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Partly because the state charges too little for the guarantees it offers, taxpayers are subsidising housing borrowers to the tune of up to $150 billion a year,

by dzdt 10y ago

Partly because the state charges too little for the guarantees it offers, taxpayers are subsidising housing borrowers to the tune of up to $150 billion a year, or 1% of GDP. The original post makes this claim without any citation. I don't think it is correct. Recent stress-test reports on Fannie and Freddie show that, even making provisions for future bailouts in the stressed scenario, the agencies are profitable to the government. [1] Instead of costing $150 billion per year, since the agencies were nationalised they have returned $60 billion to the government. [1] https://www.bloomberg.com/view/articles/2016-08-08/fannie-and-freddie-will-be-profitable-after-their-next-bailouts-too https://www.bloomberg.com/view/articles/2016-08-08/fannie-an...

tokenadult 10y ago
The claim of the article is more that current government policy has not correctly priced in the externalities caused by most mortgage funds ultimately being available through bonds rather than through bank deposits. "The public would have to foot the bill, of around $400 billion, making explicit the contingent liability for future losses that it already bears. The cost of mortgages, at a record low today, would also rise. But that would eliminate the ongoing hidden subsidy and create a level playing field so that private firms were able to do more mortgage lending. If that bill was too big to swallow, a second-best would be to impose the new rules on new mortgages, leaving the stock of subsidised existing loans to run down over the coming decades." Thanks, by the way, for linking to the Bloomberg article, about a different issue, but a good source in general for comments about economic policy.
martincmartin 10y ago
The post links to another article with a few more details: [Imagine that the securitisation industry] had to carry the same level of capital as banks do and to make an adequate (10%) post-tax profit on that capital. The higher costs entailed give a sense of the scale of the current distortion. On this basis The Economist calculates the subsidy on mortgages to be running at $150 billion a year, 1% of GDP. (This estimate includes the impact of the Fed’s bond-buying on interest rates and the cost of tax breaks on mortgage-interest payments.)
evanpw 10y ago
This stress test is assuming credit losses about a quarter of the size of the stress test 2 years ago, and much smaller than the last crisis (0.56% vs. 2% vs. 1.4%). Does anybody know if something has structurally improved in the Fannie/Freddie portfolios, or whether the testers are just less pessimistic than they were 2 years ago? [1] http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_DFAST_Severely-Adverse-Scenario.pdf http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_DFA... [2] http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/GSEFinProj2014FINAL.pdf http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/GSEFinPr... [3] https://online.wsj.com/public/resources/documents/irasohnfinal2014.pdf https://online.wsj.com/public/resources/documents/irasohnfin...
- fathom 10y ago
  If anything this [1] article would lead the reader to believe since Fannie/Freddie are now spearheading the leading charge their portfolios are further out of line with the market reality. [1] http://www.economist.com/news/leaders/21705317-americas-housing-system-was-centre-last-crisis-it-has-still-not-been-properly http://www.economist.com/news/leaders/21705317-americas-hous...
tedunangst 10y ago
It's possible to turn a profit while still selling something too cheaply. The claim (as I understand it) is that leaving money on the table is tantamount to giving it away.
spikels 10y ago
I can remember people making similar arguments before the last crisis. It turned out we had to put not only bailout Fannie and Freddie, HUD's mortgage programs and the entire mortgage banking industry but also create a price support program for mortgage securities. If the guarantees really cost nothing or are profitable, the US should stop making them. They create all kinds of distortions even if it averages out. But it's the fact that all the particpants (banks, agencies, etc) want them so badly makes it clear how valuable they really are.

by dzdt 10y ago

tokenadult 10y ago

The claim of the article is more that current government policy has not correctly priced in the externalities caused by most mortgage funds ultimately being available through bonds rather than through bank deposits. "The public would have to foot the bill, of around $400 billion, making explicit the contingent liability for future losses that it already bears. The cost of mortgages, at a record low today, would also rise. But that would eliminate the ongoing hidden subsidy and create a level playing field so that private firms were able to do more mortgage lending. If that bill was too big to swallow, a second-best would be to impose the new rules on new mortgages, leaving the stock of subsidised existing loans to run down over the coming decades." Thanks, by the way, for linking to the Bloomberg article, about a different issue, but a good source in general for comments about economic policy.

martincmartin 10y ago

The post links to another article with a few more details: [Imagine that the securitisation industry] had to carry the same level of capital as banks do and to make an adequate (10%) post-tax profit on that capital. The higher costs entailed give a sense of the scale of the current distortion. On this basis The Economist calculates the subsidy on mortgages to be running at $150 billion a year, 1% of GDP. (This estimate includes the impact of the Fed’s bond-buying on interest rates and the cost of tax breaks on mortgage-interest payments.)

evanpw 10y ago

This stress test is assuming credit losses about a quarter of the size of the stress test 2 years ago, and much smaller than the last crisis (0.56% vs. 2% vs. 1.4%). Does anybody know if something has structurally improved in the Fannie/Freddie portfolios, or whether the testers are just less pessimistic than they were 2 years ago? [1] http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_DFAST_Severely-Adverse-Scenario.pdf http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_DFA... [2] http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/GSEFinProj2014FINAL.pdf http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/GSEFinPr... [3] https://online.wsj.com/public/resources/documents/irasohnfinal2014.pdf https://online.wsj.com/public/resources/documents/irasohnfin...

fathom 10y ago
If anything this [1] article would lead the reader to believe since Fannie/Freddie are now spearheading the leading charge their portfolios are further out of line with the market reality. [1] http://www.economist.com/news/leaders/21705317-americas-housing-system-was-centre-last-crisis-it-has-still-not-been-properly http://www.economist.com/news/leaders/21705317-americas-hous...

tedunangst 10y ago

It's possible to turn a profit while still selling something too cheaply. The claim (as I understand it) is that leaving money on the table is tantamount to giving it away.

spikels 10y ago

I can remember people making similar arguments before the last crisis. It turned out we had to put not only bailout Fannie and Freddie, HUD's mortgage programs and the entire mortgage banking industry but also create a price support program for mortgage securities. If the guarantees really cost nothing or are profitable, the US should stop making them. They create all kinds of distortions even if it averages out. But it's the fact that all the particpants (banks, agencies, etc) want them so badly makes it clear how valuable they really are.