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Editorial: Mortgage crisis still begs for intervention
February 3, 2012
What happens when the path to good intentions becomes more important than the destination? You wind up in a roadside ditch.
The Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) were created to help Americans achieve the dream of homeownership. Fannie Mae emerged during the Great Depression to buy mortgages from lenders. Later, Freddie was created to give Fannie some competition. Both were converted into publicly traded companies.
This duo dominated the mortgage market because, despite becoming investor-owned, they nurtured the implicit assumption that the government would back them if they ran into financial difficulty. That turned out to be true when the government assumed control of both after the housing bubble burst. This bailout has cost taxpayers more than $150 billion, and the total is expected to grow.
What the government has found out is that running these entities like a business can be counterproductive to the original intent of placing Americans in homes. For example, business decisions aimed at preserving Freddie Mac are making it more difficult for homeowners to refinance their mortgages at today’s historically low interest rates. Without that option, some people could lose their homes because they can’t make the current payments.
An investigation by the nonprofit ProPublica journalism outfit and National Public Radio unearthed the details.
Last year, Freddie Mac Chief Executive Officer Charles Handelman said his organization was “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.” But Freddie has tightened its lending standards, making it more difficult to refinance. Meanwhile, the investigation showed that widespread refinancing would’ve hurt Freddie’s investment portfolio, so it had no incentive to help hurting homeowners. Instead, it bet against refinancing.
While this might seem like blatant hypocrisy, it isn’t clear that the outcome was intentional. However, this does demonstrate one of the consequences of preserving an institution at the expense of its mission. Congress must find a way to phase out Fannie and Freddie, which had lost their way even before the housing crisis hit.
Meanwhile, an important question remains: What is the government doing to help people stay in their homes? The answer is not much. The Obama administration has offered small, ineffectual solutions. Congress has remained on the sidelines.
This inaction raises the prospects of more people walking away from their homes, which will further depress the housing market, increase the taxpayers’ bailout bill and hinder economic recovery.
The government needs to help struggling homeowners to forestall the tumbling of those dominoes. Under normal circumstances, we would oppose intervention, but there is greater harm to the economy in doing nothing.
Editorial:
“The government needs to help struggling homeowners to forestall the tumbling of those dominoes.”
It needs to do no such thing. Government interference in the housing market is what launched the housing bubble to begin with. It needs to cease that interference and allow that market to find a natural equilibrium.
gmorton, you are spot on. “The government needs to help struggling homeowners to forestall the tumbling of those dominoes.”government means you the taxpayers must pay for other peoples mistakes(wall street, bankers, fannie/freddie, govt. and yes homeowners). This is exactly why Rick Santelli of CNBC made the comments that started the Tea Party. I paid my mortgage in full and on time and I do not appreciate having to pay for others foolishness and good intentions.
Noble thoughts gentlemen. Perhaps then, you can reach out to our friends the “righties” and have then shut up about the economy. Perhaps you have noticed that President Obama is personally responsible for things like the unemployment rate, and this mysterious thing known as “the economy.” In spite of the fact that the economy has actually rebounded quite well, we still face a few daunting issues. An improved housing market would help a great deal towards getting people back to work, but I happen to also share your views on personal responsibility. The unfortunate thing is we bailed out literally everyone else, wall street got a pass. Why not the common man?
On the gubmint interference - we could just eliminate the secondary market for mortgages. Eliminate Freddie and Fannie. Then banks could only lend their money, and no longer sell off the mortages they write.
I’m afraid it took more than the government to cause this problem gmorton, but of course you know that.
johnclarke wrote,
” … we could just eliminate the secondary market for mortgages. Eliminate Freddie and Fannie.”
Eliminating Fannie and Freddie does not eliminate the secondary market for mortgages.
“Then banks could only lend their money, and no longer sell off the mortages they write.”
Of course they could sell off the mortgages they write – for whatever they are worth in the bond market, with no gummint guarantees.
“I’m afraid it took more than the government to cause this problem gmorton, but of course you know that.”
It sure did. But you always blame the coach, not the players. The gummint wrote the game plan and called the plays.
Overly simplistic view, but I am used to that from you. Land prices contributed more to the price increases than structures.
Furthermore, LACK of government intervention can be blamed as well, since the whole thing could have been stopped…but everyone knows that. Yeah, I know what the bond market is thanks.
johnclarke on February 03 at 12:07 p.m.
Land prices contributed more to the price increases than structures.
Interesting. Do have any links on that John?
Not proof positive but I can tell you from personal experience that the land I purchased just inside Stevens County sold at $25K for 10 acres in 2002 and went to $50K in 2006. It is now back to $25K. The Spokane county market was higher but a similar percentage increase. Some pocket areas were higher or lower but a 100% increase in that 4 year period was very common.
Dennis Patterson—Deer Park
You betcha.
http://www.amazon.com/Irrational-Exuberance-Robert-J-Shiller/dp/0691050627
Start here, there is the 2000 book and then the 2nd addition update. This guy totally called it.
johnclarke wrote,
“Land prices contributed more to the price increases than structures.”
That is a pointless distinction. Land and building prices are inextricably tied. If demand for (say) housing increases, so does the price of land zoned (re-zonable) for housing. Likewise for industrial land, etc. And of course your mortgage finances both.
gmorton on February 03 at 1:33 p.m.
That is a pointless distinction
Funny, I feel the same way about pretty much everything you post. Read the book and you might understand.
The other thing I would encourage you to read gmorton is the Financial Crisis Inquiry Commission report, not that I don’t enjoy these fruitful arguments.
johnclarke wrote,
“The other thing I would encourage you to read gmorton is the Financial Crisis Inquiry Commission report . . .”
Oh, I have. I hope you read the dissents, especially Peter Wallison’s.