Kill The 30yr Mortgage?

fannie freddie

The Market Ticker – Kill The 30yr Mortgage?

The stupid, it burns!

After a devastating cycle of bubble and bust, the U.S. housing sector is on the road to recovery. New homes are being built at the fastest rate in years and prices are increasing across the country. Foreclosures are down and the number of “underwater” mortgages has declined by almost 12 percent since the peak at the end of 2011. Even Fannie Mae and Freddie Mac, the mortgage-finance companies in conservatorship since 2008, are reporting record profits.

What’s wrong with this picture? None of this would be possible without massive government support. Today, the government owns or guarantees about 90 percent of new mortgages, up from about 50 percent in the mid-1990s. It isn’t sustainable, let alone fiscally acceptable, for the U.S. to have such a domineering presence in what should be a private-sector function.

The biggest challenge going forward is separating the choice to buy a house from the decision to make a leveraged bet on housing prices. Right now, when a borrower puts down $50,000 to buy a $500,000 house, she doubles her equity if the value of the house goes up to $550,000. The lender, however, has no claim to any of that appreciation. Alternatively, if the price declines to $400,000, the borrower is suddenly in the hole. She has a strong incentive to default, leaving the lender in the lurch.

Oh please.

First, the lender always has superior information.  The lending entity has the experience of thousands if not millions of loans to draw upon.  The consumer has only himself and what’s worse, the lender can and will actively deceive him if he’s able.

For the borrower to actively deceive is a felony (Mortgage fraud.)  For the lender (or other “housing professionals”, such as those claiming “house prices only go up!”) to actively deceive is “ordinary business practice” or “puffery.”

Think I’m overstating the case?  Have you ever seen a car dealer tell someone it’s a bad time to buy a new car?  That’s what I thought.

The problem lies directly in the government “support” for this alleged “market.”

In the 20s, as noted (and it’s amusing how this is the first notice I’ve seen of this in the mainstream media!) the “traditional mortgage” was a balloon note that had to be rolled over and was typically interest-only.  This was the past-day version of an OptionARM!  They blew up en-masse when housing prices went down, just as did the OptionARM.  I note that most of the OptionARMs were private sector loans, not GSE things.

Why should anyone care about private-sector hubris?  Nobody should.  What we should care about are so-called “professionals” with superior information intentionally misleading by either omission or commission the consumers who rely on them for advice.  That should be treated as the criminal felony that a consumer misleading one of these professionals is!

There is no reason for the government to get involved in this at all, other than enforcing the law on an even basis and giving neither side the ability to abuse the other.  I have no quarrel with prosecuting someone who misleads a lender as to their income, but I demand in turn that a lender or real estate professional that misleads a consumer as to the risks and rewards either by omission or commission that come with ownership and financing of a purchase be subject to the exact same criminal sanction.

Of course the lenders and real estate professionals don’t like that point of view and have demanded, lobbied for and received protection from their deceptions while the common person is (at least in theory) punished for theirs.  This is flatly wrong and utterly indefensible.

The worst part of the government being involved in the mortgage market is that it denies both the opportunity for the market to design its own solutions to funding problems and at the same time presents an overly-cheap model for funding that is not connected to the underlying risks associated with ownership of the asset in question, in this case houses.

We should kill something all right, but whether it’s the 30 year mortgage should be determined by the market, not government.  What should absolutely be killed is government and quasi-government interference in the private mortgage market.

If the price of 30 year money with all of its uncertainties exposed to the marketplace and not guaranteed by anyone is too expensive for buyers, they will not elect that choice.  We need no government jackboot to make that happen — the market is perfectly capable of allocating that risk all on its own.

More government socialism is not the answer, and despite the incessant lefty screaming the facts are clear in that it is exactly this distortion that was largely responsible for the bubble inflating to the degree that it did originally along with the fact that its deflation has been interfered with quite-effectively.

As a direct consequence housing, with few exceptions, remains overpriced today.

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6 Responses to “Kill The 30yr Mortgage?”
  1. Kathleen Burt says:

    Senator Durbin (IL) was absolutely right in his speech from the Senate floor, the banks own Congress. It’s that simple. There are a few Senators, like Elizabeth Warren and Jeff Merkely we can count on to help, but they’re outnumbered.

  2. Sarah says:

    I’m not sure what is wrong with libertarians other than there absolute relentless ability to lie.
    You hear the same idiocy on Zerohedge from people who don’t know what work is, don’t know how to work, spend considerable time blaming poor people and holding some peculiar fantasy about Weimar Germany. Inflation as a concern, at this point is pure Koch Brothers/Santelli propaganda, they want Government printing money for *banks* to hold over everyone’s head as debt. The wretched 1% do not know how to profit unless they brutalize people. School’s open still, how about a course in macro, Neidermeyer?

    • neidermeyer says:

      MACRO? Zimbabwe is coming … I have a $100,trillion note from there in my study ,, printing money doesn’t bring wealth it brings destruction ,, I can’t stop it but I can position myself ,, you can bet that I’m looking for a house with land or farmland that can be bought with owner financing… quite literally 2 eggs in 2008 Zimbabwe were about $75million … I’d be real happy to pay that note early on 20 acres just by selling off a liter of rum or a used bicycle.

      The lesson is that you don’t need economic activity to have HUGE inflation ,, you don’t even need people able to pay the price ,, you just need the same money printing we currently have.

  3. neidermeyer says:

    The 30 year mortgage is an absolute steal at any current rate ,,, inflation is coming downhill at us AND FAST … Right now the government is the only game because portfolio lenders can’t afford the risk of putting out $250k on a loan to you for 30 years when they know that with all the money printing it’s a certainty that in just 3 or 4 years (at most) your payoff of $244k will be about the same price as a coffee …

    • Apple says:

      But the price of housing isn’t. Buy low sell high. Housing is a function of interest rates. You want to buy when interest rates are at record highs, not at record lows.

  4. Sarah says:

    “the U.S. housing sector is on the road to recovery. ” Sorry, no one’s buying it, but land always has value. No one buys the central premise of this scratch either, there is no “socialist intervention”. there is no “government intervention” there is Wall Street parasitzing the public. That’s it. Done. Fannie and Freddie are the fronts. Just ask Rick Santelli when he began to scream about who should be bailed out. They’ve stolen our homes and they own the “government”, make sure you know your enemy.

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