“OH GIVE ME A HOME, LONG AS FREDDIE MAC LOANS…”

1/25/08

A major piece of the what is being called a “stimulus” plan but what is really a “rob Peter to pay Paul” plan is an increase in the size of a mortgage loan that Fannie and Freddie can guarantee AND an identical increase in the size of a mortgage that the FHA can guarantee. “Identical” is probably too strong a word; there is a difference. While the Fannie and Freddie increases are designed to be temporary, expiring on 12/31/08, the FHA increase is permanent. As a practical matter, though, this will probably work out to be a distinction without a difference; as 12/31/08 approaches, homebuilders and overextended upper middle income homeowners, two key GOP constituencies who spend much of their spare time trumpeting their dedication to free markets, will increase the volume on their whining that the government has to “do something” to “save” the home market, and the “temporary” increases in the size of Fannie and Freddie conforming mortgages will, as if by magic, be made permanent.

So now responsible homeowners and taxpayers will be placed on the hook for people who borrowed up to (Are you sitting down?) $625,000 (Six hundred twenty five thousand dollars!), or maybe $730,000 (In its rush to get this legislation through, Congress was a bit murky on this detail; one wonders how many Congresspersons read the bill.). Not only will you be indirectly on the hook for homes that, in most cases, you couldn’t afford (I certainly would not even consider spending that kind of money for a home.), but you will be DIRECTLY responsible through the FHA. Recall that while Fannie and Freddie merely have an implicit federal guarantee, the FHA is a federal agency and has a DIRECT line into the Treasury.

Recall also that, while Fannie and Freddie were not designed to help lower income households, but, rather, to support the overall housing market, the FHA was created explicitly to help low and low-middle income households buy homes. This was all part of the notion, firmly embedded in the American psyche, for better or worse, that homeownership is per se a good thing. The philosophical underpinning of this idea is that if people own a home, if they own a piece of the American Dream, if you will, they will have a larger stake in the American economy and thus will be more supportive of policies that maintain prosperity and, by extension, more supportive of their country as a whole. This has led the United States to invest a far greater share of its GDP in owner occupied housing than any other nation on earth, to the relative deprivation of other sectors of the economy. One wonders if this policy has resulted in the typical American’s being more patriotic than the typical citizen of, say, France, Japan, or Germany, but I digress.

With this expansion of the FHA’s guarantee limits to maybe $730,000 (Seven hundred thirty thousand dollars! Are you nuts!?), this whole charade of the FHA’s serving the low income, on the cusp potential homeowner has been eliminated. Yes, I know houses are more expensive in sections of California and other “highly desirable” places to live, but consider a few things. First, one of the reasons that houses are so expensive in California is that credit has been so loose. Making credit more available by putting the taxpayers in, say, Nebraska or Michigan on the hook is not the obvious remedy to California’s affordability problem. Second, if house prices are so high in such “desirable areas” that taxpayers in places where the typical home might sell for $200,000 must be forced to subsidize homebuyers who want to spend over $800,000, perhaps lower, and even middle, income people should consider relocating or renting. Just a crazy, heartless idea, I know, but it just seems to make sense that if you make, say, $70,000, you have no business buying a, say, $600,000 house and even less business dipping into the pockets of your fellow citizens to do so. But I digress.

That the veneer of “helping the less privileged” and “helping calm the housing market” has been thoroughly dispensed with was confirmed by Dom Cecere, CFO of KB homes. Mr. Cecere was quoted in the Wall Street Journal today as saying “It’s (i.e., the increase in the lending limits) a shot in the arm to the market. It’s going to spur people to move up to a more expensive house (emphasis mine) and that’s going to get the new and used markets moving again.” So there you have it: the government is going to force the typical taxpayer to subsidize the purchase of more expensive homes by faux upwardly mobile types, who in many, if not most, cases already own a home that the typical taxpayer (and, come to think of it, even the subsidy seeking “homeowner,” who simply must “move up”) cannot afford. Your government at work.

One more thing…

In my 1/17/08 commentary, I outlined my suspicions that the Bush administration has a plan to bail out their free market overextended homeowner, builder, and Wall Street constituencies by expanding the role of Fannie and Freddie, while not insisting that regulation of these two monstrosities with the Treasury’s celphone number be tightened up. (I am reminded of the words of that great businessman Don Vito Corleone, in response to a question from his consigliere Tom Hagen regarding insisting that drug dealers have clean records, “Mention it; don’t insist on it,” but I digress.) Such a plan has the virtues of temporarily helping the housing market and the economy while leaving the mess for the next (highly likely Democratic) administration to clean up.

It looks like I was once again prescient. The plan unveiled yesterday expands the size of Fannie and Freddie conforming loans while abandoning efforts to tighten up regulation of these rudderless leviathans. Treasury Secretary Hank Paulson says that he wanted to tighten up regulations but “I got run down by a bipartisan steamroller…Republicans and Democrats were united on this.” I am sure that Mr. Paulson’s attempts at tightening regulation were every bit as sincere as his feigned “regular guy” approach to the language displayed in that quoted sentence.