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Obama mortgage reform proposal

Posted by WARREN MOSLER on February 14th, 2011

If this is actually the jist of the proposals they make no sense to me.
For me the starting point is the question,
‘Is there public purpose supporting home ownership for lower income earners?’

Under current institutional arrangements, I’d say yes, and come up with an entirely different set of proposals, as I did
a while back for my website.

As is, looks to me like an obstacle to higher levels of output and employment.

Mortgage Costs to Rise As Government Lessens Role

February 11 (AP) — The Obama administration laid out three broad options Friday for reducing the government’s role in the mortgage market. All three would almost certainly lead to higher interest rates and costs for borrowers.

The administration said in a report that the government should withdraw its support for the mortgage market slowly, over five years or more. The report describes a path for winding down the troubled mortgage giants Fannie Mae and Freddie Mac.

But rather than making a single recommendation, the administration offered Congress three scenarios and will let lawmakers shape the final policy.

The options are:

— No government role, except for existing agencies like the Federal Housing Administration.

— A government guarantee of private mortgages triggered only when the market is in trouble.

— Government insurance for a targeted range of mortgage investments that already are guaranteed by private insurers. The government guarantee would kick in only if those private companies couldn’t pay.

27 Responses to “Obama mortgage reform proposal”

  1. zanon Says:

    what are your proposals?

    Reply

    WARREN MOSLER Reply:

    see if they are in here somewhere, thanks

    http://moslereconomics.com/proposals/

    If not, i’ll keep looking. mainly for the govt, which targets interest rates, to set a rate for mtg finance that serves public purpose and lend to the banks at that rate to fund the qualifying mtgs they make which would be ‘insured’ by the govt. much like the agency paper today. but the banks could only work for a fixed fee.

    Reply

  2. Tom Hickey Says:

    Limited to the the three choices, I’d go for “No government role, except for existing agencies like the Federal Housing Administration.”

    If the answer to Warren’s question, “‘Is there public purpose supporting home ownership for lower income earners?’‘ is affirmative, I would do it directly through a government agency extending loans where it is not profitable for private lenders at reasonable rates, on the principle that public/private deals are inherently flawed.

    Reply

    zanon Reply:

    how would you stop govt loan from simply flowing to higher prices for homes, or developer pocket?

    this is essential what end up happening to all “DPA” (downpayer assistant program) and it is/was huge source of fraud and theft. basically, developer and government get together and set up ring of theft, fraud, and corruption all in the name of the “poor”.

    sound familiar?

    Reply

    beowulf Reply:

    That’s a good point. Certainly there are a few steps the government can mitigate against theft, fraud and corruption. To that end the VA is better run (i.e not as subject to regulatory capture by the housing sector) than the FHA. For example, the VA itself (and not the vet’s lender) randomly selects the appraiser.
    http://www.vamortgagecenter.com/faqs_appraisals.htm

    But Zanon’s larger point is dead on; trying to make housing more affordable with easy credit terms such as low down payments and especially low mortgage rates, only lead to higher sale prices, making housing even more unaffordable.

    Reply

    Tom Hickey Reply:

    I agree that this is a problem and there would have to be some ceiling set on government loans. One way would be making government the lender of last resort, i.e., only those people not able to get a private loan would be eligible for a public one, with some deserving exceptions such as veterans who the country should reward for their service with special perks such as low rates.

    In many places there are affordability programs for renters to replace the old “project” model that failed. A few years ago, I lived in a pilot project like this in the Boston area that seemed pretty successful. The old project was torn down and a green replacement constructed in its place with renters mixed by income. As I recall, about 25% of the apartments were “affordability.” Most of the people occupying them seemed to be recent immigrants from all over the place. Very interesting place to live. There was also an opportunity to purchase an apartment as a condo. Something like this could be worked out for “affordable” homeownership. No MacMansions.

    Reply

    WARREN MOSLER Reply:

    when the loan payments can only be such that your payment isn’t any more than say 20% of income, the max amount is fixed, and the borrower can only pay that amount.

