David Streitfeld’s NYT piece on home-equity defaults is so aggressively anecdotal, rather than quantitative, that he even says at one point that “the amount of bad home equity loan business during the boom is incalculable”. I really don’t think that’s true: a lot of very smart analysts have done a lot of pretty accurate work on that front. And Streitfeld himself belies the statement by including a pretty illuminating chart with his story.
The key thing in this chart isn’t the drop from 2009 to 2010, which is a function of the fact that the 2010 data covers only the first quarter. Rather, it’s the fact that first mortgages actually account for a minority of home-loan write-offs, and that home equity lines have accounted for significantly more, in the way of write-offs, than second mortgages.
Which brings me to the first of three op-eds that the NYT has published today on the subject of Frannie and the FHA. Here’s Katherine Stone:
Until recently, most Americans paid for their homes through 30-year self-amortizing mortgages, in which interest and principal are paid at the same time. These work well as long as homeowners have stable, long-term jobs that enable them to regularly make their monthly payments.
But these days such careers are increasingly scarce. Therefore, any effort to recover from the crisis must include more flexible mortgages that take today’s employment landscape, with its frequent job-hopping and episodic unemployment, into account.
The problem here is, as a glance at Streitfeld’s chart will show, that “more flexible mortgages” are also more dangerous mortgages. Home equity loans had all the flexibility you could possibly want — and they failed disastrously.
What’s more, Stone doesn’t actually want to get rid of the 30-year fixed-rate mortgage. She just wants to layer gimmicks on top of it: an option to pay only interest if you’re laid off here, an escrow account available in the event of unemployment there. These things don’t really make the mortgage more flexible, they just make it more expensive for the borrower, who has to pay either for the option (which he might not want or need) or else has to pay directly into the escrow account, which would be a sure-fire money loser due to paying an interest rate lower than the rate being charged on the mortgage.
Bill Poole, meanwhile, has a plan which would make mortgage rates rise much further still, assuming that mortgages were available at all:
Fannie and Freddie could not be shuttered immediately; they are too large. A sensible transition plan would have them stop buying new mortgages, and their portfolios would decline as the mortgages they own are paid down. Within 10 years, the portfolios would shrink to insignificance…
In 10 or 15 years, the companies would be gone, closing a chapter in American financial history that enjoyed considerable success but ended very badly and at great taxpayer cost.
The fact is, as John Carney says in his own op-ed (the most sensible, but also the narrowest, of the three), that the FHA and Frannie now back more than 95 percent of new mortgages. If they simply stopped buying new mortgages, the entire housing-finance business in the US would come to a screeching halt. No one could buy, no one could sell, and home values would be entirely hypothetical for years.
Yes, it’s possible to slowly build an entirely private system of mortgage lending. But you can’t do that overnight, as Poole seems to think. And he’s completely wrong, too, when he says that “if the home finance market were fully private, then it would bear the losses from its own mistakes in pricing and insurance”. Not true: when there’s a major housing crash, the government ends up bailing out the lenders whether they’re public or private. Look at Ireland.
So let’s embrace Carney’s idea of forcing lenders to retain 5% of whatever they originate, even when they sell their loans to the FHA or Frannie. And let’s try to get these state-owned behmoths out of the mortgage business in a controlled and non-chaotic manner. But let’s not do anything drastic. The last thing we need is another housing crisis, before the current one has even finished playing out.