Since the housing melt-down in 2008, Government domination of the U.S. mortgage market has grown exponentially. Virtually all private investment capital has disappeared from the mortgage industry. This means that U.S. home builders, real estate licensees and others whose livelihood depends on home sales are facing the prospect that their economic future is now controlled by a small group of government institutions.
In a video piece posted on Mortgage News Daily, Diana Olick relates the numbers as they now apply to the mortgage industry, 4 years after the industry melted-down under the weight of over valued, over financed home mortgages. A scenario that years of poorly constructed government policy helped to create in the first place.
Consider the following from Olick’s report: In 2007 private investment capital totaled about $2.2 TRILLION dollars, or about 70% of the capital in the mortgage market, with Fannie and Freddie at 27% and FHA at 3%. But today, Fannie, Freddie and FHA control 90% of the mortgage market, and according to the American Enterprise Institute, FHA is insuring 90% of all new mortgages. What this means in practical terms is that government is developing a near monopoly on consumer debt.
The government would have us believe that they are doing everything they can to bring private capital back into the mortgage market, but clearly, this is not the case. The American Enterprise Institute is referring to this new state of affairs in the housing industry as the “Government Mortgage Complex“.
Unlike 2008, another housing collapse or severe downturn would mean that the brunt of the losses would be borne by the U.S. taxpayers, who’ve already coughed up hundreds of billions of dollars to help save the very entities that are now running the show.
Investors have left the market partly because of the extremely low return on investment for the risk that is involved. With interest rates below 4%, the private sector simply does not want to accept the risk for the potential reward. Government run entities on the other hand, unlike private companies, don’t risk their own capital, they just pass that risk along to the taxpayers.
U.S. monetary policy is one of the factors driving this trend. In the past, the low interest rate policies of the FED helped revive the economy by encouraging home sales, but this time the policy has not worked the way it has in the past.
If the market were not being purposely manipulated to keep interest rates low, it is likely that interest rates would exceed 7%. This would certainly attract more private capital to the mortgage market, which is what is needed to make mortgages more widely available and loosen qualifying criteria to standards in line with the risk/reward ratio. It would also help millions of Americans earn desperately needed income on savings and investments.
But U.S. monetary policy will continue to suppress interest rates as long as possible, as rising interest rates would increase costs on the 15 trillion dollar public debt. This could lead to a U.S. default if rates were to rise above 7%. So for now the government mortgage complex will maintain it’s choke hold on the mortgage market, making it harder for anyone to get a mortgage if they can’t jump through the hoops demanded by the bureaucracy.
In a recent case a wealthy investor friend of mine, with lots of income from cash flowing investments failed to qualify for a new mortgage with Wells Fargo, even after offering to put 50% down. The new rules for determining net income from investment cash flow were so convoluted that someone with a net worth of over a million dollars could not qualify for a $300,000 mortgage, even with $150K down! 6 months ago, my doctor told me that she could not qualify for a mortgage at a local bank. The self-employed and those most able to handle the responsibilities of ownership have been severely impacted by the government controlled mortgage industry that continues to offer the most flexibility to those who can least afford to own a home.
As a practical matter, the government may have the ability to fund the mortgage market, but the goverment does not have the expertise necessary to properly evaluate and monitor risks in mortgage lending. It also competes against the private sector by offering lower interest rates on loans with very high loan-to-value ratios, a practice which helped create the existing crisis.
It reminds me of a paraphrase of an old saying…”Any government big enough to fund the entire housing market, is a government big enough to destroy it“.