Awesome Idea for Making Fannie and Freddie Go Away

I am in the process of completing a home mortgage.  The process has become awful again, not as bad as it was in the early 90's but harder and more frustrating than in the mid-2000's.  There is one set of rules, and if one's situation does not fit those rules, good freaking luck.  Right now, for example, getting a home mortgage when one is self-employed, even in a pretty large business with a decade of history, is really hard.

So I like this proposal

At the moment there is nobody doing conforming mortgages except Fannie and Freddie. Indeed there is almost nobody doing mortgages of any kind except Fannie and Freddie. If the free market wants the business they can have it. (They just don't want it at this sort of interest rate spread - and I don't blame them.)

All the government need to do is tell Frannie to raise their price a little each quarter. Currently they charge 20-25bps for guaranteeing mortgages. (The free market won't take credit risk at that price.) So it is entirely open to the FHFA (and hence the Treasury) to tell Fannie and Freddie to raise their prices by 5bps. The government will get paid better for the risk they are taking (and what free market ideologue will disagree with that) and the private sector can compete if they want to.

I doubt the free market will. But then in a quarter or two Frannie can raise their pricing by another 5 bps. And a quarter or two later Frannie can raise by another 5bps.

At some stage you will get to a level where the private sector chooses to compete. Frannie should not set its price competitively though. In another quarter they should raise the price another 5bps. And in another quarter they should raise again.

By the way, this is a classic example of not learning from your last mistake.  That spread is absurdly low.  I wouldn't guarantee my best friend's loan for 20bp.  Would you take on the default risk of a $100,000 mortgage for $200 a year?

  • IgotBupkis, President, United Anarchist Society

    > Awesome Idea for Making Fannie and Freddie Go Away

    I haven't read it yet...

    Kill 'em all and let God sort 'em out?

    That certainly sounds awesome.

  • morganovich

    Right now, for example, getting a home mortgage when one is self-employed, even in a pretty large business with a decade of history, is really hard.

    that is the triple truth.

    i just took out a mortgage that was significantly less than my annual income and put over 67% down on a house that appraised well over the selling price and STILL had a massive wrangle to get a loan because 0% of my income is on a w-2.

    hell, i pointed out that i had 5 times the mortgage in extremely liquid assets and nearly its whole value just at their damn bank and they still squabbled over a $400k conforming loan which then then promptly sold to fannie according to the letter i got.

  • Noah

    It's the government. They make up the losses with volume.

  • A Friend

    I do not think that word means what you think it means. The purpose of FNMA and Freddie is to prop up the housing market far above market pricing. If you make them go away, the housing market will collapse and Obama will not get re-elected.

  • morganovich:

    Surely, you jest about zero W-2 income. Sounds to me like it is time to create an S-Corp and put yourself on the payroll.

  • Dr. T

    Under the new mortgage rules, a person with a steady income that will barely support the initial ARM payments can get a mortgage with just a 3.5% down payment. However, a person with plenty of collateral and either investment or self-employment income cannot get a mortgage at all. (See moganovich's comment above.)

    I'm an early retiree with a net worth of over 1.7 million, but I could not get a mortgage for $300,000 (or for any smaller amount) because I do not have a "guaranteed" income. (The fact that no private sector employee has a guaranteed income seems lost on government bureaucrats.) The mortgage broker told me of a customer worth over six million dollars who could not get a $400,000 mortgage because he did not own enough investments (such as annuities) that guaranteed dividends. Banks would love to provide mortgages to such persons, but they are prevented by current regulations.

    Government interference in the financial industry was, is, and always will be a disaster.

  • IgotBupkis, President, United Anarchist Society

    > It’s the government. They make up the losses with volume.

    Noah, I don't think "Shouting Loudly" is what is usually meant with that phrase...

  • joshv

    The fact that nobody is making loans to individuals willing to put down 20%+ puts lie to the idea that anybody believes the market is close to or has stabilized. If the market has stabilized, 20% down is almost a guaranteed profit for the banks in the event of foreclosure, they really shouldn't care at all how stable your income is - at 30%+ they shouldn't even look at your income - who cares if you go into foreclosure. At 40%+ it shouldn't even matter if the market is still falling. If I put $80k down on a $200k condo, I have no idea how the bank could possibly lose money. If I lose my income and am stupid enough not to sell at a loss and eat into my significant equity, the bank can do it for me and pocket a nice profit, even if it has to sell at $150k to make a quick sale.

  • Bob Smith

    "Banks would love to provide mortgages to such persons, but they are prevented by current regulations"

    No, they aren't. What they're prevented from doing is selling those loans to Fannie and Freddie. They can keep the loans in-house, like lenders traditionally did before securitization, if they want to do loans Fannie and Freddie won't buy.

  • markm

    As Bob said, the issue is that the banks nowadays are less mortgage lenders than mortgage brokers. Rather than taking the profits and risk of carrying loans, they often just collect their loan processing fees and resell the loan. If the major mortgage buyers are government bureaucracies with inane rules, then the banks will issue mortgages according to inane rules.

    So what do the banks do to earn a return on their own capital and deposits? I suspect Dr. T could easily get a loan secured by his stocks rather than his house, but the interest rate would be much higher. Blue-chip stocks might be more stable nowadays than the housing market, but the bank would be risking it's own money rather than the taxpayers. Likewise, unless Warren has a whole lot of cash set aside - and he wouldn't be seeking a mortgage if he did - every expansion of his business requires negotiating a loan with his bank. Unless he can manage to fit this under some sort of government loan guarantee, it's going to need a substantial investment by Warren (far more than the equivalent of a 20% down payment), and still have a pretty high interest rate. A small business that looks quite sound this month may fail next month because of things outside its control, or because the owner suddenly became stupid. And then it's unlikely the assets can be auctioned for even half what they cost.