Tag Archives: mortgage meltdown

Why short term fixes in the mortgage market are going to cause long term structural issues

23 Apr

The US mortgage market is unique; the peculiar composition and dominance of government sponsored entities guaranteeing mortgage debt destabilises the price matching function of the free market. The GSE’s do not allocate capital effectively; securitisation masks risks instead of decreasing them.  Markets traditionally are a meeting place between buyers and sellers where supply and demand match to establish price. Sometimes this process is compromised where monopolies or price fixing exists, but generally the system functions well and roots out inefficiencies. It allocates capital to the most efficient and effective operators. Furthermore, even bankruptcy is a healthy process; it re-allocates capital to the more efficient providers and exits those companies who cannot create a return on capital employed.

The US mortgage market is characterised by heavy government policy, involvement and interference. Almost 90% of mortgages are federally guaranteed by GSEs. This transfers the risks from the lender to the government.  Why should the government be the orchestrator of the mortgage market? Why should gains for the banks be privatised and the losses are socialised? There are many countries where home rentals are in the majority; home ownership shouldn’t be a mantra that the government prosletysizes; it is job of the individual who should consider whether they can afford to and whether this is in their best interests; where the government is involved this causes unnecessary distortions at a magnitude which is going to be catastrophic, and has already been.  A federal guarantee also encourages relaxed lending standards or the complete absence of them; the government is not qualified to make an assessment of individual creditworthiness, the government itself is insolvent.  The government should not be dictating to individuals that they should make it their lifetime objective to purchase a home; again it is for individuals and their families to make that decision and direction. What the government should be advising is that individuals should spend and save prudently even if that means renting. It is absolutely due to the government abuse and behaviour in the mortgage market that had encouraged rampant speculation in the largest domestic sector.

A home primarily is a place to reside in, it should not be leveraged as an object of speculation.  Now I don’t want to repeat the causes of the crisis and this is no attempt to do so, I am just noting that after a crisis that pinpointed exactly what the major problems are,  Fannie and Freddie Mac, nothing meaningful has changed with these GSEs.  The government needs to move out the way and let the market operate to re-establish the true price-finding mechanism of the free market; governments need to be apt to ensure lending standards are being enforced and that they are not artificial; bank writedowns should be encouraged and the interpretation of regulation should not be freely adjustable; this allows financial institutions to value their assets purely as they see fit rather than marking to market.   Deposits should be enforced and short term flipping should be taxed to discourage speculation. There is no need for the government to be so deeply mashed within the mortgage market; it is incredible that rates are approx 5% with implicit government guarantees; rates are being artificially subdued with government intervention; the upcoming rate hikes are going to penetrate the mortgage and wider markets; debt matters and we have 5000 years of recorded history to prove that.

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