Don’t fear end of Freddie and Fannie.

President Obama and both houses of Congress are calling for an end to Fannie Mae and Freddie Mac, the two government owned entities that guarantee most of the home mortgages in the U.S.  Real estate agents, home builders, mortgage brokers, wall street bankers, and others who have a vested interest in keeping our government in the mortgage guarantee business are scared to death.  They have all become so addicted to government guarantees that they can’t imagine a world without them.

When Fannie and Freddie are closed down, and private lenders are left to decide what risks they will or will not take, It is likely that 30 year fixed interest rate mortgages will become more difficult to obtain.  It is also likely that when lenders risk their own money, they will want things like significant down payments, accurate appraisals, and borrowers who have a proven ability to make the monthly payments. ( Back in the olden days, before government guarantees, mortgage bankers used to do something called “underwriting” before deciding whether or not to make a loan – you can look it up on Wikipedia.)

Still, there are businesses such as life insurance companies, annuity companies, pension plans and others that need to invest large sums for long periods of time in secure investments like home mortgages.  So, there is no reason to believe that mortgages will not be available in a private market.

It may be that mortgages in the future will have fixed interest rates for only 10 to 15 years, and will need to be refinanced at the end of that time.  But, the monthly payments can still be based on a 30 year payoff schedule.  This has been the situation in parts of Europe for many decades.  There is a risk to the home owner that interest rates will be significantly higher at the time of refinance, but the principal balance will be paid down significantly, so the risk of having to make significantly higher monthly payments fairly low, and the ability to get a refinance should be fairly easy.

So, don’t believe those who have a vested interest government guaranteed mortgages when they tell you that housing markets will fall apart if Fannie and Freddie cease to exist.  Fannie and Freddie still allow all of the players in the home mortgage marketplace to shift much, if not all, of their risk to taxpayers.   If Fannie and Freddie had never existed, it is likely that we never would have had the housing crisis and the great recession that followed.  When people are required to pay for their own mistakes, people make fewer mistakes.  We need to get our government out of the mortgage guarantee business.

Iowans don’t live in poverty.

Contrary to the picture painted by the recent series of articles in the Des Moines Register, very few Iowans actually live in poverty.  What we have is families who whose incomes, before counting any welfare benefits received, are below government established guidelines for poverty.  We measure “food insecurity” because very few Iowans are actually go without food for any extended period of time.  Taxpayers provide food stamps, Medicaid health insurance, subsidized housing, and much more.  Charitable organizations provide food banks, clothing, shelters and much more. For children, taxpayers also provide pre-school, meals before, during and after school, subsidized child care, and much more.
We clearly have an effective and extensive safety net.  The relatively few who fall through the cracks either don’t know about the benefits or won’t ask for help.  It appears quite clear that we do not need to spend more taxpayer money to expand welfare benefits.  It’s actually hard to imagine that spending for welfare programs cannot be reduced.  There has been much anecdotal evidence of fraud and abuse in our welfare programs by both recipients and providers.
Today, the best way to help the poor is by having a vibrant, growing economy with enough jobs for those who are willing to work, not by expanding welfare benefits.  To encourage a growing economy, we need for our government to stop regulating businesses in areas not related to employee and public safety or pollution of our environment.  Government should not mandate pay levels or benefits.  Government should not provide corporate welfare (subsidies) to artificially prop up favored industries.  Just as with individual welfare, corporate welfare breeds competitive weakness and dependency on government.

$3 Mil. D.M. boondoggle?

Recently, the D.M. City Council approved $3 million in federal flood disaster relief funding subsidy for the $3.9 million Franklin Field Senior Apartments project.  Since there was no flooding in the area, I assume we must just want  more taxpayer subsidized housing.  In this case, the owners risk $0.9 million and taxpayers give away $3 million.  This will build 30 units at $129,000 each. “Of the 30 units, 66% will be designated for households under 80% of median income and will charge approximately $580 for a one bedroom apartment.”  After 10 years of compliance with the subsidized housing regulations, the $3 million loan will be forgiven.  After that, I presume they can charge whatever rent  they want. The owners will have a $3.9 million dollar property at a cost of only $0.9 million.  I understand the good intentions of making low cost housing available to needy seniors, but I disagree that taxpayers should be forced  to pay for this kind of thing.  This is something that should be handled locally.  If there is a real need,  and if people want to contribute to this kind of project, then private charity should be able to add whatever support is needed.