    RSJ Reply:

    “when the loan payments can only be such that your payment isn’t any more than say 20% of income, the max amount is fixed”

    No, the payment amount is fixed (capped) so prices (e.g. values) are still free to rise as rates fall.

    At the end of the day, a decline in rates is going to cause the equilibrium price of the asset to go up — you can’t get around this. Then additional regulations such as loan to value restrictions will serve to ration the market, delivering more of the asset to higher earners. This is why the U.S., with its massive subsidies, has roughly the same homeownership rate as nations without subsidies, or with much smaller subsidies. We pay much more for housing than we need to because of these programs.

    The public would be much better served with a direct income subsidy to households that would allow them to rent or own, spend or save based on their own preferences, without routing this subsidy through the financial markets in a way that disproportionately benefits those who currently hold assets or who have higher incomes.

    WARREN MOSLER Reply:

    with a 0 interest rate policy the term structure of risk free rates goes to 0 as well, and so (risk adjusted/fee adjusted) mtg rates wouldn’t mover around all that much at that point.

    WARREN MOSLER Reply:

    if loans are limited by the borrowers income, meaning he’s able to pay them back on schedule, then what your getting at is a general consumer protection policy which can serve public purpose, depending on how it’s done.

    Reply

    zanon Reply:

    warren:

    this is not solution. first, most “poor” do not have income. Or their income is very variable. So, do you go for stated income? What happen if lose job and income fall to zero? Or what happen if there is some other emergency that use up income, like relative gets married or sick?

    if goal is to put shelter over head of those who cannot otherwise afford it, that is fine and worthy. there are many ways to do it, some better some worse.

    but pushing real estate is not obviously good solution

    WARREN MOSLER Reply:

    not the full answer but never said it was

    RSJ Reply:

    You are talking about consumer credit, not mortgage debt.

    Loans for mortgages are limited by the ability of the buyer to re-sell the asset, not to repay the loan.

    Almost no-one repays a mortgage loan. Banks would be shocked if people did.

    They service the loan for a period of time — I think 5 yrs is the average — and then move to a different house, benefitting or losing from the gain. It is effectively an interest only loan, not a loan in which anything is repaid.

    Which is why you see such variations in the degree of “stretching”, with new home buyers spending a huge proportion of their income on housing, hoping to benefit from appreciation.

    We spend far too much of our income on housing compared to other nations and to our own past (when rates were higher and there were fewer subsidies).

    ESM Reply:

    Look, once again people get caught in this trap where they identify a resource that poor people lack and then try to use government to provide targeted subsidies for that resource.

    The fundamental thing that poor people lack is money. If you give them enough of that, the government doesn’t have to tie itself up in knots trying to figure out how to give poor people housing or food or transportation or education or child care or medical care without grossly distorting the marketplace.

    I can think of only one reason why it might make sense to encourage home ownership by the poor, and it’s a bit of a stretch. Poor people are much more likely to be underemployed, so ownership of a home would give them a project into which they could invest their surplus labor. Not a bad reason, actually, but I don’t think that it has ever been on anybody’s radar screen.

    By the way, the main reason poor people are shut out of home ownership is that local zoning laws often specify a minimum lot size for a home. Most of those laws are in place for purely selfish reasons, in order to support the home prices of the people who got there first.

    Reply

    WARREN MOSLER Reply:

    I agree with much you say but consider this- one risk of making mtgs is interest rate risk, which ads a vol premium/convexity premium to 30 year mtgs.

    that means rates are higher than they would be if the govt just left them alone, as with my 0 rate policy proposal.

    so the govt constantly changing or threatening to change rates puts a cost on lenders that makes housing less affordable than otherwise.

    so offering funding without charging for convexity, which only govt can, and should, as it creates the convexity penalty in the first place, would
    open home ownership to those who it would have been open to if not for the current, ill thought out, institutional structure

    Tom Hickey Reply:

    Admittedly, there are lot of ways to address this than government involvement in the mortgage market. IPoverty is often considered an economic problem. It is not as much an economic problem as a social problem. A government, one of whose chief purposes is promoting the general welfare per the Preamble, should be addressing this problem politically through economic policy.

