More Important Than Running Mates

As attention shifts from the Olympics to running mates and the celebrity "news" de jour, the infrastructure beneath your house is termite infested. Just beneath the nicely painted exterior and behind all the new appliances, doubt is boring through the beams, gnawing at the studs. Fannie Mae and Freddie Mac have nose dived and been down graded toward a smaller future. Alongside falling prices, rising mortgage rates, stricter credit conditions and general malaise, the structure that supports American home ownership is being condemned by market valuation. Freddie and Fannie are more important names for your future than Joe, Sam, Kathy, Mitt, Meg....

Fannie Mae was created in the depths of the great depression to decrease foreclosure and increase homeownership. In 1968 it was re-chartered as a public company, removed from within official government agency status. Since its inception in 1970 Freddie Mac has financed 50 million homes. Fannie and Freddie mission statements make clear, they exist to facilitate, ease and cheapen home ownership. They do this by acting as liaisons between international capital markets and mortgage seekers. They borrow at preferential rates- based on the implicit/explicit- assurance of the US government. Borrowed funds are used to buy mortgages and bundles of mortgages. They provide credit guidelines and purchase mortgage issued by banks. This reduces banks' risk and provides banks with more cash, more quickly to make more loans at lower costs. These firms exist to facilitate, ease and accelerate bank lending for home purchase.

Fannie and Freddie form a central hub between lenders and investors. After they buy American mortgages they, bundle sell and guarantee repayment. This transforms mortgages into investments for banks, corporations and governments all over the world. Your home mortgage, bundled with many other folk's mortgages, are sold, repackaged and assured by the Fannie and Freddie. This reduces risk and assures global savings flow in to support American purchases of homes. International investment is the foundation on which our home ownership was built. Well over $1 trillion of our mortgages have been sold to foreign investors this way in the recent past. As you sit down and read this, your mortgage may well be "owned" by a firm, individual or central bank thousands of miles away. This relationship is neither healthy nor, sustainable in its present form. Rising defaults, falling dollars and the sheer size of past borrowing are turning people off to American mortgages. The foundation below our houses is shifting.

What we are witnessing is the breakdown of the link between middle class America and the global financial markets it has over tapped across the last several decades. Fannie and Freddie were the support infrastructure connecting houses to capital market access. They have been caught with weak financials, swollen balance sheets and escalating default, just like the home owners they assist. The size of their retained mortgage portfolios is truly gigantic. The extent of the firms' guarantee commitments is global in scope. 66 global central banks buy loans bundled and or backed with Freddie Mac and Fannie Mae involvement. As of June 30, 2007 foreign entities and individuals held over $1.4 trillion in US agency securities. Fannie Mae's June 2008 statement declares a gross mortgage portfolio of $750 billion and guarantees of mortgage backed securities and loans of $2.6 trillion. Freddie Mac's June 2008 statement details a retained portfolio balance of $792 billion and a total mortgage portfolio balance of $2.2 trillion. These two giants have retained interest in over $1.5 trillion and guaranteed over $4.5trillion in mortgages, mortgage backed securities and loans. There are $11 trillion in outstanding mortgage liabilities in the US.

The housing market is and continues to melt down with dire consequence. In the 7 years from 2001 through late 2007, household real estate value increased by $8.873 trillion to $22.495 trillion. It has since fallen by $426 billion. Many claim we are at or a near a bottom. These claims should be viewed with extreme weariness. The housing down turn is not over and it will take a while after it is over to judge the damage. The search for parallels with today yields little. The closest one finds is the interesting decline in home ownership across the period 1905-1920 followed by a surging rise across the twenties and then collapse across the 1930's. Fannie was born of this collapse, the ideology of The New Deal and sense that government driven market interventions could broaden home ownership in America. This was a success. Home ownership did grow spectacularly across the period from 1938-2007. It is falling now as Fannie and Freddie flounder.

