From HW:
Rep. Jeb Hensarling (R-Texas) re-introduced legislation late Thursday that would end the bailouts of Fannie Mae and Freddie Mac and end their conservatorship in two years.
“It’s time to enact fundamental reform of Fannie and Freddie before these companies go from ‘too big to fail’ to ‘too late to fix,’” Hensarling said in a statement released Thursday.
The GSE Bailout Elimination and Taxpayer Protection Act would immediately implement several reforms. It would repeal the GSE’s affordable housing goals and would cap their maximum mortgage portfolio size at $700 billion. That cap would gradually come down to $250 billion over five years.
The bill would also reduce the GSEs’ market share by returning the conforming loan limit to $417,000, and it would increase fees they charge for guaranteeing its securities, or G-Fees, to bring more competitive private capital to the market.
Once conservatorship ends for the Fannie and Freddie, their regulator the Federal Housing Finance Agency would evaluate the financial status of each company and place them into receivership if necessary. If not, the GSEs would be allowed to resume their “limited market operations” for a maximum of three years under certain rules.
According to the bill, during these three years, the minimum down payment would be at least 5% for all new loans. That would increase to 7.5% in the second year and 10% by the third year. After the end of that three-year period, each GSE’s charter expires, according to the bill.
“At that point, Fannie and Freddie must conduct all new operations as fully private sector companies competing on a level playing field without any government advantages,” according to Hensarling.
“Our goal is to help homebuyers stay homeowners, and free taxpayers of the burden that comes when homes get sold to buyers who simply can’t afford them,” Hensarling said. “It’s my hope that President Obama will work with us to pursue a path that will protect taxpayers, end the billions of dollars in bailouts, and bring certainty back to the mortgage market.”
This is a bit like using a cannon to kill a flea. But…
I think the net result is:
-many more renters
-the end of the housing market as we’ve known it over the last, oh, 40 years or so
-home prices trending back much closer to real wages ( a further decline in home prices)
But again, I could be wrong.
The proposal will take a lot of money out of the bottom of the housing market in California, but even at the reduced loan limit will affect the bulk of the market in most of the country. The net effect will be very negative on house prices. It will also make houses an even less liquid commodity that they are now by reducing the size and activity of the market.
If “they” made mortgage lenders keep the loan, much of the grift and chaos that’s still out there would leave the market.
Good realtors like JTR would do fine and buyers would be better served.
Consultant-I see nothing wrong with banks selling off their loans. I also see nothing wrong with banks making loans to risky customers (presumably at a higher interest rate). I also see nothing wrong with the banks then selling those risky loans. The problem was with the rating agencies stating every loan was AAAAAA++++ prime. That is, selling a portfolio of “junk loans”, like selling junk bonds, is fine, provided the buyer knows what he’s buying.
As for this bill in particular, I doubt it will become law. It’ll die in the Senate, or Obama will veto it. If it did pass, house prices would fall another 20-50%, especially on the high end.
California has the most to lose if this legislation were to become law.
Is there anyone who finds it ironic that in DC, the biggest complainers of the GSE’s are now politicians coming from states with lower housing prices, i.e. Rep. Jeb Hensarling (R-Texas)???
The once implied backing of Freddie & Fannie has turned into a massive subsidy program (directly & indirectly) for states with higher housing values. This has been going on, and growing for decades.
The direct benefit is obvious, more borrowing power. Here’s the indirect benefit — The homeowners in California get to write off more mortgage interest, therefore avoiding more income taxes, therefore shifting the cost to states (Texas) with smaller mortgage balances. This is a wealth transfer. The farmer in Texas who makes $250,000 a year doesn’t typically get a $30,000 to $50,000 mortgage interest reduction. Therefore he pays thousands more in federal income taxes. We don’t see this transfer in government figures, but it exist.
Yes, the politicians in Texas, and other fly over states are catching on to this.