    Our notion of poverty evolved and then devolved to some degree. See, for example, Awareness of poverty over three centuries. We need to turn attention in that direction again as inequality increases Census finds record gap between rich and poor
    and the number of people in poverty is growing Census: Number of poor may be millions higher. Presently, the total of unemployed, underemployed, and non-participants is in the 20%range.

    From the perspective of MMT, this is a problem that can be addressed through coherent economic policy. There really is no reason that everyone willing and able to work does not have a job with adequate benefits, and there is no financial or resource restriction on providing a decent living for the disabled and pensioners, either.

    WARREN MOSLER Reply:

    in the face of our actual productive capacity and available resources, for openers, there’s nothing preventing us from having institutional structure that allows people working for a living from being able to afford what we call a decent place to live (there is no actual housing shortage), enough to eat (we produce maybe 8,000 calories per day per person), and enough changes of clothing to only need to do laundry once a week, and, of course, a reasonable way to get to work, etc.

    there’s nothing preventing us from providing a minimum standard of living for the elderly that makes us proud to be americans

    there’s nothing preventing us from providing desired levels of education for citizens desiring to become educated.

    etc.

    ESM Reply:

    @Warren:

    “so offering funding without charging for convexity, which only govt can, and should, as it creates the convexity penalty in the first place, would
    open home ownership to those who it would have been open to if not for the current, ill thought out, institutional structure”

    Agreed. Although it’s also possible to have mortgages like the Danish do where you prepay at the market value instead of at par. I think that’s a far more sensible way to do things.

    “there’s nothing preventing us from providing a minimum standard of living for the elderly that makes us proud to be americans”

    Yes, although I am not as concerned about the attacks on social security as most of the people here. The likely scenario, if social security is cut back at all (which I doubt), is that the retirement age will be raised slowly over time. 65 years old is just not that old anymore, and at a minimum, people shouldn’t be penalized for continuing to work. In fact, studies have shown that work is good for health and happiness.

    @Tom:

    Once again, we should make sure to distinguish between absolute poverty and relative poverty, as well as poverty in consumption versus poverty in net financial wealth. Just because Bill Gates moves next door to me, it doesn’t mean my standard of living has gone down. And the miser down the street may be 100x as wealthy as I am, but his rate of consumption may be lower. I think we can guarantee a minimum rate of consumption of resources to US residents, but it is not necessary to cap the monetary wealth of rich people to do it.

    Tom Hickey Reply:

    ESM, both absolute and relative poverty have to be considered in a distributed system. For example, poverty used to be defined in terms of being destitute, e.g., unfree workers being force to live below the subsistence wage. The developed world has evolved to a different standard since then. This is a a fairly complex issue, so I won’t go deeper into it here other than to say that there is considerable thinking about this out there and there are a lot of issues involved that go beyond individuals.

    I would also add that revolution in the Arab world is traceable to this, rather than being a Facebook and Twitter “social networking” revolution, as it is being hyped in the media now. Absolute poverty is a big deal in the underdeveloped world, and relative poverty is a big deal in the emerging world. As I said above, poverty is a social problem with political and economic aspects. It is chiefly a social problem because the consequences are social.

    Secondly, I have no desire to cap monetary wealth as long as it is derived from contribution. I think you would admit that criminals have no claim to the wealth they obtain through crime. Similarly, I would argue that wealth obtained from unproductive means — economic rent — also has its claim vitiated to that degree.

    One of the purposes of discouraging economic rent is encouraging productive investment, innovation that increases productivity, choice, and quality of life, and productive contribution of capital, as well as income from production, which provides the demand needed to drive the cycle. Assuming that taxation is required to give value to state money and for functional finance, the way to target taxation is toward economic rent and negative externalities before taxing any of the factors. Michael Hudson is pretty clear on this, for example.

    MMT shows that taxation is not needed at the federal level to “redistribute” wealth, because the federal government funds itself directly through issuance, not taxation or borrowing. Taxation simply withdraws nongovernment net financial assets to control inflation and give value to state money. ( I am repeating this for newbies that may be reading this.)