In 1940 US home ownership stood just below 44%. At the start of 2008 68% of Americans owned their home. Over the decades Fannie and Freddie changed, middle class America changed and the global financial realm underwent several revolutions. The last and most transformative revolution involved the rise of securitization and integration of global financial markets. Securitization involves transforming assets and promises of future payment into financial products for sale to investors. International financial integration tears down the walls between national banking systems and allows savings, loans and payments to be gathered and transferred across international boundaries. A world of wealth poured into US real estate through securitization and deregulation. This flow was channeled and molded by the actions of Fannie Mae and Freddie Mac. The decline of these firms will have dramatic and long lasting implications for home mortgage finance. This will impact the price of American homes, the cost and ease of borrowing for home ownership. Housing prices have further to fall and global savings will likely never be lent to American consumers at recent percentage levels. Across the past few years America has been borrowing over 50% of the world's internationally available savings. The diminishing role of these institutions will impact more people, for far longer than Presidential running mate selections. Policy makers and managements in Fannie and Freddie are stuck. Today's consumer strength, their missions and international financial realities no longer align.

We face a housing finance future different from the recent past. Fannie and Freddie will not be able to function in the same way, or to the same extent. The debates about and plans for these firms will touch millions of families through housing prices, finance terms and cost. Fannie and Freddie are much more important than Joe, Sam, Kathy, Mitt, Meg...

Comments

[mosh]

Just a note to Mr. Wolff -

I attempted to find your books on Amazon's Kindle but my search came up empty. Just to let you know that selling books via the Kindle has the potential to open you up to whole new market of dedicated readers, like me, who find it hard to read a regular book now that I have discovered the Kindle. So, please, for Kindle readers everywhere, consider making your work available through Amazon. If I am like other Kindle readers, it will only add to your potential pool of readers, not detract.

Thanks for an informative article.

[Sundialsvc4]

I believe that the system began to collapse in the 1960's ... when the military industrial complex that "Ike" Eisenhower so-clearly saw coming began to take over our national psyche.

"National defense" became the siren-song to spend money for everything. In the 1960's, if you could say that toilet-paper could be used to beat the Russians, you could get millions of dollars to "develop" the stuff.

To "pay for it all," the dollar itself became a security. Today, the US Government "borrows" more than $1 million each and every minute(!), just to keep the lights on. And yet it simultaneously tries to anchor that nonsense to each and every one of the world's transactions in oil.

Freddie and Fannie are based on ... official promises, and nothing more. As those promises become increasingly un-believable, they're just another casualty.

[mosh]

And I believe we have Reagan to thank for splitting military expenditures off from the rest of the Federal budget creating the sense that in terms of 'defense' the budget is limitless. Hence, Iraq.

[DuganS1]

Military expenditures, outside the Iraq war, are the lowest relative to GDP then they've been since before WWII. Military spending it's not the problem- it's the entitlement programs like Medicare and Medicaid. Military spending has had little to no effect on home construction over the past 55 years.

[WASanford]

"Entitlement" programs should not cause this kind of economic mischief, that money goes right back into our economy where it creates more wealth.. It also creates wealth in that it provides us with longer and healthier lives.

The problem with military spending is that it produces no lasting wealth. Once you drop a bomb, you've lost the wealth that was used to create it. Another problem with military spending is that it spreads our currency around the world, cheapening the value of our dollar.

But our real problem is this, we are losing our customers. When a worker is laid off of his job, he cannot participate in the nation's economy to the extent he was able to before, if at all. Who's going to buy the cheaply made Chinese goods when we've all lost our jobs. The answer is, no one!.

[iambusto]

how about asking an alternate question?

Was it a good thing to promote home-ownership for everyone even if not everyone could afford it?

[mosh]

It was good for the CEOs of Fannie Mae and Freddie Mac and for the likes of Phil let's-dere­gulate-eve­rything Grahmm and the corporations he represented while on the Banking Committee. CountryWide's CEO also made out like a bandit before he bailed. And for many a housing speculator.

