Is there any doubt that the heart of our economic crisis centered on the mispricing of risk in a wide array of mortgage products? If that is in fact the case — and it is — then why does Uncle Sam continue to go down this road? In so doing, the ‘old man’ will only prolong the current housing crisis and likely promote another one as well. Why? A borrower’s ability to access funding at levels not correlated with that borrower’s ability to repay serves as an enormous incentive for the borrower to take undue risk. Inevitably, these greater risks will lead to greater losses. Who will absorb the losses? Ultimately, you and me. Where do we witness more of this socialized housing? Let’s navigate our way into the world of municipal housing finance.
Bloomberg details growing developments on this topic in writing, State Housing Agencies in U.S. Said Slated for Treasury Help:
State housing agencies in the U.S. would get help in providing mortgages to low-income borrowers under a U.S. Treasury Department program to provide new liquidity and purchase mortgage bonds, Treasury officials said.
The program would provide as much as $15 billion in fresh liquidity for as long as three years and would purchase as much as $20 billion in tax-exempt mortgage bonds issued by state- sponsored housing finance agencies through the end of this year, a person familiar with the matter said. The program may be announced as early as Sept. 30, said the person, who didn’t want to be named because the plans haven’t been made public.
A few questions, answers, and comments:
1. Given the enormous rally in the equity and bond markets, where is the private capital to support this initiative? There is plenty of private capital along with excess capital sitting at banks, BUT that capital would only lend itself at rates commensurate with the risks embedded in the value of the real estate and the borrowers.
2. The housing finance agencies’ inclination to ask Uncle Sam for financing and Uncle Sam’s willingness to provide it is nothing more than a socialization of this segment of the domestic housing market. How do we know? What entities will purchase the debt backing these financings?
The Treasury effort would be administered by federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, which would also purchase the bonds, the person said. Those purchases would provide enough financing to restart and to fund the state home loan programs through the end of next year, according to the person.
Oh what fun. Uncle Sam will continue to bury more mispriced debt in the books of the current wards of the state, Freddie and Fannie.
3. Why would private investors be reluctant to more aggressively provide financing to these municipal housing finance agencies? We only need to revisit the fact that virtually all of these agencies utilized a form of auction-rate security known as a VRD (variable rate debt note), which in layman’s terms is nothing short of a form of Ponzi-type financing. Investors remain stuck with a tremendous amount of this debt.
If a borrower burned you on a financing, wouldn’t you increase the rate for future borrowings?
One final comment. Socialized housing finance will certainly dissuade private enterprise from entering any part of this market for a protracted period.
Capitalism remains under assault.