I commented earlier in the week on the problems Fannie Mae and Freddie Mac are facing; problems which were long-standing but which have been snowballing as of late. Today's huge price drop in both stocks on top of cumulative losses so far this year point to a key fault in both institutions: They don't have enough cash reserves to even cover the debt they current carry or guarantee. While still above their 52 week lows they are about 90% off their 52 week high. If the feds have to take over the 2 F's (double entendre intended), that will affect the value of government bonds (both the coupon bonds as well as savings bonds) which will be even less trustworthy than they are now.
Also this week, the primary guarantor of mortgages in Canada, CMHC, said they would no longer back 40 year mortgages (setting a maximum of 35 years for amortization) and said also they would insist on a 5% down payment, a partial reversal on 100% mortgages with no money down but still only half-way to the old 90/10 rule.
In my opinion, even 25 years (the traditional amortization in Canada) is way too long. If you can't afford to pay off the mortgage in only 15 years you need to look for a smaller house. Especially here where mortgage interest is not tax deductible, having a shorter payoff period frees up capital for other borrowers much sooner as well as saves tens of thousands in interest.
This should be the rule, in my opinion: 15 years, tops. Older mortgages would be grandfathered, of course, but new ones would be bound by stricter new rules and they should stick.
As far as the US goes, the tax code is due for a huge overhaul. And getting rid of the mortgage interest tax deductible status would be an important first step in restoring sanity in the housing and stock markets as well -- the amount of money lost from the Treasury every year could very well balance the budget and then some. Two decades ago Congress eliminated the deduction of sales tax on cars and trucks (which led to a short-term flurry of sales in Cadillacs and Lincolns before time ran out).
If they could do it for cars they certainly can do it for houses. When Ontario was given the choice on deducting interest on mortgages we rejected it out of hand at the ballot box because we knew we simply couldn't afford it. America certainly can't anymore, especially with the default rate as high as it is.
And it goes without saying: Get the eff out of Iraq. Don't even wait for the election. Restoring confidence in federal debt is a major first step in restoring confidence in the credit markets.
UPDATE (4:07 PM EDT, 2007 GMT): Ben Bernacke, the Fed Chair, announced Freddie and Fannie will be able to access the "discount window" on the same basis as banks and brokerage firms. If it's gotten that bad ... I don't know how to finish this sentence.
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1 comment:
The problem with the mortgage market in the US was the government sponsored entities Fannie and Freddie themselves.
The real problem is that they would buy up all the sub-prime mortgages from the banks that originated them. The banks seeing no risk to themselves did not really care if the people taking out the loans could pay it back. This resulted in a whole lot of outright fraud but the whole thing started with a government idea to get people that really could not afford it into homes. As far as Fannie and Freddie go they are both in reality already bankrupt and eventually the shareholders will be wiped out in some sort of deal that the government makes to rescue them. Nobody is going to buy them
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