I collect some of my thoughts in this essay.
Who will win the battle to get the most favorable subsidies and regulations? At this point, all signs point to victory by two of the biggest culprits in the mortgage crisis — the mortgage bankers (firms that originate loans to distribute, not to hold) and the Wall Street investment banks. Both depend on securitization if they are to participate in the mortgage lending process. However, securitization has only been able to compete with traditional bank lending when securities are backed by guarantees from the taxpayers and when bank capital requirements punish banks that hold their own loans.
Arnold:
I appreciate the housing finance history contained in your full essay. But I suspect your treatment of who wins and who loses is somewhat myopic. You begin your essay with the question, “Who will win the battle to get the most favorable subsidies and regulations?”, and end it with, “You lose.” – with the “You” implied as being the U.S. taxpayer, or the even larger subset of the U.S. economy, the U.S. homeowner.
I beg to differ. U.S. taxpayers and homeowners have already won. By subsidy and regulation, a U.S. homeowner (real or potential) has access to a virtually limitless supply of very low-cost money, the interest portion of which is tax deductible, and the right to re-finance – at any time – at a different interest rate cost. In short, actual or potential U.S. homeowners have access to the largest and most robust credit lines in the world, and under the most privileged debtor terms in the world.
The problem for U.S. taxpayers, homeowners, policy makers and the full U.S. financial system is how to keep that state of affairs – to the benefit of U.S. homeowners – intact and viable. And to do so under all possible permutations of U.S. and local economic conditions. That was the acute problem back in the 1930’s that resulted in the origination of Fannie Mae and various other mechanisms – all designed to ensure a large, robust supply of low-cost money would always be available to the U.S. housing market, under all conceivable economic conditions. Much of the regulatory change regarding the housing finance sector subsequent to the 1930’s (some of which you noted), has been with the purpose of continuing that supply, under newer prevailing economic conditions (both excess growth, and slowdown) that weren’t conceivable then.
Any investor will tell you that low-cost money and large supply of money are mutually exclusive concepts. You noted that exclusivity in your essay in describing the inability of the S&L system to supply mortgage monies to support the California housing sector growth (and economic growth) during the 1970’s and 1980’s – due specifically to “interest rate caps” that resulted in too little depositor money available to lend. Low-cost/low-return money isn’t in abundant supply, it seems.
The problem remains: How to ensure a large, robust supply of extremely low-cost money is available to the U.S. housing sector – to the benefit of actual and potential U.S. homeowners – under all possible circumstances of U.S. economic activity? I suspect essays that describe mortgage originators and Wall Street investment banks/bankers as “culprits” and stating U.S. homeowners and taxpayers are “losers” will NOT solve that problem.
BEFORE I GET FLAMED from commenters for this …
I am NOT defending the “bailout” actions of 2008, nor am I defending the lack of prudence of SOME of the worst “Wall Street” offenders in the events leading up to the 2008 bailout. But I consider the “problem” I described above to be an important one – far too important in fact to be addressed in such myopic, superficial terms. “Wall Street” is going to continue to be the prominent player in the U.S. housing sector, for no other reason than it is the focus, source and supply of the low-cost monies made available to the U.S. housing sector. Get used to it, OR get used to no more “low-cost”. Getting to the “solution” to this problem is going to take a much more in-depth consideration of both the nature of housing assets, and the nature of the various risks associated with supplying money to that sector than simply continuing to demonize “Wall Street”.