I’m open for opposing opinions, but at first blush the plan Obama outlined to change Fannie Mae and Freddie Mac seems like a step in the right direction.
Private investors take more of risk. Agree.
Fannie and Freddie lose the implicit guarantee of government. Agree.
While home ownership is good, affordable rental housing is also acceptable. Agree. Renting makes sense for a lot of folks.
Owning does too. You should have to prove you are responsible before owning, though. When people have a tough time getting a loan from a private investor to buy a home, those people should be encouraged to demonstrate responsible behavior.
The only part I had trouble with, so far, was that government would be secondary guarantor. That sounds like an explicit guarantee. Maybe I don’t understand that part.
But, again, a step in the right direction, no?
Could Obamacare be next?
In his speech outlining the plan, Obama quips that this plan will sound confusing for those that call Obama a socialist. For the record, I never thought he was a socialist. I just thought his view on the role of government was on par with public school sophomores. It’s not so much socialism, but the belief that solving problems can be easily accomplished by having government do something about it.
Peter Wallison in the Wall Street Journal makes a good case that government intervention in housing for the well-intended encouragement of expanding home ownership distorted the housing market and helped cause its bubble.
Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.
It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.
Research by Edward Pinto, a former chief credit officer of Fannie Mae (now a colleague of mine at the American Enterprise Institute) has shown that 27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, the loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments.
Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from.
The huge government investment in subprime mortgages achieved its purpose. Home ownership in the U.S. increased to 69% from 65% (where it had been for 30 years). But it also led to the biggest housing bubble in American history. This bubble, which lasted from 1997 to 2007, also created a huge private market for mortgage-backed securities (MBS) based on pools of subprime loans.
I’m glad to see this expressed in the pages of the Wall Street Journal. Few people see this. Many seem to want to think the housing bubble was simply greed run amok….a failure of capitalism. The free market didn’t work.