Monday, August 25, 2008

Time to Nationalize Fannie & Freddie?

Fannie Mae’s and Freddie Mac’s impact on the mortgage market can’t be understated. Both borrow huge sums of money to buy mortgages. Their demand is a major force in setting the overall rate on standard mortgages, particularly now that many other sources of financing have evaporated. And even though both companies have recently been purchasing larger amounts of mortgages, rates on mortgage loans have stayed relatively high.

If the government believes cheaper borrowing costs are central to a housing recovery, it will have to do something to get mortgage rates to decline in line with Treasury rates. One guaranteed way to lower the spread between Treasury and mortgage rates is for the government to take over Fannie and Freddie. A takeover would lower Fannie’s and Freddie’s borrowing costs, which, in turn, would lower mortgage rates.

More competition from the private sector is another, though less timely, solution. Nationalizing Fannie and Freddie would drop mortgage rates immediately, to be sure, but few private firms would be able to match Fannie’s and Freddie’s borrowing costs. That would mean less innovation and fewer mortgage options for borrowers, and that could hurt the housing and mortgage markets in the long run.

Eric P. Egeland

Monday, August 4, 2008

Housing Recap

Yesterday’s housing bill is today’s housing law. Among the highlights, first-time home buyers will receive a tax credit of 10% of the purchase price of their home, up to $7,500. If you are wondering how Congress defines a first-time home buyer, it’s someone who hasn’t owned a house in the past three years. The validity and efficacy of the credit has to be questioned, because it’s really not a credit; it must be repaid in equal installments over the subsequent 15 years.

Another highlight helps people who have fallen behind on their mortgages and who owe more than their houses are worth. In such situations, refinancing is difficult, if not impossible. The law seeks to resolve this dilemma by encouraging lenders to forgive delinquent borrowers’ debt down to 87% of the property’s current appraised value. At that point the homeowner can than refinance under an FHA plan (though he or she will be expected to pay higher FHA insurance premiums).

The new law imposes few changes on Fannie Mae and Freddie Mac. Both institutions are a mess, yet the law oddly imposes no changes in management or business approach and no penalties on shareholders. Taxpayers instead are given two dubious protections: The first is that the treasury secretary will have the right to dictate terms if the government has to stump up equity capital for the firms. The second is the creation of a new regulator, whose effectiveness one must question, considering the effectiveness of past regulators.

Outside of the housing market, general economic health is waning. U.S. second-quarter gross domestic product came in below expectations, rising 1.9% versus expectations for a 2.2% rise. Slowing GDP, in turn, is impacting employment, and not in a good way. On Friday, the employment situation showed that payrolls declined by 51,000, pushing the unemployment rate up to 5.7%.

Eric P. Egeland
RE/MAX United