Exotic Loans Behind Taxpayer ‘Payment Shock’

By Robert Freedman, senior editor, REALTOR® Magazine

images Cato Institute analyst Mark Calabria in his piece, Housing Market Will Be Fine Without 30-Year Fixed Loans (Investor’s Business Daily, March 17),  argues that the stability provided to households from the 30-year, fixed-rate mortgage comes with a big contingent liability: the bailout of Fannie Mae and Freddie Mac.

As Calabria puts it, although the 30-year fixed-rate mortgage has given borrowers some stability in their monthly mortgage payment, “it has done so by exposing households, as taxpayers, to massive, hard-to-predict contingent liabilities. There’s been no bigger ‘hidden fees’ or ‘payment shock’ in the mortgage market than the cost of the bailout of Fannie Mae and Freddie Mac.”

But surely Calabria knows that it wasn’t the 30-year, fixed-rate mortgage that forced the two secondary mortgage market companies to need a bailout; it was their dabbling in subprime, stated-income, Alt-A, and other exotic loans while they were playing catch-up to Wall Street players in the private-label mortgage securities market. The Obama administration, in its white paper on reforming Fannie and Freddie, makes this clear:

“Fannie Mae and Freddie Mac were largely on the sidelines while private markets generated increasingly risky mortgages. Between 2001 and 2005, private-label securitizations of Alt-A and subprime mortgages grew fivefold, yet Fannie Mae and Freddie Mac continued to primarily guarantee fully documented, high-quality mortgages. But as their combined market share declined—from nearly 70 percent of new originations in 2003 to 40 percent in 2006—Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits. Not only did they expand their guarantees to new and riskier products, but they also increased their holdings of some of these riskier mortgages on their own balance sheets.”

Calabria says that as long as the federal government guarantees the 30-year, fixed rate mortgage, someone will have to pay for that subsidy. But it wasn’t until the two government-sponsored enterprises strayed from their role backing the 30-year, fixed rate mortgage that taxpayers got hit with a bill to pay for the subsidy to those two companies. On that basis, if the concern is over reducing taxpayer exposure to bad loans that cost taxpayers money, then ensuring the government retains a role supporting the 30-year, fixed rate mortgage is arguably what we should be encouraging.

And to be clear: consumers—i.e., taxpayers—have been unambiguous in their preference for long-term, fixed-rate mortgage financing. About 90 percent of those that finance their purchase choose that type of loan.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. This seems to be just another case of GREED on the part of Fannie & Freddie. It’s just nice to know that consumers get screwed twice. Go figure….

  2. Ed

    Has there been any class action?Where was all of our elected government officials during the years of 2001-2008, when private label secuitizations of Alt-A and subprime mortgages grew fivefold w/out fully documented mortgages and borrowers not needing to qualify, using risky products. Mortgages are still be issued to non qualifying buyers.

  3. Clearly we all know why the banking industry got into trouble: Liar Loans. Unfortunately greed/ dishonesty/ cupidity ( look it up, its a word, not stupidity but cupidity) on Wall streets side and dishonesty and stupidity or a dangerous combination of both on some borrowers side led to the debacle were in now. What should be outlawed is government backing or bailing out of extremely risky loans sisa/ siva. Also each institution/person that sold those loans as something other than what they were should be punished. The ensuing melt down then caused a domino effect to regular borrowers of job loss and even more defaults.

    Laura Riddle is an author “Sell your home now” which is written to help homeowners in todays market navigate selling their home as wisely as possible
    and a Real Estate Broker in So. California

  4. Art Clark

    The greed was on the part of the people in charge at freddie mac and fannie mae. As with all of the other corporations that had problems with the recession the problem is with the people at the top who wish to look good for the share holders so they can get better bonuses. At the end of the day the people in charge get paid a lot of money, and than leave the company. The customers are hurt by bad products and the share holders are hurt by bad company policy and the perpetrators are long gone with thier ill gotten gains. Mr. Calabria is not stating fact, he is stating his political opinion.

  5. More Wall Street Rhetoric!
    It is plain and simple, we need complete banking reform in this country without anyone from anywhere near wall street involved. We don’t have the political gonads for this to happen though – I wish we did. FHA loans and USDA loans are perfectly fine for normal folks, anything above those amounts, let the private market sort it out. It’s high time some folks came down out of the clouds and back to reality.

  6. Arleen

    It’s not only the greedy banks, it’s greedy agents, mortgage brokers and buyers.
    Buyers that couldn’t afford the homes, agents and mortgage brokers pushed the loans to the edge knowing people will not be able to pay when the arms became due.
    Buyers that bought their houses at a low price before 2003, stripped the equity out when the houses doubled in value. The home owners made out buying new cars, vacations etc…then dumped the houses because the mortgages went up crying they couldn’t afford to pay. The banks are double dipping when they got bailed out for the deliquent houses and on the lenders insurance that protected them. It’s the American dream, but not everyone deserves to own a house. Bank of America and a few more were giving out loans to illegal aliens with no social security numbers. Agents that represented these illegals were also at fault.