There’s always something to howl about

Farewell to Fannie and Freddie? Hold your breath…

The Obamanation plans to offer up three proposals to eliminate FannieMae and FreddieMac from the secondary mortgage marketplace. Expect to hear much mournful keening, in coming weeks, from the country’s best enemy of private property, the National Association of Realtors.

From the Wall Street Journal:

More than two years after the government seized Fannie Mae and Freddie Mac, the Obama administration will recommend phasing out the housing-finance giants and gradually reducing the government’s footprint in the mortgage market, according to people familiar with the matter.

The administration is expected to include three options for a post-Fannie and Freddie world when it releases a long-awaited proposal for the future of the nation’s $10.6 trillion mortgage market, which could come as soon as Friday. Together with federal agencies, Fannie and Freddie have accounted for nine of 10 new loan originations in the past year.

The White House’s “white paper” will begin what promises to be a prolonged and fiery debate about the future of how homes are financed across the U.S. Any wind-down of Fannie and Freddie would happen gradually to avoid roiling markets, and the central, unanswered question is what kind of federal function, if any, the administration and Congress will invent to take their place.

Steps to reduce the government role in the mortgage market likely would raise borrowing costs for home buyers, adding pressure on the still-fragile U.S. housing markets. Consequently, analysts believe any transition could take years and would be driven by the pace of the housing market’s recovery.

The fight over how to restructure the housing-finance system has roiled Washington, and yet both parties have been hesitant to propose detailed legislation.

For conservatives, Fannie and Freddie played a starring role in the financial crisis, and any solution that is viewed as replicating their function could face fierce opposition from some Republicans. But more moderate Republicans may resist such an approach and could join Democrats who have said a federal role is necessary to ensure broad access to home ownership.

While advancing one detailed plan risks providing fodder for partisan battles, offering multiple proposals may help the administration force those views into the open, said Michael Barr, a former assistant Treasury secretary in the Obama administration.

Brian Brady told us yesterday what actually should be done, to return rationality to the residential mortgage market:

I really believe the best approach to lending, on an asset which defines its price performance to be subject to local economic factors, is localized lending, without any government intervention.

The problem with “welfare-lite” is that it focuses on “national standards” for securitization: capital retention, standardized guidelines and fees, and useless oversight. Risk analysis is best done by those who intend to hold and service mortgages (the ultimate investor).

Here’s the trick: the American homeowner is still a good bet…sort of. Local market performance is influencing default rates now. Steep declines in California are causing what we usually considered to be gibraltars to be skaters while marginal borrowers in Kansas, with generational ties to the heartland, become safe bets.

There is something to be said about the Bailey Building & Loan approach to lending. An egoist can see that a borrower might see it in his best interest, to avoid default at all costs, to salvage his reputation in the community. Recent immigrants might want to establish a reputation in a community by appearing to be committed and stable. Both borrowers present unique risks, opportunities, and motivations to loan performance.

How then might we deal with the secondary mortgage market? We don’t. Investors will find ways to quantify geographical risk, communicate the paper they want to buy, and establish channels of distribution to purchase the paper.

The path to a robust mortgage market lies in complete deregulation.

Brian offers this as a peroration:

Unfortunately, the National Association of Realtors, keeps lobbying for welfare-lite to the peril of its members and customers.

Too true, alas. The nature of a parasite is that it will continue to devour its host even when doing so will assure not just the death of that host but also its own destruction. There is no better way of understanding the rapacious Rotarian Socialism of the NAR: They don’t care how many lives they ruin — including their own.

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