Friday, August 20, 2010

Why Do Bankers Rule the Mortgage Market?

There has been a lot of talk lately about what to do with Fannie Mae and Freddie Mac. Should the government get rid of them altogether? The banks say no. Have you ever wondered why they say no?

Currently, FHA guarantees loans including the very popular 30 year mortgage with as little as 3.5% down. When a bank loans you the money for a house, they turn around and package your loan with other similar loans and sell them on the secondary market. At this point, they become mortgage backed securities. In recessionary times, the government steps in and buys these mortgage backed securities, because the banks do not want to hold onto the responsibility of the loan in case of default. This is a situation where a bank has a financial incentive to sell the loan, but not to be responsible in case of loan default. In other words, they have no risk. If they have no risk, because of the government stepping in, then they have no incentive to do proper loan underwriting. Therefore, today, the banks are jumping up and down saying that they are not going to take the risk on 30 year mortgages. The banks are putting political pressure on Congress to continue to snap up these 30 years mortgages.

Now, let us examine this in a little more detail. What if the government quit stepping in on the bank's behalf? Then, the banks would probably not offer 30 year mortgages. If you could no longer get a 30 year mortgage, then what kind of mortgage could you get? Mortgage interest rates would temporarily go up, but if you look at things today, this will not really be a problem. If people are not willing to buy a house now with rates under 5%, then why would a bank think that people are going to rush out and borrow money at higher rates? They will not, believe me. However, once things settle down and the banks realize that they actually need the consumer to make money, then they will realize that they have to offer residential loans, like it or not.

Even if the banks do what they threaten to do and abandon the mortgage market altogether, I still believe that American Capitalism would take over and somebody would step up and offer 30 year mortgages. The banks are frankly too stupid to stand idly by and watch some other firm make the money on mortgages. Look what happened with credit default swaps. Once one bank starting making money with these instruments, then all the other banks followed suit. What did we poor consumers end up with? A bailout.

Personally, I do not think that banks should be allowed to underwrite a loan and pass off the risk. This is totally ridiculous. If they approve the loan, then they should keep the risk. Period.

Conversely, if banks take the risk, then they will underwrite the loans a little tougher. Yes, this means less people in housing and higher down payments, but this is the way it should be. There is no right to a house. I do not know about your neighborhood, but not too far from my house, there are some really nice apartments that are way better than anything that I ever lived in when I was younger. They have garages, exercise rooms, pools, whirlpools, saunas and even restaurants in some. Apartments are not so bad anymore.

This is a serious conflict of interest here when the bank can lend the money, but not be responsible for the loan. When did we agree to this? In reality, when we allowed the same people to stay in Congress for years and years. These terrible people have caused the problems that we are having today. Fat chance that these same people will do anything to fix it. They do not work for the American people. They work for the banks. It is patently obvious by now.

It may take an election or two, but we need to vote them out of office. It is really the only hope we have as Americans to get back control of our country.