Pres. Obama’s Homeownership Magic Wand

[solutions]

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Reading Liberally Editorial Notes:

Two days ago (8/6/2013), President Obama gave a speech in Phoenix billed by HUD Secretary Donovan in the following essay posted on http://www.WhiteHouse.org as the President’s “vision for a housing system that promotes the American dream of homeownership.”

However, the President’s “plan to reform the housing finance system” is centered on four core principles:

1. Put private capital at the center of the housing finance system.
2. End Fannie Mae and Freddie Mac’s failed business model so taxpayers are never again on the hook for bad loans and bailouts.
3. Ensure widespread access to safe and responsible mortgages like the 30-year fixed rate mortgage in good and bad economic times.
4. Support affordability and access to homeownership for creditworthy first-time buyers and access to affordable rental housing for middle class families and those aspiring to be.

As we know (though President Obama does not seem to recognize), the reason why the real estate industry has made a “come back” recently is that Chairman Ben Bernanke and his Federal Reserve have been buying home mortgages for the last year at the rate of $85 Billion/month (for a total of $1 TRillion and counting) and Chairman Bernanke recently announced that this policy will continue for at least the next few months.

And as we have also studied, the U.S. Federal reserve has been virtually “the only game in town” for financing home mortgages since the 2008-201? Economic Meltdown.

So how does President Obama propose to “ensure widespread access” to 30-year fixed rate mortgages by putting VIRTUALLY-NON-EXISTENT “private capital at the center of the housing finance system” while ending Fannie Mae and Freddie Mac’s participation???

As we have studied from the Savings & Loan crisis of the 1980’s and 1990’s and the long-time refusal, in general, of commercial banks to finance home mortgages (as distinguished from originating the mortgages and then immediately selling them to Freddie/Fannie before the Economic Meltdown and to Ben Bernanke’s Federal Reserve beginning a year ago, and then earning a fee for servicing the mortgages on behalf of Fannie/Freddie/Bernanke) IT IS INSANE TO FINANCE 30-YEAR MORTGAGES WITH CUSTOMER DEPOSITS BECAUSE THE INTEREST RATE ON THE DEPOSITS MAY RISE, RENDERING THE INVESTMENTS IN LONG-TERM FIXED-RATE MORTGAGES TOXIC.

And as we have studied, the U.S. Federal Reserve is the only American institution that can print money to cover losses on investments in long-term mortgages!!! And probably the only American institution that doesn’t even have to disclose the losses it is incurring on its investments in long-term mortgages as their interest rates rise (3.5% to 4.5% earlier this summer on 30-year fixed-rate mortgages)!!!

And, moreover, the U.S. Federal Reserve is probably the only American institution that SHOULD BE SADDLED with the task of financing long-term fixed-rate mortgages and their INHERENT PROPENSITY FOR TOXICITY because, after all, the U.S. Federal Reserve is the institution that sets the interest rates that dictate the level of toxicity for long-term investments such as financing mortgages for home buyers.

It would appear that President Obama is merely “waving a magic wand” that doesn’t exist!!!

Though he is “playing with fire” because before the 2008-201? Economic Meltdown, many Republicans routinely opined that Fannie and Freddie should be terminated and home mortgages should be financed by private capital. [Since 2008, such Republicans have either expressed thankfulness that Fannie/Freddie were still in operation to provide financing for mortgages so that the real estate market did not collapse entirely or, more often, they fell silent.]

Nevertheless, there is a real possibility that Republicans may respond to President Obama’s “magic wand” by enacting it.

And unless the U.S. Government is prepared to provide guarantees to the successors of the CHUMP SAVINGS & LOAN COMPANIES so that there actually is financing for 30-year mortgages, WHICH GUARANTEES WOULD ONLY BE A FIG LEAF FOR THE CHANGE IN NATURE (BUT NOT THE MAGNITUDE) OF THE FINANCIAL RISK FOR AMERICAN TAXPAYERS, President Obama’s “vision” will be only a “mirage”!!!

Perhaps we should consider one of our “Six Degrees of Separation E-mail Campaigns” to request President Obama to propose legislation amending the U.S. Code to spell out that in addition to the twin objectives of the U.S. Federal Reserve to minimize inflation while minimizing unemployment, the U.S. Federal Reserve should also be tasked with investing in 30-year home mortgages whenever the private-market interest rate on such mortgages exceeds a shorter-term interest rate, say the rate on 10-year U.S. Treasury Notes.


