Housing talk

By Felix Salmon
February 11, 2011
Treasury report on mortgages came out, I talked about the issues facing the market with my favorite fixed-income pundit, Agnes Crane. " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

On Wednesday, before this morning’s Treasury report on mortgages came out, I talked about the issues facing the market with my favorite fixed-income pundit, Agnes Crane. America, it seems, still loves housing. Does it have what it takes to bite the bullet and reform the market?

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5 comments so far

Has Agnes Crane been replaced by a bobblehead doll???

Posted by GregHao | Report as abusive

a) Someone has been watching too much old Python.

b) Subsidized mortgages in the U.S. are not about subsidized mortgages. They are about an effort to do wealth development in the lower class and lower middle class to create social mobility. You rant about the stratification of wealth. The bubble was an effort by all concerned, Clinton, Bush, Frank, et al, to deal with that social justice issue. Angelo Mozilo saw himself as an advancer of social equality with his loan process. Yes, he was corrupt and irrational, but that was his public justification for why Countrywide did what it did.

You need to consider the broader social cost that will come when credit is denied in those, principally minority, communities. Because that’s where ground zero will be when the subsidized money spigot gets turned off.

Posted by ARJTurgot2 | Report as abusive

Here are some challenges for those who have drunk the tea on the imperative of structural reform.

1. Saying that there was ‘no one cause’ of the failure at FNMA masks the fact that there was a principal cause: the leadership of Daniel Mudd. Finding someone who knows how to run a risk-taking institution prudently and conservatively, even a “hedged fund” used pejoratively as some do, is NOT a structural fix.

2. Tax subsides on mortgage interest have nothing to do with Fannie and Freddie. I would submit that such tax breaks are not “structural” aspects of the market, in the sense that these could be eliminated and one could still find a role for government-backed pooling of mortgages, standardization, and much else besides. Lumping them is lazy thought.

3. Thesis: Fannie and Freddie were an integral part of ‘economic stabilization’, at least as much as they might have been part of the problem because they got off track. Who did Angelo run to when things got tuff (he pushed to have jumbos bought, right)? Yes, spreads between Fannie and private narrowed in good times, so people said, “What good are GSEs?”. But have a look at what happened when the crisis hit. The spreads ballooned. You may not like the cost, but the centralized aspect of dealing with it via the GSEs was hugely beneficial to curbing systemic risk. God knows, it was more _efficient_ than the monstrosity fund that laboriously cleaned up after the S&L crisis. Consider what Paulson was able to achieve in just taking over the GSEs on one afternoon, versus what we might have gone through if all that mortgage debt was simply on private bank balance sheets, with no guarantees, except by people who wrote private MBS CDS? Put another way, in a crisis of this magnitude, the taxpayer probably ends up paying – why not prefer the most efficient? Do you really think the FDIC was funded adequately to bail out depositors, if all the bad mortgages had been on private banks balance sheets?

4. The market has already adjusted practices to combat the prior types fraud and the mis-estimate of risks on certain securities, as well as the insurance of those risks (CDS and CDO risk for MBS).

5. Their proposals will not stop another mortgage crisis. Indeed, wholesale changes to the mortgage market have almost invariably lead to the next financial crisis in real-estate finance.

6. Homeownership has been demonstrated, in various economic studies, to have important knock-on effects. Frankly, I’d rather pay some subsidies to homeownership than to affordable public housing or all the other things that go into keeping slumlords ‘in the money’.

Posted by AmicusAlso | Report as abusive

7. Despite “utopian” visions, the reality is that a home is the key retirement asset for most folks, right? Therefore, helping people to get into an “asset-generating” role of paying down a mortgage (yes, even a 30 year one), is highly preferable, at least to me, than having a whole set of people who are suddenly in need of public “housing assistance” in their old age to get by on their meager 401(K) pension and their soon-to-be-welshed social security benefit.

Posted by AmicusAlso | Report as abusive

I’m only a dog, but personally (dogally?) i never understood why the gummint thought home ownership was so wonderful — a national goal to be encouraged by means of a tax deduction. He (my master, that is) resisted buying a house for years and years, thinking it was stupid — that people who can afford to buy a house are exactly those who don’t need a tax deduction. (Forgive Him — He’s a liberal.)

Having said all that, let’s not make too much of it. It’s just a bubble, like any other bubble, made worse, and harder to resolve, by the proliferation of complicated instruments. The bubble could have occurred without tax-deductibility of mortgages, and my impression is that it did so occur in other places (Spain? Ireland?) where mortgages were not tax-deducible.

Gummint (forgive me if i’ve misspelled it — remember, i’m only a dog. Is it really “gumment”?) guarantees are another matter. But one suspects that the bubble could well have occurred without them, too. When faced with rivals who are making risky loans to people who can’t afford their mortgages, and making lots of money because the mortgage holders have been able, for some years, to sell out at a profit in a rising market, how many banks could resist the insistence of their investors that they jump aboard and take advantage of better returns as well?

The problem with eliminating tax-deductibility of mortgages now is that is will impoverish a large fraction of the population. Ending gummint (or is it “gumment”?) mortgage guarantees would, He thinks, have a lesser effect. (He acknowledges that it is in His, umm, enlightened self interest to make this argument; but He notes that He’s willing, in principle, to pay some price for the common weal. He’s a liberal — remember?)

Posted by samadamsthedog | Report as abusive
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