    One of the features of functional finance is that it can be tightly targeted. Why not target taxation toward incentives and disincentives (positive and negative reinforcement in psychological terms) instead of toward the factors while ignoring economic rent? My view is that incentives are more appropriate than regulation when they can do the same job, some regulation being needed to keep the playing field level.

    beowulf Reply:

    I think we can guarantee a minimum rate of consumption of resources to US residents, but it is not necessary to cap the monetary wealth of rich people to do it.

    That’s a fair point, liberals would do well to focus on raising the floor instead of lowering the ceiling. Which reminds me, as you probably know, the Hershey Chocolate Company has unusual capital structure– its owned by an orphanage.
    “[I]ndeed it is not merely a school at all, but… a home where fatherless boys eat, sleep, study and live together, enjoying the testator’s bounty which provides them not only an education but also lodging, board,
    clothing and all the necessities of life.

    http://webcache.googleusercontent.com/search?q=cache:caKwomAb46MJ:www.johnfhalbleib.com/LinkClick.aspx?fileticket%3DN5OO2Dmwot0%253D%26tabid%3D419%26mid%3D690

    These necessities of life — education, housing, food, clothing and (as that Court notes later) medical care– are something that our economy has the resources provide every citizen without needing to raise taxes. Beyond simply direct provision of services by govt agencies (or benevolent chocolate barons), I suppose the govt could fund every citizen’s access to these necessities by, 1. writing a check (a la Social Security), 2. refundable tax credits (e.g. EITC) or 3. by expanding use of food stamp EBT cards to pay for other necessities as well.
    http://en.wikipedia.org/wiki/Electronic_Benefit_Transfer

    beowulf Reply:

    “the way to target taxation is toward economic rent and negative externalities before taxing any of the factors”

    Tom, there was a paper presented at the AEA last month on a topic I’ve mentioned before– the Lerner monopoly index.

    The Lerner Index of Monopoly Power: Origins and Uses
    Kenneth G. Elzinga (University of Virginia)
    David E. Mills (University of Virginia)

    http://www.aeaweb.org/aea/2011conference/program/retrieve.php?pdfid=222

    Something Bill Vickrey touched on in passing in his anti-inflation warrants proposal was a point that imposing progressive tax rates or market penalties on gross markups (i.e. value added) would function as an anti-monopoly tax.

    Oliver Reply:

    Secondly, I have no desire to cap monetary wealth as long as it is derived from contribution.

    Tom, first of all, thanks for your relentless quality contributions to all things MMT!

    I’ve been thinking about the rent issue for a while and I have a feeling it only captures part of the story.

    First, to bore you with foreign languages, the German word for (old-age) pension is ‘Rente’. To me, that explains the original intention of the phenomenon. Rent is the surplus that is saved for (later or current) use as a pension, the distribution of which is determined by ones personal ‘contribution’ and the overall amount of which is determined by general productivity. The interest rate is thus the instrument which determines the amount of surplus which the working population ‘must’ save / transfer to pensioners / rentiers. In theory at least, the mechanism is in accordance with the capitalist, meritocratic dream of each according to his or her ability.

    The part where I believe the system does not function they way it was intended, is not necessarily the transfer mechanism as such, but the individual merit upon which it claims to rest. And this is where I think the focus on eliminating economic rent alone falls short because taxing away unproductive money addresses the technical side, but not the individual / social side of the issue. Money may be productive in an abstract sense, in that it can finance productive endeavour, but that does not mean that the owner of said financial asset has personally made a productive contribution to society. Furthermore, any amount of real wealth transfer that is not distributed in a capitalist way, (food, shelter etc.), would have to be expropriated and redistributed by some other algorithm or mechanism – the question is, which one? I think, as long as we have some form of capitalism, the answer is probably a dirty one that involves a lot of consumption, inheritance and wealth taxes that somehow throw spanners into the wheels of otherwise unfettered markets.

    Just because Bill Gates moves next door to me, it doesn’t mean my standard of living has gone down.

