The centerpiece of MBA’s recommendation is the creation of a new line of mortgage-backed securities (MBS). Each security would have two components – a loan level guarantee provided by a privately-owned, government-chartered and regulated mortgage credit-guarantor entity (MCGE) and a security-level, federal government-guaranteed wrap. The wrap would be an explicit government guarantee focused on the credit risk of these mortgage securities.
That takes balls. Know what takes even more balls? The self-congratulatory blurb at the end of the press release:
“Our Council, featuring some of the best minds in our industry, has spent significant time looking at the secondary market – what worked and what didn’t — and came up with these recommendations,” said John Courson, MBA’s President and CEO.
Best minds? Significant time? What took so many smart people so much time? I could have saved everyone a lot of meetings:
We believe the government should give us money
Why have we not killed the GSEs already? What function do they serve?
I suppose I could be convinced of the value of Ginnie Mae. Suppose, because while Ginnie Mae is really just centralizing the loan guarantee function of its insuring agency partners (FHA, the VA, the Rural Housing Service, and the Office of Public and Indian Housing), I cannot understand what the underlying agencies are doing insuring mortgages in the first place.
- Thanks to our tortured history with the native population, I can see why Indian Housing is insuring mortgages: the partial sovereignty of a reservation means that mortgage security cannot easily be perfected. Fine. That could explain intervening in public housing as well, although if housing is sufficiently private to have mortgages it should probably be private enough to stand on its feet.
- If the VA wishes to help soldiers buy houses, it should pay the soldiers more money instead of making a backdoor gift to the mortgage industry.
- The Rural Housing Service is a scam that continues the Agriculture Department’s long tradition of running itself like a slush fund for flyover states; consider this another reason to disband everything but the food inspection side of the department.
- FHA is a terrible idea that was supposed to goose the economy in the Depression and never went away because its cost is buried and its beneficiaries love it. Bear in mind that we are a nation that built a strategic helium reserve to be able to deploy airships in time of war. We still have it just north of Amarillo, in case the new strategy to defeat Al Qaeda involves a fleet of blimps.
Fannie/Freddie, though, do not seem to make any sense at all. To some extent they standardize the mortgage market, but in a limited way; they essentially encourage the mortgage issuer to jam a bunch of fees and closing costs on top of a conforming mortgage instead of varying the guts of the mortgage. That might be better than asking people to compare the effects of, say, a 30 year fixed mortgage against a 20 year partial bullet, but it’s far less than could be accomplished by the simple expedient of issuing a regulation standardizing the entire product and leaving one box (“rate”) to be filled in.
In exchange, Fannie/Freddie encourage the stupid to play the mortgage issuing game. In, say, Phoenix in early 2006, it was not a good idea to issue an 80/20 mortgage. A prudent banker would not buy a property for 80% of the nominal transaction price, so the equity cushion was irrelevant. We have spent the last year and change listening and reading different proposals of how to solve this: should the Fed have intervened earlier with rates, should there have been rules against exotic finance, etc. But the most simple rule would have been this: if you end up with a mortgage that fails to perform, it hurts.
Without Fannie/Freddie as the sucker in the room buying up any crap a boiler room can process, every mortgage would have to be sold to another party making an investment decision. Like true lemmings, they might well make terrible decisions all on their own. But they would have suffered for it; in a non-GSE world, hundreds of billions of dollars of nonperforming loans would have bitten investors large and small in the ass. Right about now, mortgage issuers would be thinking like gun-shy investor. That’s how they should be thinking.
For all of the double-PhDs with glass dry-erase boards refining the topic on Wall Street, the economic drivers of a mortgage are reasonably basic:
Someone takes out a loan and promises to repay it over a period of time. In the event he cannot or does not repay it, he specifies a property that he will provide the lender as either full or partial settlement (depending on whether the state limits obligations to purchase money – essentially allowing your house to be treated as a corporate subsidiary). Some number of the loans will not be repaid in full, even with the liquidation of the collateral. Who loses money then?
The GSEs don’t make the house better. They don’t make the buyer and seller come to a better price. They don’t make the buyer think more carefully about his cash flow profile or risk appetite. They don’t make his job more secure, his marriage stronger, his body healthier, or otherwise contribute toward his performance of his mortgage. They do not make the mortgage any more or less valuable.
What the GSEs do is create a mortgage market by the unimpressive alchemy of simply absorbing losses onto the taxpayer’s account from the mortgage issuer or one of the mortgage’s intermediate holders. How does that do any good? Shut them down.