![]() The FHA, an agency tasked with promoting home ownership, has tripled its guarantee book since the crisis. In all, these five bodies own or have guaranteed $6.4 trillion of loans: a book of exposure three times larger than Mr Dimon’s balance-sheet. Along with Fannie and Freddie, the other main players are the Veterans Affairs department (VA), the Federal Housing Administration (FHA) and Ginnie Mae, which helps the FHA and VA package loans into bonds and sell them. This means that the securitisation of loans, most of which used to be in the private sector, is now almost entirely state-run. Other private securitisers have withdrawn or gone bust. They are now in “conservatorship”, a type of notionally temporary nationalisation that shows few signs of ending. It is the majority shareholder in Freddie Mac and Fannie Mae, mortgage companies that were previously privately run (though with an implicit guarantee). The second big change is that the government’s improvised rescue of the system in 2008-12 has left it with a much bigger role (see chart 3). They originate roughly half of all new mortgages. New, independent firms like Quicken Loans and Freedom Mortgage have filled the gap. But with the exception of Wells Fargo they are less keen on writing riskier loans in their branches and feeding them to securitisers. They still own mortgage-backed bonds and they still make home loans to wealthy folk, which they keep on their balance-sheets. The trouble with Gosplanįirst, banks have partially withdrawn from the mortgage game after facing swathes of new rules and $110 billion of fines for misconduct. There was a run on mortgage bonds and on the firms that issued or owned them. The machine blew up in 2006-10 for a host of reasons, the most important of which was wild and sometimes fraudulent underwriting. After all this, derivatives contracts are created whose value is linked to these bonds. The bundles of bonds thus produced are then flogged to investors. Next the loans are guaranteed and securitised. The loans thus underwritten are then spruced up to look more attractive or realise some profits for example sometimes insurance may be taken out against defaults, or the rights to “service” loans (collect interest payments) sold off. Mortgages are originated, or agreed, with millions of homeowners. The vacuum left by the thrifts was filled by the new technology of securitisation, which seemed, for a while, to make the risk vanish altogether. Between 19, over 1,000 thrifts were bailed out at a cost to taxpayers of about 3% of one year’s GDP. But in the 1980s they blew up due to a mixture of risky lending, inadequate capital and bad bets on interest rates. These generous terms are made possible by the support of a housing-finance machine that funnels cheap credit to homeowners and, in doing so, takes on the risk, thereby shielding both the borrowers and the investors.įor decades lightly regulated thrifts did most of this lending. American borrowers get a better deal: cheap 30-year fixed-rate mortgages that can be repaid early free. In most countries banks minimise their risk by offering short-term or floating-rate mortgages. A crisis as bad as last time would cost taxpayers 2-4% of GDP, not far off the bail-out of the banks in 2008-12.Īmerica’s housing system has always been unusual. But an analysis by The Economist suggests that the subsidy for housing debt is running at about $150 billion a year, or roughly 1% of GDP. ![]() No one is keen to make transparent the subsidies and dangers involved, the risks of which are in effect borne by taxpayers. The structure of these loans, their volume and the risks they entail are controlled not by markets but by administrative fiat. Some 65-80% of all new home loans are repackaged by organs of the state. ![]() The supply of mortgages in America has an air of distinctly socialist command-and-control about it. The strange path the mortgage machine has taken has implications for ordinary people, as well as for financiers. It has not gone unreformed in the ten years since it set off the most severe recession of modern times. It is still closely linked to the global financial system, with $1 trillion of mortgage debt owned abroad. America’s mortgage-finance system, with $11 trillion of debt, is probably the biggest concentration of financial risk to be found anywhere. At $26 trillion America’s housing stock is the largest asset class in the world, worth a little more than the country’s stockmarket.
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