    ESM, if someone like Bill Gates moves next door to me, chances are it’s because the area around me has moved considerably up-market. Depending on whether I own or rent the piece of land I live on, the impact would be very different, but large in any case. This is precisely what is happening to the street I live on here in Zurich. For the past 30 years it was the main throughway for traffic going from north to south. Now that Zurich has finally built its western bypass, following 30 years of protests by the ‘highway residents’, it is precisely those residents who have to make way for the developers and their fellow yuppies (including myself, I guess) who are homing in on these newly gentrified areas.

    All fine by me since I can (just) staying here, but e.g. the poor sod who until now was the caretaker of the house I live in, and who lives on the ground floor of the ruin that looked directly onto the highway that will soon make way for a luxury residential high-rise, now faces the lovely task of finding affordable housing in a city that has a residential vacancy rate of ca. 0.05% and with rents that are close to those in London and Tokyo. His standard of living most certainly has deteriorated, while others are making a killing. And the same goes for 50% of all others who have lived here for the past 30 years and who make up the social fabric of this part of town. Capitalism can be very disruptive to people’s lives and there are always winners and losers even if the general trend is upwards.

    Tom Hickey Reply:

    Oliver, of course some saving is necessary, but as we know saving doesn’t yield investment, but rather investment yields saving. So encouraging productive investment is a public investment.

    Naturally, people want to save and MMT shows how to make space fot this through the sectoral balance approach. Moreover, as I understand Michael Hudson’s view on economic rent, progressive taxation of economic rent would not materially affect the middle class saver. The “recycling” of the tax revenue from progressive economic rent — it is the top of the town that accumulates most of it — would be directed to public purpose that would benefit the middle and lower class people, such as education, health care, pension, etc., so that they would be relieved to a degree of having to save for retirement and eventualities like illness. This benefits all the factors in real terms, since less leakage to saving result in greater effective demand, making for a more productive economy that benefits all in a distributed way.

    The basic idea is to increase productivity and distribute the gain to all factors, while using functional finance to further public purpose. This increases the standard of living in a distributed fashion, which is the measure of national prosperity.

    This relates to the poverty issue as well. Poverty is not only socially damaging and politically disruptive, it is economically inefficient in that it results in a huge loss of opportunity and waster of valuable resources, especially when poverty becomes institutional.

    Oliver Reply:

    Yes, investment yields saving, not vice versa. I wasn’t looking to dispute the causalities of financial flows but rather question the logic or algorithm by which a person’s actions map to his or her recording of nominal, financial wealth. Admittedly, once one unveils the current classical story as a meme, the arbitrariness of any such algorithm becomes apparent. Nevertheless, I think there is still an advantage in keeping up appearances, as it were, because it preserves an element of self-determination, which I believe is the main argument in favour of any capitalist system as opposed to a command economy. Of course, in our reality this is all a matter of nuance, and I wasn’t questioning your ability to differentiate. I just think every interference in what we have come to perceive as our ‘natural’ right to greed and hedonism is contingent upon an appropriate story as moral accompaniment to be workable in a democracy. The first rule to successfully implementing change is making people understand why change is necessary. Levying a tax with will be easier if you can explain what for, even if the money really goes straight to the shredder. And knowing that that $ I won a the lottery in 1993 and then invested in an off-shore pension fund will still be there in 2017, minus socialist taxes, plus ‘well-deserved’ (because savvy) interest, gives me some sense of coherence and self-determination to hold on to even if it’s a complete illusion. That part of the human psyche, the Nintendo junky in search of the magic mushroom, doesn’t change with MMT.

    Tom Hickey Reply:

    Oliver, that’s what the “innocent frauds” aka “white lies” are all about. It’s paternalism and I don’t think it has a place in a liberal democracy. If there is a problem in this regard, it is with institutions underperforming, such as the educational system and media. The whole idea behind democracy is “the wisdom of crowds.” Otherwise it is just paternalism.

    Oliver Reply:

    I’m saying humans need both – a desire to seek out the truth and a good excuse to partake in the game of life’s contradictions. But yeah, that’s nearing sophistry so I’ll leave it at that.

    regards

  3. Jim Baird Says:

    BTW – looks like the White House may have some MMT advocates in it:

    http://mikenormaneconomics.blogspot.com/2011/02/my-not-so-small-influence-on-policy.html

    Reply

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