So I guess it depends on where you were/are on the predatory lending food chain.

[elbzee]

Gotta remember, lenders WANT defaults. That's where the money is!

[swift goat pet for truth]

I do not understand how American Economy comes back until the middle class gets a pay raise.
Corporations have to grow their top line, sales.

Enriching the upper 2% does not work.

[mosh]

It works just fine for the upper 2% especially if they manage to repeal the death tax. Or did they do that already?

[OregonJay]

Perhaps it was a colossal mistake to allow the financing of home ownership to be profit-driven and dependent on global capital markets. Over the past 60 years, the government has borrowed trillions of $ to finance its global military empire. This money could have been used to finance affordable home loans and a national health care system, but that might have taken away the opportunity for profits in the military industrial complex, credit markets and health care. The government kept and keeps the capital flowing to these bloated, inefficient and costly systems, which has left enormous and growing debts for the middle class, but the profits accruing to the rich executives and shareholders in these enterprises are spectacular.

[dadw5boys]

IF YOU LOVE POVERTY ,VOTE MC CAIN !!!!!!!!!!

[americaforme]

Bring it on, lets get this thing over!!! The still halves, cant get out of denial until the boom is lowered, and I see this reaching into the glorious convention, and election,and beyond. Money is an insidious culpert, the wad of credit cards drives folks into a false sence of security. To wake up just short of disastar is nigh impossible. Denial is a fine art, thirty years of deregulation, without hardly an ouch, teaches us one thing that financial fall is booked for our future.

[BethStuart]

I recently read a book by Kevin Phillips called "Bad Money" that I can recommend. Basically, it examines the culture of debt in the US but also describes the problems that this debt culture has created in tapping global financial markets. The book was written in 2007 and published in early 2008. It disturbed me a lot that the problems he described have only gotten worse since the book appeared.

[pvernier]

Excellent Book.
If you want to understand the potential impacts of this problem. Read this book. A bit frightening.

[mosh]

Thanks for the recommendation. Here's another good/scary read:

"Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders" by James Scurlock.

And for an even larger overview of how we got here:

"The Limits of Power: The End of American Exceptionalism" by Andrew Bacevich. Not for the faint of heart.

[WASanford]

You know, sometimes I’m convinced that we’re surrounded by idiots. We laid most of our workers off, and moved their jobs overseas. We’ve had decades of massive trade deficits, and our government has been going through money faster than a fleet’s worth of drunken sailors, and no one saw this coming?

I sold my house in 2000 because I was afraid of a housing slump. Ok, so I was ahead of my time, but the so-called real estate appreciation during those eight years only made matters worse. Before this is over, we’ll be burning our houses for energy. It’ll be cheaper than using petroleum products. I see this little example of genius lasting at least 2 more years and that may be optimistic.

Why do we go through this crap every 2 or 3 generations? You’d think we’d learn something from this. Heaven knows that we’ve tried it often enough and we always get the same results, a depression.

What pack of idiots thought that we could put all of our wealth and capital in the tender grip of a very few hands and still maintain a viable economy? How’s that working out for us? Not very well, I’d say.

[mosh]

Americans, like all primates, have very limited attention spans and live in the moment. We are lucky if we can remember the day of the week let alone what happened 2 or 3 generations ago.

[WASanford]

Thank you mosh. I thought that might be the case!

[joebaggadonuts]

Excellent observation, Max. The connection via Fanny and Freddy to the international financial markets puts into the minds of international investors in US mortgages a credibility gap that cannot soon be repaired. As we lose the access to money that made the housing sector in the US boom, we lose the credibility and creditworthiness that went with it. Where will the money come from to loan US house purchasers to buy US housing? Why should foreigners who have lost so much money put up more? These are interesting questions. Their answers may determine whether the US can again have a middle class.