The Ultimate Fix

Much speculation regarding the Future of Housing Finance and the overall housing market around the news lately.  I penned a couple articles for HousingWatch (here and here) on the conference of the same name that took place at The Treasury last month, they’re good prerequisites to whats written below.

While there were many threads of thought that could turn into policy when Congress is presented a proposal in January 2011, I rub my Conjecture Ball and foresee:

The Government sponsored artists currently known as Fannie and Freddie shift from hybrid private/Government controlled entities to straight up Government controlled.  OK, it’s not really speculation when Timmay Geithner states: “We’re not going with a system where private gains are subsidized by taxpayer losses.”  Anyway, they abandon the practice of implicitly guaranteeing (~90% of all) mortgages today in favor of an explicit guarantee that reads like an insurance policy.  So, the Government will provide mortgage insurance for a fee instead of the Freemium model currently enjoyed by financial institutions.  That model didn’t work out real well for anyone except big ass banks.  Our Government hasn’t been real savvy when it comes to financial engineering…free really shouldn’t be the new business model, with all due respect to Chris Anderson.

Government Sponsored Mortgage Insurance (GSMI).  This is interesting, really.  The premiums for something like GSMI would be paid by the individual mortgage holder and the policy would insure the actual asset, not the business entities that hold them…suitably addressing Mr. Geithner’s statement above.  Fannie and/or/nor Freddie can thus go back to performing the duties they were essentially created to carry out: To create affordable housing for the masses and mitigate risk on their behalf.  They could still maintain, even increase their influence on the market whilst scaling back on the actual buying of mortgages…insuring parts thereof instead.  

Theoretically this shift would provide enough incentive and security for the private sector to gradually re-enter the mortgage space and fill any vacuum created by the Governments very, very gradual decrease in purchasing mortgages.  A new fee like GSMI means other fees and current tax deductible benefits currently innate to a mortgage take a hair cut…like the mortgage interest deduction.

The powers that be are also focused on providing suitable, affordable housing…just not necessarily through home ownership.  As such, rental market dynamics are being primed for adjustments. Multi-family housing loans made accessible and desirable due to favorable GSMI terms seems highly plausible.  There are likely to be other subsidies into the rental market from initiatives like PETRA to help shore up this sector of affordable housing.

If you continue to listen closely and look closer, the landscape is being primed for The Ultimate Fix…

“The only way to fix it is to flush it all away...” - Tool

So- Over the next six or so months the housing market will continue to tank as financial institutions release huge amounts of distressed (shadow) inventory into the market creating supply that far exceeds the ability to consume.  This will exert extreme downward pressure on property values.  The number of banks will continue to contract.  Homeowners will continue walk away from their houses.  The National Association of Realtors will continue to tell anyone who is listening that its a great time to buy.

These sour conditions will be amplified with the seasonal slowdown to such a point where everyone is clamoring for additional Government ‘intervention’ or stimulus or Print More Money!!  Except I don’t think there will be much, if any, of that.  There really isn’t much left to be done except to allow the existing system to flush itself and prepare for what comes out the other side.

Whats on the other side of this economic enema?  Explicit Government guarantees via the artists formerly known as Fannie and Freddie to keep the cost of credit within reach of the qualified rather than the entitled, increasing private money participation, and a retooled rental market system to support all the displaced homeowners.  Dead inventory will be channeled off through a series of initiatives like HomePath.  The housing market and property values drop below this ‘double dipped’, false floor we’ve been dancing on for almost 2 years…and there is no where to go except up.  Which equates to a real recovery and sustainable growth which will lead to inflation and all those other problems that we can worry about that sometime post 2012, assuming that whole Mayan prophecy thing doesn’t absolve us of any future responsibilities.

This painful process constitutes a necessary de-leveraging of an economic system thats based on a debtor society which has been taught to borrow/spend beyond it’s means.  While it may hurt and otherwise cramp our very American style, its really not the end of the world as we know it.