Mortgage Mosh Pit

In my series of Federal teat suckers, I’ll now look at the housing market.  If you are a homeowner with a 30 year mortgage, it might surprise you to find that you are on the home stamp program, a program that may pay you each month about the same as the average food stamp recipient.

President Obama has recently spoken about a 5 – 7 year transition of the mortgage market from federal quasi-governmental agencies like Fannie Mae and Freddie Mac to the private market.  The problem is:  private market lenders do not want to loan money to homeowners for thirty years.  A 30 year mortgage has no prepayment penalty so that the homeowner can pay off the loan at any time and refinance when rates are lower.  In the private market, lenders – and bondholders – like to be paid more interest when they tie up their money for longer periods of time and 30 years is a very long time. A history of the 30 year mortgage.

Let’s compare Joe homeowner to one of the largest and most dependable companies in the world – Johnson and Johnson (J&J).  For more than a 100 years, this company has regularly paid dividends to their stockholders and paid off their bonds.  In August 2010, the company sold 30 year bonds at 4.5% (Source).  Joe homeowner could get a 30 year mortgage for about 4.4% at that time.  What would you choose if you had the money?  Loan it to J&J or loan it to Joe homeowner for his mortgage?  In a realistic private mortgage market, Joe homeowner, with a good credit rating, would need to pay 2 – 3% above what Johnson and Johnson is paying simply because Joe is a riskier bet than J&J.  But that higher interest rate would price a lot of potential homeowners out of the market. 

The monthly mortage payment (PI) on a $250,000 30 year loan at 5% interest is $1342.  At 7%, the monthly payment is $1663, more than $300 higher.  At 8%, the monthly payment is $1834, a $500 free monthly premium to the homeowner.  So why do banks and mortgage companies loan money on mortgages?  Because the Federal government backs 90% of the mortgages in this country.  The government and its quasi-government mortgage agencies effectively loan the credit rating of the richest country on the planet, the United States, to little Joe homeowner, enabling him to save hundreds of dollars each month on his house. 

In Colorado in 2007, a low income family of 3 received a little over $400 a month in food stamps (Source).   Food does not build equity –  homes do.  The government’s home stamp program pays Joe about as much as the food stamp family and lets him keep any home appreciation – or lately, depreciation.  In addition to the home stamp program, the federal government has a stamp tax program that enables Joe to write off most of his mortgage payment for the first ten years since it mostly interest.  Not only does Joe get $300+ a month in savings on his mortgage but gets an additional $150+ a month in reduced income taxes. 

Until the meltdown in the housing market, the thinking was that real estate values always went up so the government was happy to loan its credit rating to homeowners at little or no cost.  Happy teat-sucking homeowners voted for the politicians who continued these home welfare programs. Then, in 2007, the unthinkable happened.  First home prices stopped rising, then started to decline in some markets.  Then the banking crisis of 2008 hit and price declines accelerated, leaving many recent homeowners “underwater”, owing more money on their house than it was worth.  Job losses and continuing price declines led many homeowners to walk away from their homes.  As of mid 2010, Fannie Mae and Freddie Mac had “borrowed” $148 billion from the Treasury (Source) to make up for the losses.  Mega-banks have written down billons and some estimate that the default total will approach $1 trillion.

In a recent Bloomberg article, “About $600 billion of the [Option ARM – Adjustable Rate Mortgage] loans were made from 2005 through 2007, according to industry newsletter Inside Mortgage Finance. Of those packaged into bonds, some 20 percent have been liquidated at losses to investors, and almost half of the remaining ones are at least 30 days delinquent, in foreclosure or have been seized by lenders, according to data from JPMorgan.” “A model developed by JPMorgan Chase & Co. analysts predicts that 70 percent of remaining option-ARM loans that were bundled into bonds will eventually default.” 

The federal government will continue to be pumping in money to the home stamp program for years.  The $148 billion already pumped in is just a down-payment on this program.  In his 2012 Budget, Obama wants to spend $85 billion on the Food Stamp program called SNAP, an annualized increase of 7.5% over 2010 spending.  If only we could hold the increases in the cost of the home stamp program to those levels.

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