Archive for the ‘Homeownership’ Category


Ever since Fannie Mae and Freddie Mac collapsed and were bailed out by the U.S. government in 2008, in one of the largest government bailouts in history, the future of the 30-year fixed mortgage has been in doubt. Both President Obama and the Republicans have expressed support for the idea of eliminating Fannie and Freddie and  privatizing the U.S. mortgage guarantee process.

But it hasn’t happened yet, and it’s been nearly 5 years. The reason why is that killing the 30 year mortgage, which an editorial in Bloomberg espoused yesterday, is extremely unpopular politically. Consumers love fixed-rate mortgages because they provide certainty in terms of the monthly payment, lessening risks that are posted by adjustable rate mortgages.

Interestingly enough, adjustable rate mortgages are the rule in Europe, where the government never developed the role in the mortgage process or the investment in the idea of homeownership that the U.S. government did. Here in the U.S., the government has for more than the past half century played a central role in the mortgage process, either outright owning or guaranteeing many fixed rate mortgages.

From a risk point of view, assuming the interest rate risk on a 15 or 30 year basis is something that few, if any, financial institutions are willing to take on given what happened in the financial crisis and what has happened with interest rates over the past few decades.

That’s because if interest rates increase — and they, will eventually — a financial institution would be stuck paying out higher interest rates on savings accounts, certificates of deposit and IRAs, while receiving a very small return on interest on fixed rate long term mortgage commitments made years ago. In contrast, an adjustable rate mortgage will eventually increase to market rates, which poses much less risk for banks and other lenders.

That leaves the U.S. government as the default lender of last resort for fixed rate mortgages. Today, the U.S. government owns or guarantees 90 percent of all new mortgages, which is a major increase from the 50 percent it owned or guaranteed in the mid-1990s. Given the boom and bust nature of U.S. real estate markets, that means it’s all too likely that at some point the U.S. government will be left holding the bag when the real estate market goes bust again and large numbers of homeowners default.

That’s not as likely with rates so low, because the underwriting environment is so conservative currently and payments are affordable. However, as underwriting standards loosen and rates go higher, the table will be set for another housing market disaster. After all, the most recent real estate market boom/bust wasn’t the first, just the latest in a long line of U.S. real estate market ups and downs.

So when the next bust happens, the U.S. government, as the guarantor of last resort will be on the hook for all those defaults, obligated to pay — wait for it — billions of dollars to banks for the homeowners who are unable to make those payments. And since the U.S. government is us, the taxpayers, we could be left footing the bill for another expensive bailout.

The solution, many say, is to abolish fixed rate mortgages altogether and leave adjustable rate loans as the only option for consumers. This would take the long-term interest rate risk out of the picture for both the government and financial institutions. Unfortunately, that leaves consumers holding the bag and assuming the vast majority of risk surrounding interest rates.

Well, that’s hardly fair. Why should consumers bear most of the risk from an unpredictable, speculative real estate market? We saw the impact of a variety of adjustable rate loans during the real estate bust. Lax underwriting standards, outright fraud on the part of some unscrupulous mortgage brokers and appraisers and exotic loans left homeowners at the mercy of sky high payments and many lost their homes or were stuck making unsustainable payment that they could barely afford.

The Bloomberg editorial mentions some creative solutions that could help fill the gap if the 30 and 15-year fix rate mortgage is abolished. These intriguing options include:

  • Pegging monthly mortgage and interest payments to neighborhood home values
  • Allowing borrowers to pay more up front for the ability to make lower payments later if home prices go down

If the 30-year mortgage is indeed toast, we need to see more innovative ideas like those above so that homeowners aren’t forced to bear all the risk from unpredictable real estate markets. It’s certainly not fair to expect the government or financial institutions to do so and there is no reason why consumers should have to either.

During a conversation on Twitter last night with ExWallStreetGuy V2.0¬†about Fannie Mae, Freddie Mac and the implications of Dodd-Frank for mortgage financing (this is what I do for fun on a Saturday night), I started to think about how we’re seeing an unprecedented transfer of risk from institutions, governments and corporations to individuals. It’s happening in almost all aspects of our lives, which is scary enough, but what’s really terrifying and infuriating is that it’s eroding any sense of security we have in our ability to move forward in our lives with confidence, have faith in the future and believe that our children will have better lives.

Instead, we’re slipping backwards in time to a place where, as Hobbes said, “…and the life of man, solitary, nasty, brutish and short.” Except, ironically enough, life isn’t short, it keeps getting longer and we’re faced with the prospect of living longer than ever with fewer resources, less confidence and the prospect of running out of money in our old age, when we can least afford to bear it. This state of affairs engenders fear: fear of unemployment, fear of illness, fear of a bad economy, fear of a natural disaster and on and on and on. We’re subject to living in a state of fear over events that we have little or no control over, events that could bankrupt us and leave us on the street in a matter of months, no matter how hard we work, how diligently we save and how careful we are of our health.

During the last 30 years, the corporations, institutions and government that we formerly relied on for a sense of security seem intent on taking the little that we still have left away. Remember lifetime employment? Pensions? Retiree healthcare? Those are just a few examples.

The push to place responsibility and risk on individuals for issues and events that carry tremendous risk is relentless and in some ways, happening below the radar of most people, so that it’s hard for anyone to put all the pieces together and see the big picture. That makes sense, because the big picture is completely terrifying and most people are just struggling to stay afloat, hoping that they won’t be run over by a financial, health, natural or legal catastrophe.