Donny,
Talk about a cannonball to kill a flea…
Texans will still pay higher taxes, since the bill does not address marginal rates or deductibility of mortgage interest, points you made.
Higher prices are only offset with higher incomes, so someone in Texas making 250K has a much lower cost of living than in California, and presumably better quality of life (at least on paper).
If they really wanted to enforce fairness, they would abolish the MID and enforce an expanded standard deduction… but they won’t do that because many of them own rental properties, or have friends with rental properties, and that impacts their ability to deduct interest.
The real conundrum is the deduction of amortization on real property. Everyone accepts that real estate only goes up, so why does the IRS only assume it only goes down? I’ll tell you why… powerful lobbies and friends in high places.
Chuck
Re #6 the situation of a landlord is compeletly different, than a home owner resident in the home. The expenses and income of a rental property go on schedule e not schedule A (where resident homeowners get their mortgage interest deductions) The landlord deducts repairs mortgage interest, taxes, insurance and the like against the rents recieved and then also subtracts 1/27.5 of the basis of the property to determine the profit or loss. Now if you live in the home for more than 14 days the story is different.
So if you rent houses as a business interest is just like interest in any business a business expense.
Now on the depreciation, it gets recaptured when the house gets sold as a long term capital gain, start with the price paid and then by year depreciate and add improvements to the basis and do it again. Note that only improvements are depreciated land is not depreciated. So at most you convert income at regular rates to capital gains rates saving at most 20% today, and postponing the tax. Once again not quite a free lunch.
Consultant,
You’d be right on count #3. A balanced market *is* a market, meaning it won’t price itself out of existence. Prices will gravitate to what people can pay, period.
I’d love to see the conforming rate go back, but I’d (again) point out that under the original formula $417K ($625K for SD) is too high since it was based upon bubble valuations. A correct current limit would be about $300K ($450K for SD).
Why should high cost areas be aided with higher loan limits? There is nothing that mandates prices are higher here, just people’s willingness to pay more to be here.
I don’t see why one number shouldn’t be adequate across the board. Everyone pays the same federal tax rates regardless of where they live, why not give San Diego residents a lower tax rate because our cost of living is higher.
Anyone who wants to live here will really have to pay for it…and the evidence is that they will.
Wages and salaries for the area need to dictate what housing can cost. Otherwise you have Boca in Florida. I think I may have just had an epiphany. I’m wondering if some of the contributors to this blog are somewhat elitists and perhaps I should find another forum to read and contribute to. Perhaps start my own for those who aren’t getting free rent and working the system, but just trying to provide a nice environment for their families and not have to scrub hidden mold and duck bullets at the same time, but don’t have $1M to do it with. It’s a lot easier to build wealth if you have wealth and it snowballs. Sadly, San Diego is becoming OC South. Never thought it would happen as a native of a native San Diegan.
Why should high cost areas be aided with higher loan limits?
I’m totally with you, clearfund. I’m also with Chuck on killing the MID, since it’s basically a subsidy to affluent housing areas like SoCal.
Deb,
“Sadly, San Diego is becoming OC South.” … very correctly observed and said. I see this happening all along the North County Coast. Its no longer the sleepy little surfing town. Its been evolving more and more like OC South. About the snow-ball effect … A big part of buyer’s pool on the coast appear to be the wealthy folks from LA, OC, Bay Area, La Jolla and RSF. They typically have deeper pockets and are seen regularly playing with that Low Ball Million Dollar All-Cash offer for Trophies. Our own “CV Owner” fits the profile somewhat.
@5 Donny: What I find ironic in Rep. Hensarling’s statement is the fact that CA is a net-federal-tax donor, and TX is a net-fed-tax taker, as are many of the flyover states and much of the south.
“Since 1984, states that receive the most federal spending per tax dollar that their citizens pay have voted increasingly for Republican presidential candidates.”
http://www.allacademic.com/meta/p_mla_apa_research_citation/1/3/8/4/5/p138457_index.html