Setting The Stage
“Ignoring Fannie and Freddie, the Gigantic Subprime Elephants in the Room”
Where Congress missed the mark was in addressing how Fannie and Freddie distort the housing market. By pursuing their federally mandated goal of expanding credit to finance housing over the past decades, the GSEs artificially distorted mortgage prices down across the housing market. Peter Wallison and Edward Pinto estimate the GSEs took on about $1.6 trillion in nonprime debt as a direct result of pressure to meet affordable housing goals. This flood of financing for homes, in turn, put unnatural upward pressure on housing prices. The cheaper a mortgage is, the more demand for housing increases, driving up prices and bloating a bubble. Ironically, this undermines the whole goal of affordable housing.
Unfortunately, the cycle is starting over. Americans should practice responsible wealth-building that may or may not include buying a home with enough cash for a substantial down payment. But instead, there’s still an attitude that homeownership should be pursued at all costs. And this perception is being promoted from Washington. The government has been using fiscal policy to try to boost housing prices through tax credits and federally financed mortgage modifications. But with credit markets frozen, they’ve had to use the GSEs, controlled through conservatorship by the Federal Housing Finance Authority, to act as the sole housing financers on the block.
With Fannie Mae and Freddie Mac as the only source of housing finance available today, the market is essentially completely distorted beyond what it naturally would look like. This means price levels are artificially high, and the demand for homes is inflated because of the unnaturally low mortgage rates. This is setting the stage for another bubble in housing. This is the danger that Congressional reform should address.
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Setting the stage? Some at the St Louis Fed are “setting the stage” for QE 2.0 it seems?
[quote]
The St. Louis Fed chairman said that with interest rates near zero, the central bank should shift its focus from promising low interest rates to using its printing press to push more credit into the financial system as economic conditions fluctuate.
Comment by Randal — 7/30/2010 @ 7:42 am
Looks like my prediction on Wednesday of a bad GDP number has come true. Futures -10 at 9:00 AM EDT…
-Greg
Comment by Greg — 7/30/2010 @ 8:19 am
But a decent Chicago PMI number. If you’re into that sort of thing.
Comment by BMB — 7/30/2010 @ 8:53 am
UM Consumer confidence better too.
Comment by BMB — 7/30/2010 @ 9:01 am
So true. PPT can’t allow TOO many bad numbers to come out all at once. Otherwise the market might go down. Can’t have that…
-Greg
Comment by Greg — 7/30/2010 @ 9:30 am
Freddie and Fannie were doing just fine before their conforming limits were rejiggered by Bush (through HUD) and the Republican-led Congress. The GSE’s were also allowed to purchase mortgage backed securities in liu of buying mortgages. What a great way for commercial banks to offload their junk? What a great way to socialize risk!
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay0Kkt47a3s4
Comment by John — 7/30/2010 @ 6:45 pm
Taxpayer financed debt dumpsters. But more and more little banks die off each week…
Comment by BMB — 7/30/2010 @ 8:21 pm