30-Year Conundrum

Populism, profits, policy, and prudence

The Federal National Mortgage Association (a.k.a., Fannie Mae) and the Federal Home Loan Mortgage Corporation (a.k.a., Freddie Mae) are government-sponsored enterprises that are 80 percent owned by U.S. taxpayers. Between them they have $5 trillion dollars of mortgage debt on their balance sheets that's not included in total federal debt of $17 trillion.

$22 trillion of debt on $17 trillion of gross domestic product. I'm not reaching for the alarm; I'm just saying.

The reform legislation for Fannie Mae and Freddie Mac that's currently circulating in Congress has all types of interests crying foul: progressives and conservatives, those for and against government intervention in mortgage markets, mortgage investors and affordable housing advocates. All fear change because change might cause them to lose – whether political influence or financial leverage.

An article in today's Washington Post displayed the headline, "Why housing reform could make your mortgage more expensive". Why? Because the most popular mortgage product in the United States is the 30-year fixed-rate loan. Without government guarantees, this product goes away: the uncertainty involved with interest rate variations over any 30-year period are too great for a private lender to affix a constant rate. And with uncertainty comes a risk premium on top on the mortgage rate which drives up the cost of borrowing.

So therein lies the conundrum: without the backing of the U.S. Government, private lenders face the prospect of losing money through rate variation so they increase interest rates to offset potential losses which drives up homeownership costs. And if you take away mortgage interest tax deductibility and other explicit and implicit subsidies more costs are conveyed to homeowners and greater risk is borne by lenders – where, in fact, those costs and risks belong.

We're at the juncture of a tremendous opportunity to redefine housing policy in the United States, moving from the dream of homeownership to the reality of well-housed Americans. While the old guard harps on affordable ownership, the next generation sees that owning a single fixed, immobile, illiquid asset reduces labor mobility, increases opportunity costs, and heightens the risk to personal savings.

We seem to be looking for a sure thing, a guarantee, a backstop. Or, as former U.S. Treasury and Federal Reserve official Peter Fisher put it, "an insurance company with an army". If that's all we want from our government then let's be honest about it and not hide behind a metaphor, ideology, or lofty cause.

Lenders want to make money. Borrowers want to pay less. That's as it should be. But if neither a borrower or lender be, you're out of luck and out of your own with current policy. And, it seems, without any footing to scale a mountain of debt.