It’s never a good idea for someone in business to talk politics. But as I think about what’s going wrong with our mortgage system, it seems hard to avoid. I don’t mean to imply that banks and other financial services firms don’t deserve some of the blame for the housing crash. There’s really enough blame to go around. The federal government may not have been involved at the beginning, but it’s involved now.
Take Freddie Mac and Fannie Mae. According to Investopedia, they are government-sponsored enterprises. GSEs are defined as privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. But in September of 2008, the federal government took over Freddie Mac and Fannie Mae, which together accounted for 50% of the mortgages in existence.
The other 50% of mortgages are done by financial institutions who create mortgage-backed security pools. These institutions fund the mortgages on credit lines, and then pool them together on the secondary mortgage market, where pension funds and insurance companies buy them. These are some of the mortgage-backed securities that went south early on, trigging the downturn. The federal government is now trying to create new rules to govern these securities, so they will basically have their fingerprints all over most of the mortgages written in the U.S.
What concerns me is that when government gets involved, the engines of commerce tend to slow down. If the U.S. economy is going to generate a recovery, housing is going to be a key part of it. When people buy homes, it triggers a multiplier effect. They remodel. They paint. They buy new furniture. They throw housewarming parties.
Approximately 90% of the population is still working, but the housing market is still in the doldrums. We could already be in a spiral that will decrease the value of housing. In the rest of the world, the mortgage business is already quite different than in the U.S. It has higher interest rates, shorter term mortgages, bigger down payments … and less expensive housing.
Americans believe that owning a home is one of their sacred rights. The public may have to face that fact that that may be changing. If there is a transition going on in which the percentage of homeowners in the U.S. decreases, it will increase the number of renters and increase the number of investment properties. But those properties may not be as profitable as they have been, so that will make them less desirable.
I don’t have the solution to this problem but I do believe the government is going to have to start extricating itself from the mortgage business - it’s simply not its core competency. And the private sector is going to have to figure out a way to step in and take over.
