We have an odd juxtaposition to consider today. The mortgage rate on conforming 30- year mortgages is around 5%, according to Bankrate.com. Meanwhile, at the sale of Greek seven-year notes yesterday the yield was set at 5.9%. I should note, too, that even at 5.9% (the coupon rate), investors were not rushing to buy. So what state of the world puts a working stiff somewhere in New Jersey or Calfornia or Texas worthy of a mortgage at just 5% when Greece, a sovereign nation and a member of the European Union, is seen as a less worthy borrower and told to pay more? It’s either time to start citing catchy verses from The Second Coming or it’s time to pull back on some of the generous guarantees on U.S. home mortgages.
As we have seen from the disasters known as Fannie and Freddie, home mortgage guarantees are not a risk-free business, and putting the full faith and credit of the United States behind such institutions (true it’s just implicit–but it’s no less expensive) is a largess that American taxpayers should begin to rethink. Such guarantees enable more home ownership but as we have seen over the past two years, homeownership can bring as much heartache as happiness, so why subsidize it to such a great extent? Others may argue that government guarantees are critical to the securitization of mortgages. Now, we all know where securitization got us.
I don’t know if Treasury secretary Geithner was comparing Greek bonds and U.S. mortgage rates today, but he was clearly thinking about some of the related issues. Here is a snippet from his testimony today before the House Financial Services Committee on the issue of Fannie and Freddie (the GSEs):
The performance of the GSEs was symptomatic of this larger regulatory and oversight failure. They were allowed to earn private gains for many years, but ultimately the taxpayer subsidized their losses. They were allowed to expand and manage their investment portfolios without regard to the risk they posed to the system. Over time, the GSEs were permitted to guarantee riskier mortgages and mortgage-backed securities. They were not required to hold adequate capital and employed inadequate risk management. The housing finance system clearly cannot continue to operate as it has in the past. A broad reform process of the housing finance system must be undertaken to achieve comprehensive and effective reform that delivers a more stable housing market with stronger regulation, more effective consumer protections and a clearer role of government with less risk borne by the American taxpayer. Where guarantees or support is provided, it will be explicit and priced appropriately. There will be no ambiguity over the status or allowable activities of any private entity which enjoys any benefits or protections from the government.