Wednesday, August 18, 2010

Economic Events of the Week

Wednesday – Petroleum Report
Thursday – Jobless Claims
Friday – Regional and State Unemployment

Featured Story
The Future of Housing Finance (Round Up)

Editorials & Commentaries
Whither Fannie and Freddie? A Proposal for Reforming the Housing GSEs (Marron and Swagel in e21)
Reform the Forgotten GSE (Papaganias in e21)
Stop Subsidizing Wealthy Homeowners (Dean Baker Interview with Ezra Klein)
Why GSE Reform Will Be a Challenge (The American Prospect)
Three Ideas for Mortgage Securitization Reform (Daniel Indiviglio in The Atlantic)
Bill Gross Suggests US Consider Full Nationalization (Bloomberg Video Interview)
The Government Mortgage Subsidy (Kling in EconLog)

Resources
Secretary Geithner's Opening Remarks (Conference on the Future of Housing Finance)
Housing Data Wrap Up: August 2010 (Wells Fargo)

Featured Story

The Future of Housing Finance (Round Up)

Yesterday the Treasury and HUD hosted the Obama Administration's Conference on the Future of Housing Finance. Treasury Secretary Timothy Geithner sketched out the administration's case Tuesday for some type of continued, if limited, government guarantee of home mortgages. The private sector's "full retreat" from the mortgage market over the past three years provides a "compelling illustration" of what would happen without some government role, he said. Reform of Fannie Mae and Freddie Mac, which have incurred losses of about $150bn since being placed under government control in 2008, was left out of the massive financial regulatory overhaul bill enacted last month, but has since risen to the top of the economic and financial policy agenda.

Editorials & Commentaries

Whither Fannie and Freddie? A Proposal for Reforming the Housing GSEs (Marron and Swagel in e21)

Few issues are as important to financial markets, the U.S. economy, and current and future American homeowners as the fate of Fannie Mae and Freddie Mac. The challenge for reform is to establish an institutional structure for mortgage finance that maintains the best outcomes of the earlier system and corrects its flaws. Under our proposal Fannie and Freddie would become private companies that buy conforming mortgages and bundle them into securities that are eligible for government backing. The federal government would offer a guarantee on mortgage-backed securities composed of conforming loans. This guarantee would be explicit, backed by the full faith and credit of the United States. To compensate taxpayers for taking on housing risk, Fannie and Freddie would pay an actuarially fair fee to the government in return for the guarantee, and the shareholders of the firms would take losses before the government guarantee kicks in.

Reform the Forgotten GSE (Papaganias in e21)

There is a temptation to focus housing finance reform exclusively on Fannie Mae and Freddie Mac, given their size and eye-popping losses. Lawmakers should not lose sight of the problems presented by the “other” GSE, the Federal Home Loan Bank. During the bubble, banks like IndyMac could finance their investments in bad mortgages by relying exclusively on government sources of funding – deposits insured by the FDIC and low-cost advances provided by the FHLBs. When institutions can fund their investments exclusively through non-market channels, the system becomes prone towards crisis. If lawmakers are serious about preventing another crisis, they must reform the FHLB system.

Stop Subsidizing Wealthy Homeowners (Dean Baker Interview with Ezra Klein)

In terms of ownership, I think it’s fine to help middle-income people buy homes, but the current structure is crazy. Most of the benefits go to higher-income people. If you go back to 2005, Bush’s tax commission actually had a very good proposal on housing: They proposed switching the mortgage tax deduction to a credit, and it would be capped at $450,000. Currently the cap is $950,000. That would orient it much more towards moderate-income people. And then in terms of Fannie and Freddie, go back to the old model where you have them as government companies and they just hold the mortgages. They don’t securitize them. The government can bear the risk.

Why GSE Reform Will Be a Challenge (Tim Fernholz in The American Prospect)

In the lead-up to the GSE reform conference, I'm not sure I've been clear on why these agencies are so crucial to our economy and, correspondingly, why changing their structure, role, and even fundamental existence is going to be a tricky push for policy-makers. The real issue seems to be that private investors aren't interested in mortgage securities right now, and likely for good reason. The problem of GSE reform is figuring out how much the government ought to be involved in the mortgage market backing affordable homeownership, and the correct mechanism to achieve that, without upsetting the apple cart. 

Three Ideas for Mortgage Securitization Reform (Daniel Indiviglio in The Atlantic)

One potential solution is to encourage better transparency and information. If the investors had all of the information they needed to fully analyze the mortgages behind the bonds, then they would be able to better evaluate the securities without having to rely on rating agencies. A second solution, championed by the FDIC, is the concept that banks should have some "skin in the game" if they sell assets through securitization. Finally, Fed economist Diana Hancock has suggested higher capital requirements for the GSEs. One of the major problems with the GSEs stemmed from their luxury of having unusually low capital requirements. Higher capital requirements would make any government agency involved in backing mortgages more stable, and it would also allow the private sector to better compete.

Bill Gross Suggests US Consider Full Nationalization (Bloomberg Video Interview)

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., talks with Bloomberg's Carol Massar about the role of the government and private lenders in the nation's mortgage-finance system. Gross said earlier that the U.S. should consider “full nationalization” of housing finance as the Obama administration plots the revival of a market that was at the center of the 2008 credit crisis.

The Government Mortgage Subsidy (Kling in EconLog)

But once upon a time we had a mortgage market in which borrowers with documented income and assets took out loans for 90 percent or less of the price of the house they were buying. If we went back to those types of mortgages, a typical borrower would not save hundreds of basis points by having Uncle Sam as a co-signer. If the guarantee is worth that much, then there is something fishy about the loans that are being guaranteed.

Resources

Secretary Geithner's Opening Remarks (Conference on the Future of Housing Finance)

Fixing this system is one of the most consequential and complicated economic policy problems we face as a country. And I think it's worth stepping back and asking the basic questions: What went wrong over the past few years? And what are the most important flaws in the system that we have to fix? Alongside the broader failures that contributed to this financial crisis, there are several that directly involved the government sponsored entities, Fannie Mae and Freddie Mac.

Housing Data Wrap Up: August 2010 (Wells Fargo)

We have slightly reduced our forecast for home sales and new home construction to incorporate more recent data. While the changes are relatively minor, the significance is that we needed to lower our numbers even further. Our housing outlook has consistently ranked among the lowest of regularly published forecasts. Our lack of optimism for the housing sector has been driven primarily by the lack of improvement in the labor market. Potential homebuyers are also being held back by more stringent mortgage underwriting and more conservative appraisals, neither of which is likely to improve until the oversupply of housing is reduced. If all of this sounds circuitous, that is because it is; and this is one reason why the recovery process in the housing market is so slow and agonizing.

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

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