President Obama reportedly will propose today a revamped
system of guaranteeing residential mortgage loans in this country. The previous system, in which Fannie Mae and
Freddie Mac, strange hybrids of private profit, public risk, and federal
patronage, guaranteed mortgage loans with the implicit guarantee of the
taxpayers, has obviously been a failure.
Mr. Obama proposes replacing them with private sector guarantors
backstopped by a government guarantee, which sounds strangely like, well,
Fannie Mae and Freddie Mac.
The Republicans are not quite clear on what they would
replace Fannie and Freddie with but are paying their usual lip service to the
private sector. But a purely private
mortgage loan guarantee system is a pipe dream.
Why? Because there is no
substantial market for the types of loans that have supported real estate in
this country for just about as long as most people can remember—long term
(usually 30 year), fixed rate loans with no call protection for the
lender—without federal guarantees. As
long as we insist that borrowers are entitled to loans that feature almost
incredibly juicy terms to them and just as incredibly lousy terms to the
lenders, the government has to play a big role in the mortgage lending.
The obvious answer, it seems, to avoiding a repeat of the
Fannie/Freddie debacle is to move away from the 30 year fixed rate loan model
on which the real estate market has been built. Remove the guarantees and let lenders make
loans that make sense from an investment perspective, loans that they would be
willing to hold on their books rather than sell to a government backed entity. Variable rates would clearly be a big part
of such a mix, but the cleverness and innovation of the free markets would make
all sorts of loans, probably including equity participation loans, available to
consumers. But the 30 year fixed rate
loan, ridiculously skewed in favor of the borrower, would probably become a
museum piece.
Such a logical transition will probably never take place,
even though it works in most other advanced economies. The real estate industry would scream bloody
murder. Homeowners, largely at the
inducement of the real estate industry, would complain that the value of their
homes, previously inflated by government guarantees, would be hurt. Potential home buyers would whine that their
entitlement…the 30 year fixed rate loan…had been taken away from them. And so Fannie and Freddie, or, more likely,
something very much like them with a different name, will be around more or
less forever.
Long ago, we decided, for whatever reason, that we would
heavily subsidize homeownership, and thus investment in residential real
estate, in this country. The largest
components of that subsidy are the deductibility of mortgage loan interest and
the 30 year fixed rate loan made possible through the intercession of the
government. Neither makes much sense,
but neither will be going anywhere soon.
As usual, politics trumps finance, economics, and common sense…and we
live with the consequences.
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