The leadership structure of the Federal Housing Finance Agency, the body that runs Fannie Mae and Freddie Mac, has been ruled unconstitutional by a federal appeals court in Texas.
Mel Watt – Brookings Institution/Flickr
According to the ruling by the U.S. Court of Appeals for the Fifth Circuit in Texas, the FHFA has been “unconstitutionally insulated from executive control” due to its single-director structure. Should the court’s decision be upheld by a higher court, the FHFA’s actions could be rendered void according to the law, American Banker reported.
“We hold that Congress insulated the FHFA to the point where the executive branch cannot control the FHFA or hold it accountable,” appeals court judges said.
The FHFA does not have a bipartisan commission, unlike other federal agencies, so there is nothing to insulate it from executive oversight, the judges explained.
At present the FHFA executive cannot be removed from his post except for good cause. However, the judges called for a change to be made in the law so that the president can remove the director at will.
The Washington Examiner says the issue is not an academic one, as Mel Watt (pictured), who is the incumbent acting FHFA director, was appointed by former president Barack Obama, and has been criticized by the Trump administration several times since it took over the White House.
The previous acting director Ed DeMarco was also criticized for his fiscally conservative management of Fannie and Freddie, leading to calls from some liberals for him to be fired.
The FHFA took control of Fannie and Freddie on a caretaker basis after the two mortgage backers were bailed out by the government in 2008. Since then the FHFA has directed their business and strongly shaped the housing market. Fannie and Freddie facilitate a national secondary mortgage market by buying home loans from banks and other lenders and packaging them into securities for sale to investors.
The lawsuit against the FHFA was brought about by shareholders of Fannie and Freddie. Those shareholders also raised concerns that the Treasury took 100 percent of profits from the mortgage giants rather than pay out a 10 percent dividend. However, the court rejected the latter argument, validating an agreement that requires both bodies to deliver almost all their profits to the Treasury Department.
The FHFA refused to comment on the case.
Courts across the country continue to focus on appropriate checks on independent regulators. Twice in less than a year, a federal court has ruled that the Consumer Financial Protection Bureau isn’t constitutionally structured, also citing its single-director format.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
I’ve seen a number of articles lately predicting that mortgage rates will rise in 2021, a couple even from other HousingWire contributors. The rationale for these predictions have been erudite, multifactorial and complex. I am, on the other hand, a simple man. Most days I don’t even wear shoes. When I think about the direction of mortgage rates there is only one factor I consider – and that is economic growth.
Over the years I have professed that the rate of economic growth pretty much explains the whole lasagna so that should be the entire focus. When the economy gets better, bond yields rise and mortgage rates follow. When the economy slows, bond yields drop and mortgage rates follow. I expect mortgage rates in 2021 to stick to the same pattern.
The trick is to find a respectable range within each economic cycle. I started to incorporate bond yield forecasts for my yearly prediction articles and every year since 2015 I had said the same range. The 10-year yield would range between 1.60%-3%. In 2020, that range broke but continued a long-term downtrend in yields which started in 1981.
Before the 10-year yield broke below 1% this year, I wrote this year that if the U.S. went into a recession the 10-year would trade between -0.21% – 0.62%. On the morning of March 9, the 10-year traded at 0.34%. Since that low point the 10-year yield has been above 0.62% for most of the time during the COVID recession. This has been a consistent strong indicator for me, that, despite all the drama in various sectors, the bond market expected the economy to improve.
When the COVID recession hit the U.S., I proposed an economic model to track the progress of the economy. I called this model the AB Model for America is Back. The last variable that needs to be realized for this model to predict that the American economy is growing again is for the 10-year yield to break over 1% and stay in the range of 1.33% to 1.60%
Time is running out for this last variable to be checked off in 2020, but it remains within the realm of possibility. Here are the factors that can either drive yields to break above 1% this year or prevent this from happening.
