Fannie, Freddie and the Future of Housing, Innovation and Green Design


"lend them money and you get a rabble instead of a thrifty working class"

The Federal National Mortgage Association, previously known affectionately as Fannie Mae, was founded in 1938 by Franklin Roosevelt as part of the New Deal, to provide liquidity to the mortgage market so that working Americans could buy houses. The Federal Home Loan Mortgage Corporation (Freddie Mac) was founded in 1968 to do much the same thing after Fannie Mae was privatized.

No doubt older Roosevelt-hating Free Market types are thrilled that this last vestige of the New Deal and government intervention has been re-nationalized and eviscerated; John McCain calls it "an example of cronyism, special interest, lobbyists," adding that the companies needed "more regulation, more oversight, more transparency, more of everything, and frankly, a dramatic reduction in what they do."

Unfortunately, Mr. McCain, what they did was make money available for banks to lend to people who can't pay cash for real estate. What they did was what the government wanted them to do- make it possible for builders to build houses and for people to pay for them. This included apartments and resales, all kinds of mortgages, and did not include the sub-prime loans that started this crisis.

While their structure was problematic since President Johnson privatized them to pay for the Vietnam war, they had higher standards than the private lenders and didn't cause the credit meltdown but were victims of it. Now the government is the only mortgage lender left standing, and it will make Mr. Potter look like George Bailey's uncle on a bender.

While the stock market is up and everyone is pasting on smiles, I am deeply pessimistic. Here's why.


"bread, so you will never know hunger, salt so life will always have flavor, and a house"

In 1988, I joined a development company with eighty employees; by the time I left 3 years later in the middle of the last real estate crash (a hangover from the American Savings and Loan crisis) there were only three left, including the owner. There was not a single residential unit built in Toronto for five years; the banks had simply turned off the taps. When it finally started coming around in 1996, few of the builders that were there before still existed. That's because developers don't borrow money to build, they build to borrow money. When they can't build and borrow, they die.

Now, once again, the banks are in crisis, and the backstop of last resort has been wiped out as well. Suddenly moral rectitude, "more regulation, more oversight more of everything, and frankly, a dramatic reduction in what they do" is the buzzword. Result:


"But Tom, your money isn't here, it's in Joe's house and Mrs. Smith's house. That's what banks do!"
No More Mortgages

It used to be that you couldn't get a mortgage without a 25% down payment, guarantees from Dad, and a decent job where you didn't have to spend more than 30% of your income on your payments and property taxes. Well, that is what it is going to be like, starting this afternoon. And even though house prices have fallen, they still are higher in proportion to wages than they were 50 years ago, when there were GI bills and other incentives to get people into houses; the incentives are now gone.

What is left of Fannie and Freddie will be rolled into a new organization that will spend billions to blot up the mess, and lending more money to working people will probably be the last of its priorities. It will probably be run by Herbert Allison, who, when firing 500 employees at TIAA-Cref, was accused of "herbicide."

No more innovation and no more premium for Green

Daniel Akst wrote an article about the problems of building something different, a modern house, back in 1992. He had trouble: " Almost everyone borrows to buy or build a home, and the size of the mortgage you can pry out of a lender depends heavily on the appraised value of the place, which is the bank's collateral, after all. I am here to attest that unusual houses, no matter how wonderful, appraise for less."

In the last decade, appraisals didn't matter that much; the banks were just selling the paper in CDO s to someone else. Now they will again; guess what will happen when you say you want to put in a 25,000 dollar ground source heat pump instead of a $5,000 furnace, or insulate the walls to R-30 or build out of FSC timber. Only a small percentage of the population understand or care what this means, so you will never get their value out of an appraisal.

Result: Innovation and green design requires cold, hard cash from rich purchasers. It's history for everyone else.

Recommendations:
1) Stay Put. If you have a good rental stay in it. If you own a small house and think you should upgrade to a bigger one, don't- you are making your mortgage payments now and at some point it will get its value back.

2) Inherit or marry money. Because you are not going to get a house any other way. If you can't do that, save every penny you can.

3) Move to Buffalo or Rochester Seriously- there is good housing stock at good prices. It is going to be in demand. Read Buffalo : Where the Urban Dream is Going Cheap
4) Demand that your candidates explain who will back mortgages from now on. If they say "nobody, it should be a free market thing" remind them that the Government has been in the mortgage business since 1938. And don't vote for them- this needs intervention, not a "dramatic reduction in what they do."

5) Demand an end to Mortgage Deductibility. Since only the rich can get a mortgage, why should only the rich get a tax break? Read more on Dingell wants cap on Mortgage Interest Deduction
6) Read up on the Savings and Loan crisis of 1990. It took years to get over it, cost billions; it seems that nobody, including members of the Keating Five, has learned anything from it.

7) Read Jim Kunstler.
He's right and being proven so every day.

8) Get ready for hard times, expensive money and a penniless shadow of a government controlling both the till and the printing press, with predictable results. We all live in Pottersville now.


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