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http://www.whitehouse.org - August 06, 2013 - 05:50 PM EDT

Promoting the American Dream of Homeownership
By Shaun Donovan, Secretary of Housing and Urban Development (“HUD”)

Today, I joined President Obama in visiting Phoenix, where he laid out his vision for a housing system that promotes the American dream of homeownership.

For years, owning a home was a symbol of responsibility and a source of security for millions of middle-class families across the country. But the financial crisis in 2008 put that all at risk, and by the time President Obama took office, the housing market was in free fall. Home values were plummeting and foreclosures were at record highs.

This Administration immediately took a number of steps to heal the market that helped millions of Americans stay in their homes, save money on their mortgages and turn their communities around.

Today, the market is coming back. Thanks to reforms of the financial system that cracked down on the most reckless practices that led to the housing crisis, responsible Americans can feel more confident and secure when they borrow money to purchase their own home.

We see this as critically important, not only because housing and home ownership are one of the bedrock cornerstones of the middle class – but also because it is so connected to the other ones. How do most families pay for their kids to go to college, to start small businesses, to save for retirement? It's through the savings in their homes. If we can't protect American families from this kind of crisis again, if we can't build safe, stable investment in housing and home ownership, we also cut out the rungs in the ladder to opportunity for so many families in other areas as well.

First, there are steps we can take right now that could help immediately strengthen the housing market and make sure that no homeowners or communities are left behind by the housing recovery. This includes helping more responsible homeowners save money by refinancing their mortgages, cutting red tape so responsible families can get a mortgage, helping hard-hit communities rebuild, and preserving access to affordable rental housing.

Second, President Obama put forward a plan to reform the housing finance system, centered on four core principles:

· Put private capital at the center of the housing finance system.

· End Fannie Mae and Freddie Mac’s failed business model so taxpayers are never again on the hook for bad loans and bailouts.

· Ensure widespread access to safe and responsible mortgages like the 30-year fixed rate mortgage in good and bad economic times.

· Support affordability and access to homeownership for creditworthy first-time buyers and access to affordable rental housing for middle class families and those aspiring to be.

Third, because buying a home is one of the most important decisions middle-class families make, there is more we can do to make sure that process is safe, sustainable and easy to understand. The Consumer Financial Protection Bureau has already taken a number of steps to this end, and President Obama is calling on the CFPB to finish a simplified mortgage disclosure form, which highlights the key facts any potential homeowner should know before they take out a mortgage in three pages or less.

Finally, Congress must move quickly to confirm Mel Watt, President Obama’s pick for Director of the Federal Housing Finance Agency, to transition toward a safe and sound future housing finance system.

By taking these and other steps outlined in the President’s plan, we can finally put an end to the practices that got our country into this mess. As a result, we will grow our economy and give the middle class – and all those working hard to get there – a better bargain for generations to come.

[solutions]

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Reading Liberally Editorial Notes:

The following transcript of yesterday’s (8/7/2013) PBS Interview of the Publisher of “Inside Mortgage Finance” provides additional information about President Obama’s Magic Wand.

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Salient Point No. 1 = 68% Of The New Mortgage Market Is Still Sub-Prime!!!

In paragraph 3, Margaret Warner claims that 68% of all new home mortgages are still guaranteed by Fannie Mae or Freddie Mac.

As we have studied, virtually all new home mortgages for the last year have been financed by Chairman Ben Bernanke’s U.S. Federal Reserve Bank which has been purchasing them at the rate of $85 Billion/month (for a total of $1 TRillion and counting) with a recent announcement from Chairman Bernanke that this would continue for at least the next few months.

So how do these two “facts” reconcile???

They relate to two different issues!!!

Guarantees only relate to the issue of whether a mortgage would otherwise be sub-prime, most commonly in the wake of the 2008-201? Economic Meltdown the issue of whether there is LESS THAN a 20% down payment.

In the event of default, the standard 20% down payment in the old days before sub-prime mortgages would cover interest, penalties, fix-up costs, brokerage fees, etc., etc.

Accordingly, a guarantee from Fannie/Freddie only protects the investor in the mortgage (nowadays Chairman Bernanke’s Federal Reserve) to the extent a sub-prime mortgage had less than the standard 20% down payment.