Here is a link to the City of DM approval:

http://www.dmgov.org/Government/CityCouncil/Communications/2012/12-504.pdf

Fed subsidy of Iowa housing.

On 10/9/2012, The Des Moines Register reported that the Des Moines City Council granted $3 million in federal economic relief funding for 134 new apartments in downtown’s Des Moines Building.  The Register reported earlier that the funding comes by way of the Iowa Economic Development Authority and is intended to provide economic relief for the 85 counties that flooded in 2008.  I don’t  believe there was any flooding of the Des Moines Building in 2008.  The federal government has no proper business subsidizing housing in Des Moines, Iowa.  This is a perfect example of the kind of federal spending that must be ended.

Federal Reserve blunder.

On 9/14/12 The Des Moines Register reported that The Federal Reserve (The Fed) announced it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make buying a home more affordable (“Fed unveils plan…”).  The Fed is not doing this to make homes more affordable.  They are doing it to inflate the prices of houses.  If everything else is equal, lower interest rates will result in lower house payments.  But everything else is not equal.  Lower interest rates also encourage sellers to ask for higher prices and allow buyers to pay more for homes.  Lower interest rates and higher housing prices also encourage home builders to build more homes.  That means more jobs and lower unemployment.
The problem is that The Fed policy of keeping interest rates artificially low has serious negative consequences.  The Fed buying $40 billion of bonds each month will not only keep interest rates low, it will also pump $40 billion of new dollars into our economy each month.  That will certainly lead to increased inflation.  (Inflation in housing prices is what the Fed wants.)  So, The Fed;s answer to a deflated housing bubble is to try to re-inflate the bubble. Low interest rates, especially when combined with inflation, also hurts savers who try to earn interest from savings accounts, CDs, and bonds.  With interest rates so low, some savers just try to get by with less, while other savers move money into the stock market looking for higher returns.  So, both housing prices and  the stock market are being propped up by the artificially low interest rates.
The Fed’s mandate from Congress is to, “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”  Their mandate should be changed to only promote stable prices.  That mandate alone is difficult to achieve.  The Fed’s current goal for stable prices is 2% inflation.  2% inflation will double prices every 35 years!  How does the Fed know that prices should not actually go down as we continue to become more efficient and productive?  The best answer would be a return to a gold standard so that our money supply can’t be manipulated by politicians or economists who imagine they can successfully control our economy.

Deflation is good!

Our federal government is doing everything it can to inflate housing prices. Of course, taxpayers are on the hook for trillions of dollars in mortgages, so increasing housing prices does reduce taxpayer’s liabilities. Inflation helps borrowers and hurts savers. If homes truly increased in value, that would be a great thing. But, if housing prices go up only because our government keeps interest rates artificially low and intentionally prints more money, then any housing price increases are not real. If the price of your home doubles, and all other prices also double, then there is no real gain.

If housing prices went down like electronics and clothing, what would be wrong with that? Wouldn’t it be nice if houses became more and more affordable? I know that people who own homes feel great when they believe that their home has increased in value. I feel the same way. But it is a false feeling. If housing prices went down, more people would buy houses – just like electronics. Do you not buy a computer or cell phone because you are afraid that the price will go down next month?

No one wants to see their pay go down. What if your pay got cut in half, but at the same time all prices went down by half? Would you be any worse off? No. We live in a world where the vast majority of people make less money than those of us in the U.S. There is, and will continue to be, tremendous worldwide downward pressure on wages and costs. The key for each individual it to be productive. If you are productive, as valued by others, then you will earn a competitive income. If you do not have skills and are not productive, then you will have problems. That is true whether we have inflation or deflation.