As a concerned citizen and expert on housing risk relating to mortgage-backed securities, I have been following the discussion relating on what to do about our beloved Government Sponsored Enterprises (Fannie Mae and Freddie Mac) with more than just a little interest.
On Tuesday this week the Treasury Department is going to hold a conference on Fannie and Freddie that should be the first step in abolishing the entire concept of Government Sponsored Enterprises in the United States of America. However, based upon what I have been reading, I am fearful that the Treasury Conference will end up with a result that will only lead to further “housing finance” problems for in the future.
My concern begins with the so-called industry leaders that have been called in to flesh out solutions, which include, and let me be frank here, several players by company name alone that make the hairs on my neck rise in fear. These names as reported include such people as Wells Fargo Co-President, Michael Heid; Bank of America Home Loans President, Barbara Desoer, and Moody’s Economy.com chief economist, Mark Zandi.
In full disclosure I do not know any of the above mentioned people personally. And although I assume they are all very smart and able individuals, it strikes me that the Treasury’s asking Wells Fargo, Bank of America, and Moody’s for solutions relating to housing and mortgage-backed securities seems a little like asking the fox “how to build the hen house”.
Over the last two-plus years of our housing trauma, there has been a well kept secret that has not been reported and that is this. The wholly owned Government run programs of Ginnie Mae, the FHA, and the VA “significantly” outperformed the programs of “the independent banks”, Fannie Mae, and Freddie Mae. And the basis of that measurement is in dollar losses, public and private.
Based upon the average reported banking income as reported to the FDIC prior to the fall of the housing market (12/31/2007) and the last 10 quarters of reported banking income since then, the banking industry has absorbed nearly $400 billion in losses associated with their debt lending. Similarly, during that same period, Fannie Mae and Freddie Mac have acknowledged losses in the range of $150 billion, which is probably an underestimate as the same self-serving accountants that the GSEs had prior to their downfall are still doing the accounting and counting.
In comparison, during that same period, the entirely Government Owned Corporation called Ginnie Mae actually reported positive net income while backing their own mortgage-backed security program with the Full Faith and Credit Guaranty of the United States of America. Although I am not currently privy to the degree of losses reported by the FHA and VA in the last two-plus years, I am sure beyond any doubt that their losses pale against those of the GSEs and the banks in both real and relative terms.
For twelve years (1988-2000), including the period of the Savings & Loan crisis, I was responsible for designing and developing the risk systems used to monitor Ginnie Mae’s $550 billion portfolio of mortgage-backed securities. Since leaving that work in 2000, I have spent much time and expense relating my concerns about housing risk and the GSEs to different powers to be with little success.
One may want to scoff at my claims, but let me assure you I have documentation. I also know that the government run programs like the FHA and VA and Ginnie Mae served a clientele that just by its nature should have carried more risk than any loans that the banks or the GSEs made. In truth, the only reason the Government run programs that I have mentioned existed was to provide an opportunity for certified individuals to get a housing loan which they could not get through the private bank or GSE means.
So before we start looking for solutions as what to do about Fannie and Freddie using the opinions of the so-called industry experts, I say we should actually take a look at programs that were not part of the housing problem and see what those programs actually did right.
The more than $10 Trillion of mortgage debt in the United States is nearly the size of our National Debt. However, there is a big difference between “mortgage debt” and “national debt” and that is this: A change in the current average mortgage rate today affects every single dollar of the $10 Trillion in mortgage debt, whereas a change in the current Treasury rate today only affects the value of new “treasury debt”.
Why? Because a change in the current mortgage rate today affects the value of every house in America today. As mortgage rates are lowered, housing becomes more affordable, thus driving up housing prices. And this works in reverse when mortgage rates are raised.
Now if you believe in the Federal Reserve’s role in establishing rate policy for economic purposes, which I know can be debated in and by itself, then due to the general importance of housing in America, you have to believe it is at least as important for the Government to play a role in deciding “mortgage rate policy”, too. In truth, mortgage rate policy has become more important to our economy than any decision the Federal Reserve currently makes.
So here is what needs to come out of the upcoming Treasury conference. Roll Fannie and Freddie into Ginnie Mae, FHA, and the VA and create a new federal entity, called the Federal Home Loan and Security Corporation, and back those particular loans with the Full Faith and Credit Guaranty of the United States of America. Together these entities account for approximately half of the current mortgage debt in the United States.
Let the private sector banks, which currently cover the other half of our U.S. mortgage debt, compete head-on outside of the Federal system. Only allow the new Federal Agency to guaranty “primary homes” under a certain value (e.g., $500,000) of “American citizens” with certified good credit ratings using a new state-of-the-art underwriting system.
Reduce current Fannie, Freddie, and government staffing by more than one-half to two-thirds in the process.Put a real financial wizard (maybe even an economist, god forbid) in charge of the new Federal Agency and give that person the responsibility for establishing mortgage rate policy in the United States. Also hold that person responsible for assuring that good, solid credit standards are followed in every loan that is put into a security backed by the Federal system. Require this “financial housing czar” to get confirmed like what is done for a Federal Reserve Chairman or Secretary of the Treasury.
Home loan risk is not rocket science. In truth, most people treat their home as their castle and would do anything to preserve having one. The Government should not be in the business of subsidizing housing, but instead, assuring that the best housing policies (including rate setting) are used to promote our economy and the general welfare of our public.
My proposed solution will work and it will not result in a “third” housing crisis in the United States. As the so-called experts begin conferring on Tuesday with the Treasury, I am fearful that we will not be able to say the same thing regarding the solution that comes out of that dialogue. But so what, any future housing crisis is still probably another 20 years away and an entirely new cast of characters will be in charge to figure out what to do then.
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