The Forclosure Picture Worsens: Privatization Thwarted; Disaster Prevented

First a little background info… FM Policy Focus, formerly FM Watch, is a coalition of financial services and housing-related trade associations working with affordable housing and consumer advocates, taxpayer groups and financial institutions. FM Policy Focus is dedicated to monitoring the activities of two government-subsidized enterprises (GSEs), Fannie Mae and Freddie Mac.”(FM Policy Focus is currently Chaired by J.C. Watts, conservative ex Republican Congressman from Oklahoma, and was originally named “FM Watch”. Originally formed in 2001, it would have put these GSE’s out of business by now if left to its own devices.) 

“The fundamental problem is that GSEs are private companies with a public mission… While every company has the right to pick its partners, the fact that the GSEs enjoy an array of taxpayer-backed benefits means that this process of picking winners and losers selectively transfers government benefits and distorts the efficient functioning of the private market.” (emphasis added)

New Alliance Confronts FM Watch, Champions Existing Housing Finance System
by Broderick Perkins

“On the heels of the U.S. Department of Housing and Urban Development’s vow to boost home ownership to 70 percent this decade, the new says its national coalition of home builders, community bankers, community developers, civil rights groups, real estate brokers and secondary mortgage market leaders will help make it so….The Homeownership Alliance says FM Watch is comprised largely of Fannie Mae’s and Freddie Mac’s private-sector competitors who want to undermine the competition. “Until all Americans enjoy decent and affordable housing, as well as the opportunity for home ownership, the critical support provided by the GSEs to the housing finance system should not be weakened,” the alliance says.”

Followers of the current real estate/foreclosure crisis know that the part of the system based on “conventional loans” (Fannie Mae and Freddie Mac), and “government loans” (FHA and VA) is functioning near normally with regards to being able to provide mortgage financing throughout the events of the past few months and is anticipating no problems for the future. These loans consistently make up about 60% of mortgages nationwide.

Conversely, the other 40% of mortgages were originated by strictly private entities and are presently either functioning on the basis of dramatically higher rates for jumbo loans (large loan amounts), or, in the case of sub prime and ALT A (stated income, etc.) lenders and products are now virtually non existent.The long and the short of it is that the people who controlled 40% of the business were strictly private players and have had an ongoing effort to take away the 60% of the business that serves ordinary middle class borrowers. This market segment has been able to function well and effectively in the past because of its connections with the federal government. Those connections have resulted in the ability to offer mortgage interest rates that strictly private lenders have not been able to compete with, and it is this fact that gave rise to the organized and concerted effort by big business to privatize all mortgage lending in the

FHA (Federal Housing Administration) and Fannie Mae (Federal National Mortgage Association) had their genesis in The Great Depression. Real estate markets collapsed, and home ownership retracted dramatically. FHA is a straight government program under HUD that, today, lends no money directly, but insures lenders who make loans in compliance with FHA guidelines. FHA is mostly not in the sights of the privatizers yet because of its small market share, and the fact that FHA does not directly raise or lend money.

Fannie Mae was designed and intended to be a conduit to efficiently move mortgage money from Wall Street to Main Street. Along the way Congress made Fannie Mae a private corporation, and that is where it got the title of “GSE” (Government Sponsored Enterprise). “Fannie Mae is now the ninth-largest business in the world according to Forbes’ Rich List of top 1,000 businesses. Freddie Mac (Federal Home Loan Mortgage Corporation) was created by Congress to be a competitor to Fannie Mae but, aside from being smaller, is different from Fannie in no important aspect.

Fannie and Freddie have preferential access to money from The Street because their nature as GSE’s gives them a connection to the federal government not enjoyed by any other mortgage industry player. This relationship gets labeled as “implicit full faith and credit” and results in borrowing costs (rates) a bit higher than Uncle Sam gets directly, and a bit lower than even the highest rated private borrower can qualify for. This lower cost of doing business is passed on directly to qualifying borrowers and it is this fact that makes conventional loans the gold standard of all mortgages.