HOWEVER, IT DOES NOT GUARANTEE THAT THERE WILL BE ANY INVESTORS FOR MORTGAGES IF CHAIRMAN BERNANKE’S FEDERAL RESERVE ABANDONS THE FIELD!!!

And presumably no investors in their right minds will want to invest in long-term fixed-rate mortgages (whether or not they had 20% down payments or a U.S. governmental guarantee that substituted for such a down payment) if they believe, as most financial gurus do, that interest rates will rise -- RENDERING LONG-TERM FIXED-RATE MORTGAGES TOXIC.

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Salient Point No. 2 = The New Federal Mortgage Insurance Co. Does NOT Guarantee Against Future Losses For U.S. Taxpayers!!!

Margaret Warner’s claim that 68% of all new home mortgages are guaranteed by Freddie or Fannie spotlights the disturbing specter that 68% OF ALL NEW HOME MORTGAGES ARE STILL SUB-PRIME!!!

And despite President Obama’s claims regarding the magic powers of his magic wand, he is NOT proposing a guarantee that the future costs of bailing out these sub-prime mortgages will not fall on taxpayers!!!

First (please see Transcript Paragraphs 5 & 7), President Obama is proposing to substitute a new Federal Mortgage Insurance Corporation for Fannie and Freddie, which will be terminated.

This is mendacious as can be seen from the history of the U.S. Governmental Deposit Insurance for the Savings & Loans of the 1980’s and 1990’s, and the 2008-201? bailouts of the commercial banks which were compelled, in part, by the U.S. Governmental FDIC Insurance for their depositors.

In other words, the existence of insurance does not guarantee that the insurance company itself will not go bankrupt!!! [Or if the “insurance company” is the U.S. Government, that the cost of its bankruptcy will not be borne by future taxpayers as happened with the S&L’s of the 1980’s and 1990’s, and as happened recently with the commercial banks!!!]

All that would have to happen would be the Federal Reserve raising interest rates to cool the economy similarly to what it was forced to do in the 1980’s AND OVERNIGHT LONG-TERM FIXED-RATE MORTGAGES HAVE BECOME TOXIC AND THE BANKRUPT U.S. GOVERNMENTAL INSURANCE PRODUCES GIGANTIC LOSSES FOR U.S. TAXPAYERS!!!

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Salient Point No. 3 = President Obama’s Magic Wand Does Nothing To Guarantee There Will Be Investors In Mortgages Once Chairman Bernanke’s Federal Reserve Abandons The Field!!!

As pointed out in the discussion of Salient Point No. 1, President Obama does not address the insanity of any investor in providing long-term fixed-rate mortgages, since rising interest rates will render such mortgages TOXIC!!!

That is why it is fair comment to accuse President Obama of waving a magic wand!!!

Because he assumes private investors will be insane!!!

[As if he really believes that nobody has learned the lesson of the Savings & Loan crisis of the 1980’s and 1990’s!!!]

Accordingly, it is worthwhile to pause at this point to note that before the 2008-201? Economic Meltdown, Fannie and Freddie were performing a basic function of investing in mortgages, both prime and sub-prime, AND NOT JUST GUARANTEEING THEM AS MARGARET WARNER CLAIMS THEY ARE NOW DOING.

In this regard, at least two points are worth noting.

First, Fannie/Freddie/Bernanke CAN ENGAGE IN INSANITY BECAUSE THEY ARE THE U.S. GOVERNMENT!!! But that does not mean that the rest of us can afford to engage in insanity!!!

Second, Fannie and Freddie had TAXPAYER SUBSIDIZED financing. Just like the Savings & Loans of the 1980’s and 1990’s which had taxpayer-subsidized financing courtesy of the U.S. governmental deposit guarantees, and just like commercial banks have taxpayer-subsidized financing courtesy of FDIC guarantees, Fannie and Freddie enjoyed below-market interest-rate costs because the market believed that Fannie’s and Freddie’s debt obligations were guaranteed by the U.S. government.

So who are the private mortgage investors that President Obama believes will materialize outside the nation’s insanity wards???

It would appear that President Obama is in the classic position of “Road Runner” -- the classic cartoon character who runs so fast he does not notice he has run off a cliff -- except that unlike Road Runner who pauses in mid-air to register/appreciate his predicament before plummeting to the rocks below, President Obama hasn’t looked down yet!!!

