Tuesday, May 11, 2010

When It Comes To Housing, The GOP Urges Use Of The Guillotine

By putting most of the blame for the housing crisis on Fannie Mae and Freddie Mac, Republicans were almost honor-bound to come up with radical ideas regarding their management. Of course, radical ideas can sound nice on paper, but what they mean in practice is something else. The GSE management amendment the Republicans have proposed means the end of middle-class American homeownership. And it's not like private lenders are out there that can fill the vacuum left behind by guillotining Fannie Mae and Freddie Mac. Without government support, loans would be too pricey for most people to obtain.

Ending homeownership (except for millionaires, of course) and turning almost everyone in the country into renters is one way to address the crisis, of course. No more trouble with liar loans, ninja loans, and the like. No more awkward real estate bubble. But also no more of the vaunted stability that homeownership brings to neighborhoods. Without homeowners, every neighborhood everywhere becomes the 'hood:
For the past year, Republicans have insisted that Congress take up legislation to stop the losses at Fannie Mae and Freddie Mac — the government-sponsored enterprises that buy up and repackage mortgages, keeping loan prices stable. Fannie and Freddie have incurred more than $150 billion in losses since the burst of the housing bubble.

...But the Republicans never said how they thought the GSEs should be reformed — until now. Last Wednesday, Sen. John McCain (R-Ariz), Sen. Judd Gregg (R-N.H.) and Sen. Richard Shelby (R-Ala.) proposed an amendment to Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill, the GSE (Government Sponsored Enterprise) Bailout Elimination and Taxpayer Protection Amendment.

Releasing the proposal — with numbers, dates and directives aplenty — Gregg commented, “Fannie Mae and Freddie Mac are synonymous with mismanagement and waste and have become the face of ‘too big to fail.’ The time has come to end Fannie Mae and Freddie Mac’s taxpayer-backed slush fund and require them to operate on a level playing field.”

But housing market experts describe the Republicans’ proposal as disastrous. Analysts from both sides of the aisle contend that the proposal would unwind Fannie and Freddie so quickly and precipitously that it would destabilize the entire housing market: pushing mortgage prices up, pulling support from low and middle-income Americans and ending the nascent — if at all extant — housing recovery.

The GSE amendment would effectively shutter the mortgage giants, which together backstopped 97 out of 100 new mortgages in the first three months of the year, according to Inside Mortgage Finance. It would keep keep the current government conservatorship in place for 24 months (or 30 months, if the Federal Housing Finance Agency determines that market conditions are “adverse”). Then, it would begin begin the process of dissolution.

Were Fannie and Freddie to prove “viable” as private institutions (a term left ambiguous) after 24 or 30 months, they would become highly regulated institutions for three years, before the expiry of their charters. They would have no affordable housing goals, would have to reduce their mortgage assets yearly, could not purchase mortgages exceeding median-home values and could only buy mortgages with certain minimum down payments — among other provisions. Additionally, they would have to pay taxes. Were Fannie and Freddie not “viable” in two years — likely, given that Fannie reported yesterday that it does not see itself reporting a profit for the “indefinite future” — the amendment puts them into receivership.

Housing experts say that the bill would impact every participant in the housing economy, including builders, buyers, developers, lenders and banks. It would make vanilla mortgages — such as 30-year, fixed-rate mortgages — much more scarce, and would make all mortgages more expensive. It would remove a major source of liquidity in the mortgage market, causing credit problems at mortgage-reliant banks. It would also rapidly reduce the number of homebuyers.

Experts describe the McCain-Gregg-Shelby amendment’s transition as too much, too soon and too blunt. Kenneth Posner, who analyzed Fannie and Freddie for Morgan Stanley and is the author of Stalking the Black Swan, describes the plan as going “cold turkey” when it might be better to “use methadone.”

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