Nationalization of the Mortgage Market

Or the road to hell is paved with good intentions

So the housing market is to get some direct help. First, by recapping Freddie Mae and Fannie Mac with $200 billion. They are effectively creating at least $4 trillion in new mortgage money if the 20X leverage ratio for these monstrosities holds. More if the leverage ratio is allowed to increase (at the end of 2008 these ratios were 20X and 70X for Fannie and Freddie, respectively). This will continue the path of nationalization of the mortgage industry. Will someone please show me one example where the nationalization of an industry provided the long-term benefits it was meant to secure?

In addition, the administration will now back “cram-down” legislation. This will force the rewriting of mortgage contracts in a bankruptcy filing. The effect of this legislation will be to increase the mortgage spreads to treasuries, as issuers will demand more risk premium for issuing the mortgage. This will insure we will all pay more for our mortgages in the future.

A possible solution to the increasing mortgage spreads will be to “fix” mortgage rates. The administration will be able to do this because they will have effectively nationalized the mortgage market (see above).

Price fixing always fails in the effective distribution of goods and services. It creates winners and losers by subjective rules that have no relationship to individual incentive.

In this perverse case here, Congress forced Freddie and Fannie to underwrite sub-prime mortgages in an effort “increase” home ownership. This led to price dislocation (i.e. a bubble) from too many people chasing too few houses. The pricing bubble led to a misallocation of resources in the housing industry, which built too many houses because of the excess demand caused by the excess available credit.

A tremendous amount of those bubble home purchases are now underwater. And since the owners never could afford the homes in the first place, they find bankruptcy their only option to relieve them of their contractual obligations. The same people in government who set these homeowners up for failure now want to penalize the rest of the housing market with more expensive mortgages.

Look for this severe warning sign, price fixing of mortgages. Either explicitly via mortgage rates, or implicitly via a “credit worthiness” criteria outside of the true bill paying capability of the borrower that helps some buyers over others get mortgages from our national mortgage providers. If you see this happen, our troubles are just beginning.