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Salient Point No. 4 = Pols Like U.S. Governmental Insurance Guarantees Because The Pols Do NOT Have To Disclose What Will Happen To Future Taxpayers When The U.S. Governmental Insurance Goes Bankrupt!!!

Some pertinent questions for President Obama’s first press conference tomorrow (8/9/2013) in 3.5 months* =

1. Do you really think, Mr. President, that proposing a new Governmental Insurance Company will cause taxpayers to “take their eye off the ball” of what always happens to bankrupt governmental insurance companies???

2. Will you be honest enough, Mr. President, to admit to taxpayers/voters that they will have to foot the bill if your new Governmental Insurance Company goes bankrupt???

3. Why do you think, Mr. President, that private investors are insane??? In other words, that they have NOT learned the historical lesson of what happens to investors in long-term fixed-rate mortgages, such as the S&L’s of the 1980’s and 1990’s, when interest rates rise rendering investments in mortgages TOXIC???

[* President Obama’s last press conference was 4/30/2013 -- on 7/19/2013 President Obama unexpectedly made a cameo appearance at one of White House Press Secretary Jay Carney’s press briefings to make an impromptu speech on the Trayvon Martin verdict, but his cameo appearance was not a Presidential press conference.]

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PBS Newshour – 8/7/2013 - Transcript

1. JEFFREY BROWN: President Obama returned to the topic of housing today. Margaret Warner has that.

2. MARGARET WARNER: The president today vowed to push Congress to pass broad housing reform by the end of the year, one of his key proposals, wind down the roles of Freddie Mac and Fannie Mae, the two massive mortgage finance companies taken over by the federal government in the depths of the housing crisis. In Phoenix yesterday, he endorsed a Senate proposal to -- quote -- "end Freddie and Fannie as we know them."

3. PRESIDENT BARACK OBAMA: Private capital should take a bigger role in the mortgage market. I believe that our housing system should operate where there's a limited government role, and private lending should be the backbone of the housing market.And that includes, by the way, community-based lenders who view their borrowers not just as a number, but as a neighbor.

4. MARGARET WARNER: Freddie and Fannie have been in government receivership since failing nearly five years ago, costing the government $187 billion to bail them out. Now they are turning a profit and are on track to fully repay that amount by 2014. Two out of every three new home mortgages today are still guaranteed by Freddie and Fannie, 68 percent of the market. To explain how the president's proposal would change that landscape, we turn to Guy Cecala, publisher of "Inside Mortgage Finance," a housing industry research publication. And, welcome, Mr. Cecala. Now, the president has been talking since taking office in 2009 about reviving the housing and mortgage market. Do you see these statements this week as significant?

5. GUY CECALA,"Inside Mortgage Finance": Yes. It's the first time in several years that we have heard a position advanced by the White House, and somewhat significant in that he's talking about specifically changing the existing system we have of closing down Fannie Mae and Freddie Mac and coming up with something to replace them, but maintaining some sort of government presence in the housing market.

6. MARGARET WARNER: So, how would that work? Because he's not proposing ending all government guarantees.Is that right?

7. GUY CECALA: Yes. He's talking about a Senate proposal which is bipartisan, at least in the Senate, that talks about setting up a federal mortgage insurance corporation that would operate somewhat like the Federal Deposit Insurance Corporation, in that it would collect money from lenders and in return give them a government guarantee.

8. MARGARET WARNER: So, in other words, there would be fees paid?

9. GUY CECALA: Exactly.

10. MARGARET WARNER: Explicitly. So, what is the thinking behind this as to how this would prevent the kind of unscrupulous lending to unqualified borrowers that really precipitated the whole housing crises?

11. GUY CECALA: Well, the legislation specifically says the only type of mortgages that can go into these new securities insured by the Federal Mortgage Insurance Corporation would be super-safe. They would have to be -- couldn't have any features that were considered predatory or anti-consumer. So they would be the safest mortgages that we would have.

12. MARGARET WARNER: So, we're really talking about tighter regulation?

13. GUY CECALA: It's tighter regulation, but it's modeled after the Dodd-Frank act, and it's pretty much a regulation that the Consumer Financial Protection Bureau has already finalized and put in place to take effect in early 2014.

14. MARGARET WARNER: Now, aren't -- haven't tighter standards already been put in place, just anecdotally? There are certainly many reports of how much harder it is to get a mortgage, how much more documentation is required.

