U.S. President Barack Obama just gave a speech saying that he wants to reform the housing market, pulling back on the government’s role as the primary backer of your mortgage. And about time.
The government currently backs about 90 percent of newly issued mortgages, through Fannie Mae, Freddie Mac, the Federal Housing Administration and Department of Veterans Affairs. To all intents and purposes, except for very large loans to very affluent people, there is no private mortgage market in the U.S.
The president said today that he wants to change that -- to make it so that investors, not the government, are bearing more of the default risk. A fine sentiment, but he’s a little vague on the details of exactly how government involvement in the mortgage market will be wound down. Especially since he wants to make sure -- above all else! -- that the American public continues having access to the 30-year fixed-rate mortgage. This may be a bit tricky, since the 30-year fixed-rate mortgage doesn’t seem to be a product found in nature; in most other countries, they basically don’t exist. Instead, people have floating-rate mortgages with long reset periods.
That isn’t to say that no private bank would ever create such a creature. After all, jumbo fixed-rate mortgages, which aren’t government-guaranteed, do exist. But without the government guarantee, they’re a bit expensive. And in other countries, people seem to look at the expense and decide that they’d rather have a long-term adjustable-rate mortgage, thankyouverymuch, than pay the extra interest it would cost them to enjoy a fixed rate for 30 years.
So how is the administration going to withdraw the government from the mortgage market while keeping the sacred 30-year fixed-rate mortgage attractively cheap? What if banks are still cautious about lending when we start to sever Fannie Mae and Freddie Mac’s relationship as wards of the state? If interest rates rise precipitously, will the administration keep pushing forward, or will it chicken out? And how does Obama square all this with his renewed call for Congress to help homeowners with underwater mortgages refinance at today’s attractively low interest rates?
The speech offered no answers. It was less of a policy plan than a fond hope that U.S. citizens, in their role of homeowners, could continue to enjoy extremely low-cost mortgages in which the bank bears all the interest-rate risk . . . without forcing U.S. citizens, in their role of taxpayers, to finance all this bounty.