SF Fed: Recent Developments in Mortgage Finance

As the U.S. housing market has moved from boom in the middle of the decade to bust over the past two years, the sources of mortgage funding have changed dramatically. The government-sponsored enterprises—Fannie Mae, Freddie Mac, and Ginnie Mae—now own or guarantee an overwhelming share of originations. At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up. This is figure 3 from the Economic Letter. (CLICK LINK TO SEE CHART) This shows the surge in non-agency securitized loans, and loans held in bank portfolios, in 2004 through 2006 (the worst loans).

The sources of mortgage finance have shifted as the housing market has gone from boom to bust. Figure 3 plots the evolution of these funding sources over the past decade. Fannie Mae and Freddie Mac combined have consistently been the largest players in the market, owning or guaranteeing about half or more of the mortgages in the sample at any given time. Non-agency securitization peaked in the first quarter of 2006, when it accounted for nearly 40% of new originations. Finally, the share of mortgages retained in the originating institution's portfolio averaged about 15% throughout the boom, but has fallen considerably since. ...In the present day, when Ginnie Mae's activities are included, the three GSEs are providing unprecedented support to the housing market—owning or guaranteeing almost 95% of the new residential mortgage lending.

Although Krainer doesn't mention it, notice the increase in bank portfolio loans in early 2007 - that was probably because the banks were stuck with loans when the securitization market seized up.

With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal.

Note: Tanta wrote this last year on the naming of the GSEs: On Maes and Macs. An excerpt: Trivia buffs will know that once upon a time there were three "agencies": the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. It didn't take all that long for market participants to start coming up with pronunciations for the abbreviations GNMA (Ginnie Mae), FNMA (Fannie Mae), and FHLMC (Freddie Mac, which makes no sense whatsoever except that nobody liked "Filly Mac." ... Old farts whose favorite childhood treat was a box of Pixies will remember the old-time candy company Fannie May, whose name is said to have inspired the whole thing, probably in the throes of a major sugar rush.

Ginnie Mae, Fannie Mae and Freddie Mac, with FHA guarantees (all "GSE"s, i.e. "the government"), now own or guarantee 95% of new (Sept 08 to date) residential mortgages. The banks and other "lenders" are just conduits, earning a spread. The government mandates a mortgage modification program and requires the unemployment insurance (from the government, just a different, state, one) count toward the qualification for modification. The government mandates mortgage lending to favoured groups. Not to leave any part of this chain outside its control, the government puts a myriad of new controls, to varying degrees, on all banks and most particularly the largest ones.

My reaction is that this makes ObamaCare look like small potatoes. The government has set in motion the inevitable effective nationalization of housing across the country, assets a dozen times more influential to the economy than the stock market. This has been in the works for a two decades, but government control has leaped forward since last September, with the credit crisis used as the pretext.

Today's stock market decline shows how much the government controls the economy, in this case solely through providing $8,000 tax credits to "new" home "buyers". The market decline on the speculation that this largess may be phased out (someone said: "It's the homebuilders who will be phased out.") proves that everyone knows that the government is artificially propping up everything, to include artificially reducing 5-10~year yields by buying $1.2 trillion of MBSs.

The question we need to ask as investors and voters is: how bad will this get when the government cannot do this anymore: (1) an orderly unwind and living standard reduction relative to China, or (2) another, much bigger, calamity.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.