Housing in America
Nightmare on Main Street
America’s housing system was at the centre of the last crisis. It has still not been properly reformed
WHAT are the most dysfunctional parts of the global financial system? China’s banking industry, you might say, with its great wall of bad debts and state-sponsored cronyism. Or the euro zone’s taped-together single currency, which stretches across 19 different countries, each with its own debts and frail financial firms. Both are worrying. But if sheer size is your yardstick, nothing beats America’s housing market.
It is the world’s largest asset class, worth $26 trillion, more than America’s stockmarket. The slab of mortgage debt lurking beneath it is the planet’s biggest concentration of financial risk.
When house prices started tumbling in the summer of 2006, a chain reaction led to a global crisis in 2008-09. A decade on, the presumption is that the mortgage-debt monster has been tamed. In fact, vast, nationalised, unprofitable and undercapitalised, it remains a menace to the world’s biggest economy.
Only in their dreams. That trillion-dollar capital buffer exists to protect banks, but much risk lies elsewhere. That is because, since the 1980s, mortgage lending in America has been mainly the job of the bond market, not the banks as in many other countries. Loans are bundled into bonds, guaranteed and sold around the world. Investors on Wall Street, in Beijing and elsewhere own $7 trillion-worth.
When those investors panicked in 2008, the government stepped in and took over the bits of the mortgage-guarantee apparatus it did not already control. It was a temporary solution, but political gridlock has made it permanent. Now 65-80% of new mortgages are stamped with a guarantee from Uncle Sam that protects investors from the risk that homeowners default. In the heartland of free enterprise the mortgage system is worthy of Gosplan.
The guarantees mean there is unlikely to be a repeat of the global panic that took place in 2008-09, when investors feared that housing bonds were about to default. Only a madman in the White House would think that America gained from reneging on its promises. And parts of the system are indeed safer. The baroque derivatives that caused huge damage, such as mortgage-based CDOs, have shrivelled away. At least 10,000 pages of new rules exist to police reckless conduct.
The dangers of a nationalised system are more insidious. The size, design and availability of mortgages is now decided by official fiat. Partly because the state charges too little for the guarantees it offers, taxpayers are subsidising housing borrowers to the tune of up to $150 billion a year, or 1% of GDP. Since the government mortgage machine need not make a profit or have safety buffers, well-run private firms cannot compete, so many banks have withdrawn from making mortgages. If there is another crisis the taxpayer will still have to foot the bill, which could be 2-4% of GDP, not far off the cost of the 2008-09 bank bail-out.
Faced with this gigantic muddle, many politicians and regulators just shrug. The system is mad, but the thicket of rules and vigilant regulators will prevent crazy lending from taking place, they argue.
Households have deleveraged, leaving them able to service their debts more efficiently.
That seems wildly optimistic. Because housing is seen as one of the few ways in which less-well-off Americans can accumulate wealth, there is an inbuilt political pressure to loosen lending standards. As a result, housing crises are a recurring feature of American life. Before the subprime debacle in 2008-10, there was the savings-and-loans fiasco in the 1980s. Since the crisis the share of households that own their property has fallen from 69% to 63%. Rather than welcoming this as a sensible shift towards renting, Donald Trump and others have portrayed it as a disgrace. Because global investors are hungry for safe assets, any bonds with an American guarantee are snapped up, adding to the incentive to borrow.
Rather than allow the cycle of remorse and repetition to repeat, better to complete the job of reform and make sure that the mortgage system cannot be used as a political tool to stimulate the economy.
The simplest approach would be to give it the same medicine as the regulators administered to the banks. The nationalised mortgage firms that guarantee the bonds—and are thus in hock if the market collapses—should be forced to raise their capital buffers and increase their fees until they make an adequate profit.
The public would have to foot the bill, of around $400 billion, making explicit the contingent liability for future losses that it already bears. The cost of mortgages, at a record low today, would also rise.
But that would eliminate the ongoing hidden subsidy and create a level playing field so that private firms were able to do more mortgage lending. If that bill was too big to swallow, a second-best would be to impose the new rules on new mortgages, leaving the stock of subsidised existing loans to run down over the coming decades.
Housing in America
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Gonzalo Raffo de Lavalle
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Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
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No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
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Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
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