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Foreign spigot off for US consumers
By Max Fraad Wolff
28/08/08 "ICH"
-- - As US public attention shifts from the Olympics to
running mates and the celebrity "news" de jour, the
infrastructure beneath your house is termite-infested. Just
beneath the nicely painted exterior and behind all the new
appliances, doubt is boring through the beams, gnawing at the
studs.
Alongside falling prices, rising mortgage rates, stricter credit
conditions and general malaise, the structure that supports
American home ownership is being condemned by market valuation.
Fannie Mae and Freddie Mac have nose dived and been downgraded
toward a smaller future - and these are more important names for
your future than Joe, Sam, Kathy, Mitt, Meg ...
Fannie Mae was created in the depths of the Great Depression to
decrease foreclosure and increase home ownership. In 1968, it
was re-chartered as a public company, removed from within
official government agency status. Freddie Mac, since its
inception in 1970, has financed 50 million homes.
Fannie and Freddie mission statements make clear, they exist to
facilitate, ease and cheapen home ownership. They do this by
acting as liaisons between international capital markets and
mortgage seekers. They borrow at preferential rates - based on
the implicit/explicit - assurance of the US government. Borrowed
funds are used to buy mortgages and bundles of mortgages. They
provide credit guidelines and purchase mortgage issued by banks.
This reduces banks' risk and provides banks with more cash, more
quickly to make more loans at lower costs. These firms, then,
exist to facilitate, ease and accelerate bank lending for home
purchase.
Fannie and Freddie form a central hub between lenders and
investors. After they buy American mortgages, they bundle sell
and guarantee repayment. This transforms mortgages into
investments for banks, corporations and governments all over the
world. Your home mortgage, bundled with many other folks'
mortgages, is sold, repackaged and assured by Fannie and
Freddie. This reduces risk and assures global savings flow in to
support American purchases of homes. International investment is
the foundation on which our home ownership was built.
Well over US$1 trillion of our mortgages have been sold to
foreign investors this way in the recent past. As you sit down
and read this, your mortgage may well be "owned" by a firm,
individual or central bank thousands of miles away. This
relationship is neither healthy nor sustainable in its present
form. Rising defaults, falling dollars and the sheer size of
past borrowing are turning people off to American mortgages. The
foundation below our houses is shifting.
What we are witnessing is the breakdown of the link between
middle-class America and the global financial markets it has
over-tapped across the last several decades. Fannie and Freddie
were the support infrastructure connecting houses to capital
market access. They have been caught with weak financials,
swollen balance sheets and escalating default, just like the
home owners they assist. The size of their retained mortgage
portfolios is truly gigantic.
The extent of the firms' guarantee commitments is global in
scope. Sixty-six global central banks buy loans bundled and or
backed with Freddie Mac and Fannie Mae involvement. As of June
30, 2007 foreign entities and individuals held over $1.4
trillion in securities of US agencies such as Freddie and
Fannie.
Fannie Mae's June 2008 statement declares a gross mortgage
portfolio of $750 billion and guarantees of mortgage backed
securities and loans of $2.6 trillion. Freddie Mac's June
statement details a retained portfolio balance of $792 billion
and a total mortgage portfolio balance of $2.2 trillion. These
two giants have retained interest in over $1.5 trillion and
guaranteed over $4.5 trillion in mortgages, mortgage backed
securities and loans. There are $11 trillion in outstanding
mortgage liabilities in the US.
The US housing market continues to melt down with dire
consequence. In the seven years from 2001 through late 2007,
household real estate value increased by $8.873 trillion to
$22.495 trillion. It has since fallen by $426 billion. Many
claim we are at or a near a bottom. These claims should be
viewed with extreme weariness. The housing downturn is not over
and it will take a while after it is over to judge the damage.
The search for parallels with today yields little. The closest
one finds is the interesting decline in home ownership across
the period 1905-1920 followed by a surging rise across the '20s
and then collapse across the 1930s. Fannie was born of this
collapse, the ideology of The New Deal and sense that
government-driven market interventions could broaden home
ownership in America. This was a success. Home ownership did
grow spectacularly across the period from 1938-2007. It is
falling now as Fannie and Freddie flounder.
In 1940, US home ownership stood just below 44%. At the start of
2008 68% of Americans owned their home. Over the decades, Fannie
and Freddie changed, middle-class America changed and the global
financial realm underwent several revolutions. The last and most
transformative revolution involved the rise of securitization
and integration of global financial markets.
Securitization involves transforming assets and promises of
future payment into financial products for sale to investors.
International financial integration tears down the walls between
national banking systems and allows savings, loans and payments
to be gathered and transferred across international boundaries.
A world of wealth poured into US real estate through
securitization and deregulation. This flow was channeled and
molded by the actions of Fannie Mae and Freddie Mac. The decline
of these firms will have dramatic and long-lasting implications
for home mortgage finance. This will impact the price of
American homes, the cost and ease of borrowing for home
ownership.
Housing prices have further to fall and global savings will
likely never be lent to American consumers at recent percentage
levels. Across the past few years America has been borrowing
over 50% of the world's internationally available savings. The
diminishing role of Fannie and Freddie will impact more people,
for far longer than presidential running-mate selections. Policy
makers and managements in Fannie and Freddie are stuck. Today's
consumer strength, their missions and international financial
realities no longer align.
We face a housing finance future different from the recent past.
Fannie and Freddie will not be able to function in the same way,
or to the same extent. The debates about and plans for these
firms will touch millions of families through housing prices,
finance terms and cost. Fannie and Freddie are much more
important than Joe, Sam, Kathy, Mitt, Meg ...
Max Fraad Wolff is a doctoral candidate in economics at the
University of Massachusetts, Amherst, and editor of the website
GlobalMacroScope.
http://www.globalmacroscope.com
Copyright 2008 Max Fraad Wolff.
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