Poor Ben Carson. He is being subjected to the “addicted to gov” crowd in the US Senate (those Senators who can’t envision a world without Federal subsidies and regulation). But are the savings from a residential mortgage backstop large enough to justify its existance?
(Bloomberg) – By Joe Light – Ben Carson, President-elect Donald Trump’s nominee for the top U.S. housing-policy job, told lawmakers that he questions the need for a government backstop of the market for 30-year mortgages, saying the private market could take on much of the responsibility.
Carson commented in response to a question Thursday at aSenate confirmation hearing where some Democrats questioned his qualifications to lead the Department of Housing and Urban Development, which has responsibilities ranging from insuring low-down-payment mortgages to administering rental assistance for low-income home owners. The housing industry has defended the federal backing as essential in keeping down mortgage costs.
Carson also said he believes private companies should play a greater role in the mortgage market. He said he supports a government backstop in the market, but also said he believes the 30-year fixed-rate mortgage could continue to exist if that backstop ceased to exist.
“You can’t do it overnight. It has to be a gradual change,” Carson said. “We can’t do it in a haphazard way.”
Fannie Mae and Freddie Mac, which are controlled by an independent agency, along with the Federal Housing Administration, which is administered by HUD, backstop the vast majority of the mortgage market. Many economists say the support allows lenders to offer relatively inexpensive 30-year fixed- rate mortgages, which are rare in other countries.
So, what would happen to the 30 year fixed-rate mortgage if the backstop was removed? Let’s compare Bankrate’s survey of the 30 year fixed-rates and their survey of 30-year JUMBO fixed-rates (meaning mortgages that are too big to be purchased by Fannie Mae and Freddie Mac). The most recent spread betwen jumbo 30 year fixed-rate mortgages and 30 year fixed-rate mortgages. The spread is currently 50 basis points.
Previously, I estimated (controlling for borrower and loan charateristics) that the savings from the guarantee was as little as 28 basis points. Is 28 basis points really that costly to homebuyers?
Regarding the Federal Housing Administration (FHA), the FHA 30 year fixed-rates have been higher than the Bankrate 30 year fixed-rates since the financial crisis (but were lower than before the crisis).
But suppose that mortgage rates rise 200 basis points without the guarantee? That would be the “market rate” as opposed to a taxpayer subsidized rate. Between The Fed and the mortgage backstop, there is little wonder why housing is so unaffordable in the USA (particularly on the coasts).
And it is true that the US is one of the only countries to be so heavily invested in 30 year fixed-rate mortgages.
Seriously, is the US housing market so addicted to government backstop that borrowers can’t tolerate an increase in mortgage rates of 28-50 basis points? In other words, is housing addicted to gov?