Sunday, October 12, 2008

With smart readers, what's a blogger to do?

If you haven't already done so, I hope you read the thread of The mortgage mess: a few thoughts where you’ll find civil, very informed comments on the current mortgage mess and turmoil in the financial markets. The comments include criticisms of some things I’ve said.

If you’re a regular reader here, you know I’ve often admitted that, judging by comments, many of you readers are smarter than I am.

The comments at
The mortgage mess: a few thoughts and on other post threads leave no doubt about that.

Sigh. What’s a blogger in my situation to do?

I blog on but with renewed appreciation for readers whose professional training, expertise and experience is often greater than mine and whom I’d be foolish to engage point by point.

But I’ll offer a few observations about home ownership, mortgages and the government’s involvement in both and welcome further comment.

The observations are meant to suggest why I think government’s involvement in home mortgages has historically been beneficial using 1930 as a start date.

At that time it was common for home buyers to have to put as much as 50% of the sale price up in cash.

Mortgages at 50% of the home’s selling price were also common; and usually much like what we today call a “balloon mortgage.”

After a certain number of years the mortgage principal became due. At that point the mortgage holder and mortgagor could renegotiate the mortgage terms or the mortgagor could demand full payment of the principal.

If the mortgagor couldn’t make the full principal payment, the mortgagee could take back possession on the house and the mortgagor was “out on the street.”

In the circumstances of the 1930s those mortgages we now call “balloons” could be pretty deadly, which is why back then they were called “bullet mortgages.”

IMO the federal government has done enormous good for the country be helping create over the last 80 years a much more stable home mortgage market than we’d had before 1930; and one that’s made home ownership available and beneficial to tens of millions of people.

There were some essential keys to the government’s success.

Good credit and satisfactory employment history were two of the most important ones. So were construction/home inspections to make sure the properties were built to a certain standard. There was also the matter of conservative appraisals of the property’s market value.

One other key to sound Fannie and Freddie mortgage lending: the mortgage principal amounts they would accept to package and back had to be less than certain amounts which were set to allow the purchase of “starter” and “average” homes, but avoid lending on “dream” homes which are often the most risky.

Those lending keys I’ve just cited have all been abused; and that abuse, much of it encouraged, really insisted on, by Fannie and Freddie in recent years explain a lot of the mortgage delinquency problems today.

In sum, I think the government can be and has been a force for good in the housing market, but it can be the opposite as well.

Private banks and other forms of business can be the same way.

I go with the notion that it’s the kind of government we have that can either help or hurt the housing market and everything else.

I believe in capitalism, but government has a role, too.

I’ll be back this evening posting on the role I see charity playing in the housing market.

Now that’s enough from me.

It’s time we all had a chance to hear again from the smart people who comment here.


Anonymous said...

JinC - You are correct about the deadly mortgages of the 1930's. My grandfather died at an early age and left my grandmother a widow with eight children and no house - they lost it because the baloon mortgage was due and they had no money.
My mother and father purchased their first house through a VA loan (he was a WWII vet). My husband and I bought our first house with an FHA loan (11% interest in the early years of the Carter administration). I agree that the federal government has done much that is good to make home ownership possible. But, I would have to say (I am no economist) that when the rules for down payments were stricter and when a more thorough credit check was in place, there were not the dangers as there are now of so many people unable to make their mortgage payments because they were extended way beyond their means.
What I would like to know is just how many of the homes that are in foreclosure or the number of people who are delinquent on their payments are of the middle and upper class? My hunch is that the number of those in the lower class is much smaller than the other two.

Anonymous said...

John -

I have been unable to comment until now because I was in transit (to visit kids & grandkids over the final week of my fall holiday season).

You are right: government can be a force for good, but usually it isn't, and that's because it doesn't play by the same rules as the market. Typically, when government gets involved in something, it becomes dominated by special interests who benefit from the government's involvment and who are unresponisve to market forces, and indeed, frequently disdain such forces. So, for example, we have an oil shortage (in the form of oils prices that exceed the marginal costs of production) because environmentalists value earth more than people; and comparably, we have insufficient atomic energy because environmentalists place a much higher probability on extremely rare (or even nonexistent) events. Then the government in response to voters' anger about high oil/energy prices pushrd the market to the solutions that are nonsensensical but have a feel good quality. So, we now have ethanol and other "creative" but not cost effective methods of energy production, and all that does is to compound the problem. That's because we end up with high prices both for oil/energy and for food as corn is diverted from food purposes to meager increases in energy; of course, investment money that could go for more productive investments ends up being used for such nonproductive ends.

When we turn to housing, the goal of maximum private ownership may be a noble goal. Special interests, though, grab the scene by pushing private homeownership way beyond any optimal amount. The consequence is that you get more private homes built and purchased than you would were the market left to its own devices. But to advocate that the government interfere in the private market and tilt it to more private homeownership, you have to show that that there is some kind of market failure. That, though, is very difficult to do, especially in something where there is no apparent reason for such failure. You have also have to show that the addditional investement in residential construction outweighs the benefits of alternative consumption or investment.

In any event, in retrospect, it seems quite clear that government, especially Clinton & Co (and ACORN-St. Barack), pushed private homeownership far more than the market could bear. The result is what you see today, a fincial crisis that never should have happened. Of course, the Democrats who initiated the whole crisis, and blocked any attempt at reform, now have the chutzpah to blame the Republicans and deregualtion. Then you get some Republicans, e.g., Sarah Palin, who, to escape the voters' wrath, blame greed and corruption on Wall Street. No one in government wants to say, we did it and its our fault.

When special interests prevail I always like to turn Article 1, Section 8, which say: "The Congress shall have Power To lay and collect Taxes ... provide for the common Defence and general Welfare of the United States ..." Note well: it says "general Welfare," and not special welfare. If government would keep its eye on that ball, we could avoid a lot of foolish policy. As a teacher I once had said, the road to hell is paved with the best of intentions.

Jack in Silver Spring

Anonymous said...

Krugman In Wonderland
William L. Anderson 10.13.08, 4:10 PM ET

William L. Anderson is associate professor in the Department of Economics at Frostburg State University in Frostburg, Md.