“The credit crisis will have been very costly for banks -- or bank shareholders, to be more precise -- but the mortgage market will remain a source of enormous profits and opportunity for major banks. All the more so if the Obama administration is successful in pushing through its newly unveiled plan to wind down Fannie Mae and Freddie Mac. After all, not many companies earned more than JP Morgan's $6.1 billion in the second quarter, but Fannie was one of them: The mortgage agency reported a whopping $10.1 billion profit this morning.”
- The Motley Fool -
Ideology drives debate on mortgage reform
WASHINGTON (MarketWatch) — President Barack Obama decided this week to lead from behind on housing finance and it looked a lot like trying to catch up.
The conventional wisdom is that Congress and the White House had to wait for evidence of a solid recovery in housing before rocking the boat with talk of reforming the mortgage market.
That time has come, apparently, with home prices gaining and housing starts generally on the rise.
So the president went to Phoenix, one of the markets hardest hit by the housing bust, to celebrate the recovery and to endorse a bipartisan bill in the Senate that wants to “wind down” the government-owned financing institutions that guarantee and securitize most of the mortgages in this country. Read Obama’s comments.
There’s no question housing finance needs reform, but it will prove difficult to decide the fate of the two companies, Fannie Mae FNMA +2.60% and Freddie Mac FMCC +2.11% , without resolving the controversy about the role they played in creating the financial crisis — and that means a full-fledged ideological debate.
There is little doubt that hubris and corruption led to empire-building and other abuses at the two institutions.
But the Republican narrative of the financial crisis seeks to lay the entire blame for the housing bubble on Fannie and Freddie, which had become Democratic fiefdoms, exacerbated they say by pressure from the Clinton administration and Democratic lawmakers (above all, they say, former Massachusetts Congressman Barney Frank) to promote low-income homeownership.
In this fashion, the Republican narrative seeks to exculpate the banks, whose boundless greed led them to lower lending standards and push mortgages onto people so that these loans could be bundled into toxic securities for unwitting investors at home and abroad. Read the report of the Financial Crisis Inquiry Commission.
The reason this debate needs to be resolved is that winding down Fannie and Freddie and eventually getting the government out of the mortgage business would leave the field to those same big banks that created the bubble in the first place.
Because the administration has neglected this issue for so long, the Republicans have assiduously planted their version of events in public opinion and will play on it to end the government role in mortgages as quickly as possible.
For Republicans, this means the government has no business subsidizing low-income families to buy homes; they should rent.
Even liberal blogger Matt Yglesias appeared to echo this narrative when he mused this week, “It’s a bit strange to come out of a massive crisis with its origins in the housing sector and the cult of homeownership, and come out of it with a reform agenda that very much doubles down on that very same cult.”
But to impute a “cult of homeownership” to this country as if it were a specifically American obsession ignores the fact that the U.S. has only a middling rate of homeownership compared to other industrial countries.
In a list compiled on Wikipedia, the U.S. ranks 16th out of 25 major countries, behind Belgium, Spain, Australia, the U.K. and numerous others, with only a 65% rate of homeownership compared to 97% in top-ranked Bulgaria and Lithuania. A less current ranking in a 2011 OECD study is similar,
Conservatives will be quick to point out that these higher rates of homeownership are achieved without government involvement and without 30-year fixed-rate mortgages.
It may be that is where the U.S. should go, too, but we’re not there yet and we can hardly change a system decades in the making overnight.
In every country, homeownership is rooted in the culture and social structure, making comparisons and specious correlations (look, Germany has only 42% homeownership and it’s the strongest economy in Europe) largely irrelevant.
The Senate bill introduced by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner calls for creation of a new regulator, the Federal Mortgage Insurance Corp., to replace the Federal Housing Finance Agency and to keep the government involved with an insurance fund instead of Fannie and Freddie’s underwriting and guarantees.
But Moody’s Analytics cautions that the bill — which allows the same institutions to originate mortgages, securitize them and collect the private capital needed to get the FMIC guarantee on the securities — could lead to domination of the mortgage market by the megabanks that brought us the financial crisis.
“The risk is that the Corker-Warner system could become dominated by large financial institutions,” says the Moody’s paper, prepared by chief economist Mark Zandi, “potentially limiting competition and increasing worries about too-big-to-fail.”
Given the tardiness of the Obama administration in addressing this issue, it’s virtually certain any actual reforms will be left to the next president. And with Fannie and Freddie now delivering fat profits to the government, Congress may be inclined to tackle more urgent matters.
In the meantime, the ideological issues driving the debate need to be discussed openly and fully, not with code words and blinkered assumptions.