Radical Ideas From a Federal Housing Bureaucrat

[momopi]

http://blogs.wsj.com/developments/2010/ ... ureaucrat/

June 14, 2010, 12:54 PM ET Radical Ideas From a Federal Housing Bureaucrat

As the chief economist of the Federal Housing Finance Agency, Patrick Lawler is usually confined in his public remarks to discussing such matters as the seasonal adjustment of home-price indexes. So I wasn’t expecting much excitement when Mr. Lawler rose to speak last week during a panel discussion at a housing-policy conference hosted by the Federal Reserve Bank of Cleveland.

It turns out, however, that Mr. Lawler has been quietly pondering some radical notions about how the U.S. might reorder its housing policies–insights acquired during more than 20 years as a regulator and Senate banking committee staff economist.

Allotted only about 10 minutes to share his vision, Mr. Lawler–who is no relation to Tom Lawler, another provocative housing economist we often quote–first made the obligatory statement that he was expressing his own views and not those of his federal agency. Yeah, right, I thought, and reached for my triple espresso.

But then Mr. Lawler launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible.

Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month.

What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.

In the first place, mortgage rates are higher than they otherwise would be. That’s because lenders and mortgage investors must build in protection for the risk that we will prepay and stick them with a lower yield than they were anticipating. Mr. Lawler estimates that Americans pay at least an extra 0.25 to 0.50 percentage point in rates because of this option to prepay without penalty. They also pay another premium-–sometimes a percentage point or two–for having a long-term fixed rate. Over 30 years, that translates into some real money, but no one ever mentions that when bragging to the neighbor.

In the second place, our nation has created the likes of Fannie, Freddie and the FHA to facilitate these oddball 30-year fixed-rate loans, which aren’t normally provided by the private market. For a long while, that seemed like a free lunch. Fannie and Freddie, we were told, were far better able to handle those complex risks than we dumb consumers ever could. But since the government had to rescue Fannie and Freddie in 2008, the taxpayers’ tab for this indigestible lunch has swollen to $145 billion, and it’s still rising. So that’s the second time we’ll pay for our irrational love of American-style mortgages – only this time, we all pay, not just mortgage borrowers.

Meanwhile, other wealthy nations–notably Canada–do without our kind of mortgages and yet somehow manage to have homeownership rates similar to ours. They do not pretend that there are risk-free ways to buy houses on credit.

Mr. Lawler then skewered one of the favorite arguments of those who assert that we need Fannie and Freddie–their ability to borrow money all over the world, drawing in foreigners’ savings to finance ever-larger McMansions (which then need to be filled with Asian gadgets and European gewgaws). But why exactly do we need all of that foreign investment in our mortgages? Mr. Lawler asked: “A good case can be made that we massively over-invest in housing.� Indeed, we might be better off investing any money foreigners lend us in something that would help us sell more of our goods and services to those foreigners so we can hope to pay them back one day.

All too soon, Mr. Lawler’s time was up, but he blurted one last revolutionary chant before resuming his role as a bland bureaucrat: “We can do with a lot less government involvement and still get what we want, just by making some fundamental changes.�

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