April 25, 2013 5:45 pm
Markets Insight: US mortgage market depends on state support
This week, the American economy passed a small milestone. For the first time in six years, a Gallup survey showed that just over half of Americans now expect house prices to rise over the next year.
That is a sharp contrast to last year, when most people expected further falls. And it follows a host of other upbeat signals: CoreLogic reports that US house values rose at their fastest pace in February since 2006; the pace of home sales has jumped; unsold inventories have declined; and developers have even started to build more homes again.
Little wonder that some senior US economic officials are quietly celebrating an end to the great housing market crash; or, at least, are expressing hopes that the market is “healing” due to a typically American combination of creative destruction (ie. defaults) and entrepreneurial instincts (bottom-fishing investors).
But amid these hints of optimism, there is a profound irony too: if you look at what is currently driving America’s housing “market”, the funding side of this equation has less and less to do with genuine market forces. Never mind the fact that the US Federal Reserve is gobbling up mortgage-backed securities at a rate of $40bn a month, to try to lower mortgage rates. And ignore the modest (and generally ineffective) measures that the Federal government has unveiled for homeowners who are underwater on their mortgage loans.
What is most startling of all is the level of government guarantees for mortgage bonds, following the collapse of the private securitisation market in the wake of the financial crisis. “Investors have nearly completely abandoned the private label [mortgage-backed securities] market— the government is responsible for nearly 100 per cent of the securitisation market,” a Congressional committee on financial services noted this week.
“In fact, the displacement of private sector competition is so large that roughly 90 per cent of all residential mortgage originations are securitised into government-backed [bonds].”
Yes, you read that right: in the supposed land of the free (markets), the state is now guaranteeing almost all new mortgage bonds. Government involvement on this scale has never been seen before in American history; although entities such as Fannie Mae have existed for decades, they used to guarantee between a fifth and a half of the market. Indeed, state support like this is unprecedented anywhere in the western world – even in the parts of Europe that right-wing American senators sometimes like to label as “socialist”.
Even more striking is how little political pressure there is for change.
Earlier this month, some voices appealed for reform, after it emerged that Fannie and Freddie had recently posted big profits amid the housing rebound.
Hank Paulson, the former Treasury secretary, for example, pointed out that government guarantees were distorting the market. He called on his former Treasury colleagues to reform the entities that he effectively nationalised (and rescued) in 2008. “Today the government is guaranteeing 90 per cent of the mortgages. If the government keeps doing this, and markets aren’t allowed to work, we’ll be right back where we were in 2007 and 2008.”
But Mr Paulson’s appeal is a lonely one; at this week’s Congressional discussion on this issue, there were few calls for an immediate end to state aid. Instead, the emphasis is on modest – slow – change. A bipartisan housing commission, for example, recently proposed that institutions such as Fannie and Freddy should evolve in the future into public “guarantors” of mortgages that “would provide catastrophic risk insurance only for qualified mortgage-backed securities, not for the issuers of those securities”. But the commisision suggested this would take a decade to occur, and its plan is considered more radical tan many of the other “reform” ideas being mooted.
In some senses this is understandable. The mortgage bond market is vast and no politician wants to kill the nascent signs of a housing rebound. There is currently little sign of the private securitisation market roaring back into life, given all the regulatory impediments, and banks lack the capacity to provide mortgage finance on their own. Indeed, the funding gap is so big that Moody’s Analytics estimates house prices would have fallen another 25 per cent in recent years – on top of their actual declines – if these state guarantees had not been in place.
But the more that politicians – and voters – get addicted to this state aid, the harder it may be to remove it in future. If nothing else, it is (yet another) sign of how distorted the western financial system remains five years after the crash; not just in Europe, but in America too.
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Copyright The Financial Times Limited 2013.
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