New Home Refinancing Plan Steals from Piggy Banks to Boost Prices
On February 8th Lenore Hawkins joined the Freedom Fighters to discuss a new proposal to aid the struggling housing market and the recent push to include Fannie Mae and Freddie Mac in the federal budget.
President Obama wants a sweeping new program to help more struggling homeowners refinance their mortgages at lower interest rates, but there’s an important detail – a fee Uncle Sam will likely charge homeowners for the government’s help. The President proposed lowering monthly payments for millions of homeowners by refinancing their loans through the Federal Housing Administration. The agency provides insurance against default for banks that make riskier loans mainly to borrowers who make small down payments. FHA currently tacks 1.15% on top of the interest rate of new mortgages it guarantees. While the Administration has not yet decided how to structure charges this new refi program, a fee of that size could reduce savings for borrowers and make it less cost effective for the borrower. To help pay for this plan, the President proposed a new fee on big banks. It would raise $5 billion to $10 billion a year to subsidize premiums–“a big chunk of the cost,” the administration official said. The subsidies would help keep the program affordable, he said–and attractive to as many eligible borrowers as possible.
- This is all about trying to boost up the prices of homes to give people the impression that they are better off, but it is yet another example of government getting cause and effect all messed up AND taking money away from one group and giving it to another.
- Keep in mind that this refinancing would harm the owners of mortgage bonds, which are primarily mutual funds, pensions and real estate investment trusts. So in order to try and boost the price of my home, the government is going to raid my savings!
On to the efficacy of the program:
- The price of anything is determined by supply and demand.
- The demand for housing is a function of 3 things: Household income, stability of that income (will you need to move/ will your paychecks keep coming) and interest rates.
- From 1999 to 2007 Median the median home price rose 54% while median household income FELL 1%. Prices skyrocketed while the ability to pay fell? Why?
- Interest rates and the availability of credit expanded. Houses were no longer purchased to become a home, but rather as a fail-safe investment. This drove demand well beyond what it should have been.
- The exploding demand induced a construction boom. Now we have more homes that the economy can support.
- Unemployment may have fallen to 8.3%, but that is a misleading indicator. The employed as a percent of the population bottomed at 58.2% in Dec 2009 and is now only 58.5%. 0.3% increase since the depths of the recession. Meanwhile household income has continued to fall, even after the end of the recession and is now 14.2% below the 2009 peak.
- The housing problem can only be solved by 1, letting the excess supply get worked out and 2, a growing economy in which household income rises. No amount of government manipulation of interest rates and the supply of loans can, over the long run, counter the gravity-like reality of simple supply and demand.
Adding Fannie and Freddie to the National Books
House lawmakers passed legislation Tuesday to put the operations of Fannie Mae and Freddie Mac on the federal budget to more accurately reflect the costs of their rescue. When the government took over Fannie and Freddie through a legal process known as conservatorship, the Bush administration opted against incorporating the companies’ obligations into the federal budget, citing the arrangement’s “temporary nature.” The President’s administration has maintained that policy, accounting for Fannie and Freddie as entities that are independent from the government but receive regular infusions of cash. Critics, however, argue that this arrangement doesn’t reflect reality.
- In 1990, federally backed loans made up roughly 50% of all loan originations. For the past 3 years, they’ve been over 90% of all loan originations.
- Home prices continue to fall, according to a Case-Shiller report prices fell another 3.7% in November (the most recent report).
- Fannie and Freddie simply transfer the risk of mortgage default from the lender to the taxpayer.
- Although the U.S. government needs very much to get out of the home loan business, it is not reasonable for this to happen anytime soon as it would be entirely too disruptive to an already fragile and critical part of the economy.
- The most likely solution for Fannie and Freddie is to have them slowly wind down their loans, which means they will be on the books for a considerable period of time, thus their financials need to be integrated with the rest of the federal government.
- Ultimately taxpayers and the U.S. economy will only be protected from future bailouts by a full withdrawal of the federal government from housing policy. Interventions by the FHA, Fannie, Freddie, Federal Home Loan banks etc continue to push excess capital into the housing markets, making the commercial banking sector overly vulnerable to downturns in the housing market.
