Steven Mnuchin, President-elect Donald Trump’s nominee to lead the Treasury Department, said Wednesday that privatizing Fannie Mae and Freddie Mac is “right up there on the top-10 list of things we’re going to get done,” setting off a buying frenzy among investors.
I am very leery of this. My preferred approach for getting the government out of the mortgage market is the following:
1. Immediately stop any government support for cash-out refinances, second mortgages, and investor loans. Restrict support to owner-occupied purchase mortgages or refinances that lower the rate and term of the mortgage without the borrower taking out equity. Leave all the other mortgages to the private sector.
2. Gradually lower the maximum loan amounts for government support. As you do this, the private sector will have to fill in. If somebody steps up to issue mortgage-backed securities, fine. If instead what emerges is a model with banks holding the mortgages they originate while using long-term funding methods, then that is fine, too.
If you were to suddenly “privatize” Freddie and Fannie, you might end up restoring the status quo prior to 2008, with these institutions enjoying “too big to fail” status. They can use that status to borrow cheaply in credit markets and behave like hedge funds. I can remember when they were doing exotic things involving securities denominated in foreign currency that had nothing to do with their supposed “mission” of helping housing. These exotic transactions did not cause the firms to blow up then–because they blew up on credit risk instead.
I really detest the model of privatized profits and socialized risks. If you are going to privatize Freddie and Fannie, then you have to figure out a regulatory scheme to avoid socializing the risks. It’s not easy.
Would it be better to have these ‘tamed but public’ Fannie and Freddie, or just eliminate them entirely?
Excellent proposals — especially #1. #2 would be a much harder sell given how widely real-estate prices vary across the country, but just implementing the ideas in #1 would be great.
Totally with you Arnold on this one!
Not gonna happen since re establishment of pre 2008 is exactly what the election and political course of least resistance leads to.
My guess the problem is a lot of the economy since WW2 depends on housing so the ‘right’ Frannie program would probably cause a recession for 6 months. So it seems having Frannie as government entity or completely private has to be the decision here. And although the try to lower local regulation in urban cities for more and higher housing, these decisions are made local decisionmakers who like high housing prices and less traffic. Living in California the less traffic has more impact. Ask any Irvine, CA citizen if they want more housing?
In a lot of ways, the Trump administration is entering at Bush January 2004 of the housing bubble. It needs to have slow growth and housing loans weren’t a problem during Obama administration because everybody was acting conservative for a variety of mostly economic reasons. (I say mostly because jobs and wages were down.) But:
1) Jobs and wages are coming back.
2) Rates will need to rise soon and my guess is we will see inflation next year. The commodity and oil have hit bottom in 2015.
3) Wall Street get more aggressive during Republican Administrations. (Sorry it is true.)
4) Tax cuts are not paid for and government debt likely to go up.
Restricting gov’t support to owner-occupied residencies is a fine move.
I was expecting you to call for elimination of mortgage interest, which seems very politically infeasible. My own:
#3 Replace interest deduction with “house payment” tax credit of 30%, up to a maximum per year of median income of prior year (~$53k, slowly rising). Plus a lifetime maximum of 10 times prior yr median income (~$530k).
For those who pay $1000/month, they’d get a $300/month tax credit for their payment.
It’s important to replace “interest deduction” with some other subsidy, to avoid the distortion of too much debt, too little equity, due to tax advantages of debt. The same rate tax credit is also more equal than a deduction.