By lending to riskier borrowers Fannie and Freddie would incur more bad loans and would, then, not have lower rates to pass on to the great bulk of borrowers (though FHA does take up some of the slack here). By lending in larger loan amounts for larger homes (currently generally above $417,000) it is clear that Fannie and Freddie would be using their preferential status to the benefit of people who should be able to afford to pay the full market rate, and Congress prohibits this. Suffice it to say that within their niche (if the majority of the market can ever be properly characterized as a niche) the GSE’s are unassailable by any business competitor.

The mind set of the right wing believer in “free markets” is, of course, that there is something inherently wrong with government involvement in anything that private enterprise would like to label as its own territory. According to conservatives, it’s unfair to make private companies compete with the government. Further, they’ll tell anyone who will listen, the public pays a high cost to assign almost all functions to government because the private sector will usually do a better job for less.

And then along comes the “credit crunch” (real estate/subprime crisis) and proves just exactly how dangerous it can be to just blithely fall for the right wing position. The part of the mortgage industry that has the most government involvement is still open for business today. The private players are hemorrhaging red ink daily, and have pulled out of most of the portions of the market that they competed in only with each other. The rules were looser, the profit motive was greater, the level of stupidity knew almost no bounds, and the players competed each other largely out of existence.

We’re facing a crisis right now with a few tools in the form of Fannie Mae, Freddie Mac, and FHA left to attack it. Fortunately the majority of borrowers can still find good financing with which to purchase the majority of homes that are on the market. Not enough buyers, and too many homes, but still.

Now imagine the same number of foreclosed homes, vacant and often deteriorating, clogging nearly every neighborhood in the land, and a privately run mortgage industry in complete shambles at just exactly the point in time when reasonable home financing is critical to our national economic wellbeing. In real estate finance, as in so may other things, if we want to have a crisis turn into a disaster the only thing required is to let Republicans run the government and the country their way.  

The reason we have government involvement in agriculture is that people would die if we had market fluctuation resulting in periods of no food. The reason why we need continued government involvement in real estate finance is that the economy would self destruct right now if there were no means left to finance the people who are still ready and willing to buy homes. We are now within shouting distance of an economic catastrophe, and would already be in the middle of it if groups like FM Watch had been able to create the mischief that they have been trying for since Bush took over the government.

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5 Responses to The Forclosure Picture Worsens: Privatization Thwarted; Disaster Prevented

  1. “New Alliance Confronts FM Watch, Champions Existing Housing Finance System” this story, is more than seven years old and posting it is a disservice to your readers. It contains little current relevance.

  2. Darrell Prows says:

    Broderick Prekins:

    The right wing attempt to privatze is a philosophical battle. Sadly, it doen’t have an expiration date. I did nothing to misrepresent the opposing parties, the current state of the antagonism, or the stakes to the nation in continuing to have government involvement in housing finance.

    Obviously if you disagree with these points, you’re welcome to offer something substantive.

  3. michelle berry says:

    we are going to enter into the realm of foreclosure. Currently in a “short sale” the government could consider the amount not covered in the amount of the sale of our home as “income” and tax us. Need recent status on the bill being voted on a government plan/bill that will wave this tax. CAN YOU HELP WITH THIS INFO?

  4. michelle berry says:

    There is a bill being considered to wave the tax currently considered income in a “short sale” for those in process of forecloser. Can you give me an update on this bill?

  5. Darrell Prows says:

    I’ve seen it mentioned, and I believe that it is in the bill just passed by the House. Even if so, it will need to go through the Senate and Conference before anyone can tell you clearly that it is a done deal. It is, however, a proposal from the Administration so veto won’t be a concern.

    I think that a publication called Real Estate Finance Today covers these things on the web. If not, it should be in any large university library.

    By the way, you may not have been told that the mortgage industry rates a short sale identically with a full foreclosure. Both things have exactly the same affect on you trying to buy a house in the future. Most people will take the foreclosure and do a bankruptcy to discharge the deficiency. That counts against you on FHA for either two or three years, depending on the circumstances.