Let’s look at the specifics:

  • Retirement: Pensions & 401(k)s: Not only are there few pensions, but the pensions that still exist have lost the explicit and implicit guarantee that they would be there in retirement. Even the 401(k), which was created to replace the pension on the assumption that corporations, governments and institutions would contribute to employee retirement has been turned on it’s head, because those entities feel free to drop their “match” whenever they like. And the idea that most individuals have the financial savvy and knowledge to manage their investments is a joke. Even the vehicles that have been created to allegedly make this process easier, like lifecycle funds, haven’t worked — they were a disaster during the financial crisis. The brutal truth is most people don’t have the financial capacity to save anywhere near enough to get through retirement or the ability to successfully manage their investments.
  • Retirement: Social Security: It’s something, at least right now, that provides a minimal safety net in retirement. But’s it’s not nearly enough, and odds are that it will be hacked to pieces and give those who already have little even less in the future. For the most vulnerable among us — the poor, the less educated, women, the disabled — Social Security payments are likely to be grossly inadequate for this population to maintain even the most minimal standard of living in what is likely to be a long, lonely and terrifying retirement and end of life. One of the most frequently offered suggestions of how to ensure that Social Security lasts longer is extending the retirement age. That works great if you’re an executive who has sat at a desk your entire life. But if you’re a hotel maid or laborer or anyone who has made a living by working with your hands and body, it’s likely that your body will give out before retirement age. It’s also likely that you have no 401(k), no pension, no spouse with a retirement income or anything else to keep you off the streets. Even I, as a well-educated woman who makes a good living, am appalled and afraid of the implications of the statistic that the the biggest predictor of whether a woman will live in poverty in her old age is her marital status — not how educated she is, not her socio-economic background, not her earning capacity, just whether she happens to be married. Appalling.
  • Health Care: Don’t get me started. My son has Major Depressive Disorder, Recurrent, Severe. During a three month time period last year when he only had a high deductible health plan, I was spending $1250 a month on his medications and therapy out of pocket. Talk about eroding savings quickly! Fortunately, I found out about a state plan that enabled me to enroll him in Medical Assistance, but it was terrifying because there was almost no way to get the costs of his medications down because even the generics cost between $75 and $175 for a month. I have a friend who has breast cancer and she has “good” insurance, still the costs of the various procedures she needs to undergo can run $1,000 out of pocket for each one. This is on top of the fact that fighting her illness is so debilitating that she can hardly earn a living. And what about people who have no insurance at all? I tell you, it doesn’t take much in the way of an illness to devastate the largest emergency fund (cancer treatments, for example, can easily eat up $100,000 or more in savings in a year or less even with insurance). High deductible health insurance plans transfer most of the risk to individuals just as corporations, who are raking in record profits and paying less in taxes than ever before, push more responsibility for health care costs onto individuals.
  • Employment: I’ve been self-employed for 11 years and in some ways feel that I have more employment security than many who work full time for corporations. That’s because I can stand the loss of a client or two because I have a number of clients, while the person who is employed by a corporation full time loses their entire salary if he or she is laid off or fired. Of course that person might qualify for unemployment insurance, which I wouldn’t, but given the state of the employment market, the odds are that those payments won’t last long enough for that person to secure a job, let alone a decent paying job with benefits. The major downside of self-employment is the lack of health insurance, retirement and other corporate benefits, but those are quickly being gutted, so it likely won’t be too long before those who are employed are roughly equal to those of us who are self-employed, which means assuming a great deal of risk.
  • Homeownership: The financial crisis showed us that individuals do assume a good deal of risk in terms of homeownership. Obviously, the value of a home can drop, wiping out equity, and interest rates can climb on adjustable rate mortgages, raising payments beyond the ability of homeowners to afford them. But for many, the 15 or 30-year fixed rate mortgage has been one of the last and best ways to neutralize at least some of the risks of homeownership. By obtaining a fixed rate mortgage for a long period of time, homeowners have the ability to lock in their monthly payment and know exactly what that obligation is going forward. Unfortunately, the 15 and 30-year fixed mortgage may be going the way of the Dodo. Congress and President Obama are intent on destroying or at least reducing the role of Fannie Mae and Freddie Mac to the extent that there will be no guarantor of last result in the mortgage market. And since banks wouldn’t touch this type of risk with a 10-foot pole, these products will soon be extinct. It’s fascinating to me on some level that no one is paying attention to this issue that will reshape the manner in which Americans live. It’s more than likely that we will end up with a system of adjustable rate mortgages only, likely going no longer than 5 years or so, placing the brunt of interest rate risk on homeowners.
  • Legal system: From binding arbitration to gutting of class action lawsuits, more and more Americans are being shut out of our legal system. I’ve written extensively about the abuses and conflicts of interest inherent in the system of binding arbitration where individuals are forced into a shadow legal system that is rigged in favor of the powerful. In courts all over America, individuals are losing rights. I can see it in the contracts offered to me for freelance writing: it’s insane when gigantic corporations expect me to indemnify them for anything and everything. Hey, if I make a mistake, it’s on me; I have no problem with that. But when I’m told that I should sign a contract that means I’m on the hook if I violate a law that I didn’t even know existed, that’s a problem. This is the expectation these days, that individuals of little means take the fall for corporations with endless means.
  • Natural and man-made disasters: My favorite TV show is Treme, which is about life in New Orleans after Katrina. It shows in stark reality the struggles of ordinary people to get the help they need to rebuild their lives. It’s an apt metaphor for the disasters that have happened since, including the nuclear catastrophe after the Tsunami in Japan, the oil spill in the Gulf of Mexico, tornadoes all over the U.S., the earthquake in Haiti and so many more. Individuals can’t even get insurance for the events that devastate their lives and are left in a Kafka-esque hell trying to survive.
That’s enough for today. I feel good in some ways to have put this all together, at least for myself if no one else reads this far (LOL), but it is depressing, to say the least. Without major changes in the way corporations, governments and institutions operate, individuals have very little chance. If we’re lucky, we’ll be okay; if we’re not, all bets are off.