Fannie Mae and Freddy Mac condition Request A bailout from the US Treasury (read American taxpayers) has brought back the unresolved legal status of these two government-sponsored enterprises to the public eye. In this debate, it is held that GSEs, or some replacement entities that benefit from government guarantees, are necessary for an effective financial market.
GSEs, however, do little that cannot be done – and has not already been done by the private sector. In addition, these institutions pose a significant financial risk to American taxpayers. Reducing this cost against the minimum cost makes it a matter that the GSE should be abolished.
Without the GSE, the mortgage market would not look fundamentally different than it is today. Proponents argue that the GSE ensures low mortgage rates, the availability of standard 30-year fixed-rate mortgages, supports home ownership and lending to people with low-income or weak credit profiles, all of which the private sector could possibly will not do. Not true on all fronts.
First, GSE does not offer lower mortgage rates to consumers despite a government guarantee that allows them to raise capital at a lower cost than the private sector. In the past, GSEs were able to charge lower mortgage rates to take risks for which they were not compensated. The result was a huge buildup of housing risk for the 2007–08 financial crisis.
Political cartoon on economy
Since 2009, GSEs have been required to recognize the risk in their pricing of mortgages, which have increased their mortgage rates relative to the private sector. As a result, since 2014, New research The performance with my colleague Steve Oliner shows that the mortgage rate for private portfolio whole loans has been about one-quarter percent lower than GSE rates – after controlling for risk characteristics.
And unlike Treasury Secretary Steven Menuchin Recent statementThe private market can ensure the availability of a 30-year fixed rate mortgage. Data from CoreLogic indicate that 76 percent of private portfolio mortgages generated in 2017 were 30-year mortgages, not far below GSE’s share of 85 percent.
In addition, GSE has a great influence in promoting homeownership. Latest 2016 housing data collected under Home Mortgage Disclosure Act It states that six out of 10 GSE mortgages had nothing to do with buying primary housing – and only one-third of these primary purchases went to borrowers with incomes below the average of the loan sector. GSE borrowers with a loan amount of over $ 200,000 were generally affluent, with an average income of more than 60 percent of all households in the metro area. So why should taxpayers be on the hook for these borrowers?
The data also shows that despite the major role of GSE, private portfolio investors – mostly large banks – are already very active in the home buying market. For loans below 2016 Credit limit, Which is the maximum loan amount for purchases by GSEs, totals $ 228 billion in private investor loans and is one-fifth of the combined total of GSE and private loans. Private portfolio loans below $ 200,000 account for a quarter of the total portfolio. While GSE borrowers below $ 200,000 had a median income under the middle sector, private sector borrowers in the same range also had lower incomes. Based on these figures, it is not true that low-income borrowers are away from the private sector.
While it is true that GSE’s credit box is somewhat wider than that of private portfolio lenders, more than two-thirds of 2016 GSE primary purchase loans fit inside portfolio lenders’ credit boxes without any down payment or price changes. Will happen. Bought home Many GSE borrowers, seeing their prosperity, can increase their down payment – or opt for a less expensive home. Either adjustments, or both together, will increase the percentage of loans that meet the credit standards of private lenders.
So why don’t we see more private portfolio loans today? The simple answer is that regulators have tilted the sports sector in favor of GSE. with speed Rising house prices GSEs are making loans more attractive relative to portfolio loans, as regulators have GSE loan allowed To carry a debt-to-income ratio of 50 percent, While for the private sector it has become more expensive by a ratio of 43 percent. Thus GSE borrowers can take more loans to compensate for higher prices. With inventions At least, This additional debt eliminates driving prices even more, leading to a vicious cycle of more debt, higher prices, greater risk and, ironically, greater demand for GSEs. What GSE puts in the business are the same failed housing policies that have brought us into the last financial crisis.
GSEs are not needed in the housing market – and they have become detrimental to the long-term health of the market. They can be eliminated through a gradual decrease in bus Credit limit. This would create space for the re-emergence of an active private mortgage-backed securities market that ensures safer and more stable housing finance systems for all, while keeping taxpayers off the hook.