The Treasury’s had a good go at trying to understand and perhaps fix the housing mess.
The difficulty comes not in the analysis of the past, which is very straightforward and clear, but in the lessons to be learned, both in the present and in the future.
At present, the government guarantees virtually all the mortgages in the country. The cost of doing so is very high: more than $150 billion so far doled out to save Fannie and Freddie.
Clearly, the long-term objective should be to get the government out of the mortgage guarantee business, except in times of national emergency.
Equally important is to change the way Americans view housing: a home needs to be a place to live, not a savings and investment vehicle.
On the other hand, there’s no evidence that the private mortgage industry will take over all of the government’s business without some form of guarantee. Treasury proposes to fix this by setting up a reinsurance fund with contributions from the mortgage industry.
Whichever way the government eventually decides to go, the cost of mortgages will go up significantly and it will be more difficult for middle class Americans to qualify for a mortgage (lower income and poor Americans would continue to receive a subsidy, either for buying or renting).
On the other hand, if these ideas also included the end of the mortgage interest deduction (an excellent idea), it’s likely the price of houses will fall substantially (Gorilla’s guess is 20-30% from whatever today’s as yet unachieved bottom will be) and therefore future mortgages would be much smaller (and therefore more affordable).
Alas, this will all be a tough sell presently when 25% of Americans are already underwater on their mortgages and it’s extremely likely that prices will fall another 10-20% until supply and demand reach a more sustainable equilibrium.
It’s also the case that the banking industry and the mortgage industry will fight this tooth and nail. They want to continue securitizing mortgages for fun and profit, they don’t want to pay anything for creating idiotic levels of risk, and of course they expect the government to bail them out when the next bubble bursts.
So the guess is that there’ll be lots of sound and fury about Fannie and Freddie, but nobody in either party will do very much except tinker at the margins for at least another 5 years.
Gorilla says: “The unraveling is good, but at the moment the unraveling has just begun!”