15. GUY CECALA: There's a combination of things. Certainly, the standards are tighter that would have been put in place by government agencies and to some extent regulators.

16. MARGARET WARNER: And is that including Freddie and Fannie?

17. (CROSSTALK)

18. GUY CECALA: Yes, exactly. But the issue too is that lenders are imposing tougher standards on top of those. And that's because they're very concerned about the losses that they have been asked to compensate the government for Fannie and Freddie, it has required them to buy back mortgages. HUD and the FHA have asked them to indemnify them from losses. So, rather than take any chances going forward, they have said, let's make the mortgages as safe as possible. Instead of having a 650 credit score, let's ask for a 750 credit score, that type of thing.

19. MARGARET WARNER: So, now, haven't there been people who have been arguing that's actually a good thing?

20. GUY CECALA: It's a good thing if you want super-safe mortgage market environment, but you're also talking about a much smaller pool of Americans who are qualifying to buy a home.

21. MARGARET WARNER: Even now? You're saying, even now?

22. GUY CECALA: Yes, oh, exactly. You know, compared to 2005 or 2006, we're probably talking 30 to 40 percent less.

23. MARGARET WARNER: Now, are private banks, are commercial banks interested do you think in extending mortgage loans? And is that private market that currently interested -- is the private securities market interested in buying and selling mortgage-backed securities, like Fannie and Freddie do, without government guarantees?

24. GUY CECALA: There is a -- what we call a non-agency mortgaged-back securities market that exist now, but it's a fraction of the size of the government mortgage securities market. And it's because it doesn't have a government guarantee and investors are very skittish since the subprime crises and everything else that if they buy these securities that there will be losses on them.

25. MARGARET WARNER: And so are you saying that there's question out there just among the industry you cover about whether the private industry would step up to it?

26. GUY CECALA: There certainly is. And that's why what Obama is endorsing essentially is maintaining a government guarantee, but having it as catastrophic insurance, effectively, and that private lenders would have to step up and pay a certain level of the first losses. But the security they would be selling would have a complete government guarantee.

27. MARGARET WARNER: So what would this mean for consumers, would-be borrowers, would-be sellers?

28. GUY CECALA: In theory, it means that interest rates are probably going to be higher than they normally would be. Fannie and Freddie maintained a huge mortgage securities market. They purchased them. They provided for a lot of liquidity. You certainly wouldn't have that, at least not initially, in that. So that would probably result in higher interest rates.

29. MARGARET WARNER: Now, would there also be higher fees actually from borrowing?

30. GUY CECALA: Probably not, because right now borrowers don't realize it, but lenders pay a fee to Fannie Mae and Freddie Mac to guarantees mortgages, and that fee is always passed right on to borrowers.

31. MARGARET WARNER: So, then what would be so different, I mean, if they're already paying these fees now?

32. GUY CECALA: It would be the value of the securities themselves and how much that would effectively fetch in the securities market by other investors.

33. MARGARET WARNER: Let me go back to something that the president said he wanted to preserve, and that is the 30-year fixed-rate mortgage, which actually a lot of more people returned to after the housing level burst. What's the future of that under this new system?

34. GUY CECALA: Well, that's one of the reasons why I think the president's supporting some role for the government, because it would be very hard to preserve the 30-year fixed-rate mortgage, unless you could package it into a mortgage-backed security that had a government guarantee and that investors would want, because, let's face it. Interest rates are probably rising over the next few years. And most people, banks, don't want to hold a fixed-rate mortgage on their books. They would rather have an adjustable-rate mortgage.

35. MARGARET WARNER: And very briefly, as a veteran of watching these legislative battles over Fannie and Freddie all these years, what do you -- how do you assess the prospects on the Hill?

36. GUY CECALA: Slim. This is going to be controversial. The Republicans in the House have already staked out a position that they don't want any government involvement in the mortgage market going forward. They like the idea of winding down Fannie and Freddie, but they don't want anything to replace it.

37. MARGARET WARNER: Guy Cecala, thank you.

38. GUY CECALA: You're welcome.

[UtahOwl]

As far as I understand ( which is not nearly as far as you do, John) - you are quite right. I don't see anyone sane putting money behind 30-hr fixed-rate mortgages with the undeniable prospect of inflation coming at some time in the future - certainly within 30 yrs. It's too bad, because frankly no sane home buyer should take an ARM under those conditions...which leaves no mortgage option at all.