Thoughts on Housing Finance

I’ve been thinking a lot about housing finance recently because, frankly, who isn’t, after Silicon Valley Bank failed, in large part, because of its huge investment in Agency MBS assets?

Agency Mortgage-Backed Securities (MBS) are issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, better known as Fannie Mae and Freddie Mac. These government-sponsored entities (GSEs) were taken into conservatorship in September 2008 by the U.S. Treasury Department.

In other words, these little devils might (or might not) have caused the Great Financial Crisis of 2008. No wonder we’re nervous. We all want to know: Are we facing another financial crisis? What is it with housing finance anyway?

I’m not going to try to answer the first question. If I knew the answer, I’d have made a fortune by now and would be sitting in some palacio overlooking the Mediterranean reading Infinite Jest.

But I will try to answer the second question.

Our nation’s housing policy was conceived during the Great Depression. It was a masterstroke of public policy if you accept that making housing accessible to working families helped blunt the Soviet Union’s efforts to export revolution to our shores. The core American belief that homeowners make good citizens would prove to be one of the most enduring legacies of the past ninety years. Who has time to agitate for world revolution when you have to mow the grass, fix the roof, and paint the kitchen?

Historically we have spoken of the “American Dream” in reverential tones, accompanied by images of modest houses and neatly-trimmed lawns surrounded by white picket fences. Homeownership is practically stamped into the American DNA. It’s where most of the average household’s wealth is stored.

This is where housing finance gets tricky. The GSEs have been in conservatorship for almost 15 years. Only Congress has the authority to modify the GSEs’ charters, but unwinding the conservatorships would almost certainly lead to higher homeownership costs. Survey results have found approximately zero legislators willing to attach their names to the “Destroying the American Dream Act.”

And so, conservatorship remains. The GSEs’ regulator has even eliminated “Ending Conservatorship” as one of its policy goals.

Perhaps this is the new status quo of housing finance: the Federal government basically guarantees most of the nation’s single-family mortgages, which are packed into securities and distributed throughout the financial system.

What is it with housing finance? Are we subsidizing middle-class home ownership? Absolutely. But who among us doesn’t love the 30-year fixed-rate mortgage with no pre-payment penalty — a creature that doesn’t exist in nature? Not to mention the mortgage interest deduction! These policies make housing accessible to well over half of Americans.

So come and take it. Let’s see how that works out for you.