Sunday, May 29, 2011

Irvine Republican Reminds Us That Stupid Housing Policy is Bipartisan

Today's Orange County Register has an interview with Rep. John Campbell of Irvine regarding his new bill, HR 1859, which would reform mortgage lending in the United States and abolish the Fannie Mae and Freddie Mac GSEs. If this guy is leading the reform effort, the American housing market is in more trouble than we thought.

Campbell's bill, which is being cosponsored by Michigan Democrat Gary Peters, would replace Fannie and Freddie with a network of "private" entities. Each of the "associations" in this network would guarantee mortgages, though they would be prohibited from securitizing them, and the government would direct the establishment of the first five associations. There doesn't appear to be any clear safeguard against taxpayer money being used to bail out the associations in the event of a crisis similar to the one that devastated Fannie and Freddie. In other words, Campbell really doesn't explain how his proposal would result in a substantively different system from the one we have now.

To put a finer point on it, Campbell's thinking seems to be very much in line with the establishment consensus in DC, which is determined to fight economic reality to the death to preserve the status quo in mortgage lending. When asked why lending can't simply be left to the private sector, this is Campbell's response:
Throughout my lifetime, we have always had some government support for home mortgages. Without some support, the 30-year mortgage will go away. Investors will simply not make loans of that duration, with a fixed rate, and additionally take the 30-year risk that you might not ever pay them back.

If we were to wind down the GSEs without some viable replacement system, home loans would likely require 25% down or more and mortgage durations would fall to 15 years or less. This would easily trigger a 30% decline in housing prices as the payments for any home loan would rise dramatically. This decline would plunge the economy into a major recession/depression and greatly reduce the number of people able to own homes in the future. This is a disaster scenario which is completely avoidable.
If that was too long for you to read, here's our short summary: housing prices must be kept above the level at which most sane human beings would buy them, and the only way that's going to happen is if the government continues to underwrite bad loans. In other words, if you're hoping that someone in DC understands that the bad investments of the past decade need to be liquidated before a real recovery can take place, keep looking.


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