1. COVID infection rates
Presently, the number of COVID-19 cases in the U.S. is rising again. If this trend continues, as I expect it will as we go into the winter months, we will reach new daily highs in the number of cases. The risk to the economy is that if new cases lead to such high levels of hospitalization rates, the government will be forced with much harder restriction nationally to combat the spread of the virus. Without that, the risk to the economy isn’t as great as some might think now.
Our country has learned how to continue to consume goods and services even with a virus that is infecting and killing Americans every day, the ups and downs of infection rates haven’t impacted the bond market or economic data too much recently.
Take the recent retail sales data as a case in point. Following the drastic dip at the beginning of the crisis, retail sales have now gone above the pre-COVID numbers. We need to credit the disaster relief package for some of these gains. Secondly, the fear of COVID-19 has faded away from American behavior, which means we went from hoarding toilet paper to buying homes, cars, driving more and purchasing more stuff on-line.
But, even with disaster relief, it’s impossible for the U.S. economy to run anywhere near full capacity with this virus still active in our society. Even though we have seen V-shaped recovery data in multiple sectors, certain parts of the economy are still at best treading water. Energy prices for one, prove this on a daily basis.
Eventually we will have a vaccine and multiple effective treatments to fight the virus and these will be the missing links to get our economy back to its traditional slow and steady growth like we had in the previous expansion — the longest economic and job expansion in history.
2. The election and more disaster relief
The disaster relief aid distributed to distressed Americans this year actually did what it was intended to do. Due to the fiscal aid, real disposable income and the personal savings rate have increased this year to levels above those of pre-COVID times. Even though the effects of the initial boost from the $1,200 check and enhanced unemployment benefits are fading as our politicians continue to argue about what to do next, personal savings and disposable income remain higher than 2019 levels.
If we had not implemented the massive fiscal disaster relief, and monetary actions from the Federal Reserve, I believe the bond market would still be in the recessionary range of – 0.21% – 0.62%. In my opinion, we need to continue distributing disaster relief to the economically distressed until the unemployment picture dramatically improves. I don’t expect the U.S. to run near full economic capacity until either the treatment for COVID improves to the point that only a very small percentage of cases require hospitalization and/or an effective vaccine becomes widely available.
I have to wonder why Republicans have been so resolute in their refusal to give President Trump months ago the trillions of dollars needed to juice the economy going into the election. Taking the uncertain state of the disaster relief away would have been a much-needed feather in Trump’s cap. After all, when it comes to winning elections, “it’s the economy stupid.”
I suspect that certain Republicans simply don’t believe Trump can win this election and they don’t want to pass anything that could help the economy during a Biden presidency. Also, Democrats have a 1.8 trillion disaster relief bill offered from Republicans ready to go, and trying to play your political hand too much just means a lack of disaster relief right away.
I know some would say that some Senate Republicans won’t accept the $1.8 trillion disaster relief package that the president wants now. However, I believe President Trump would get them back in line if the Democrats accepted the $1.8 trillion disaster relief package that the White House has offered. Maybe there’s a quiet agreement among politicians that something will get done before the election that is not known to the public. I know a deadline has been issued by the Democrats to get something done this week, so hopefully something gets done. For me, politics is the same always, Poly, Ticks. I regret my cynicism, but can’t shake it either.
In any case, the bond market, and thus mortgage rates in 2021, could rise if we get a sweep for either party. If Biden wins the presidency and the Democrats get the Senate, we can expect a lot more fiscal disaster relief will be forthcoming. If President Trump wins the presidency and the Republicans hold the Senate, I likewise expect a disaster relief package will be passed right away to support the president and the American people.
However, if Biden wins the presidency and the Republicans hold the Senate, then we can expect the Republicans to reprise their favorite “We are broke” song and dance – and hold back additional disaster relief as much and for as long as they can. This third scenario would be a factor in keeping bond market yields from rising. However, I believe a proven, effective COVID-19 vaccine and treatment can offset a smaller-than-anticipated disaster relief package.
GDP growth will be comparatively high in Q3 because we are working from the mother of all low bars. It will be what happens in Q4 of 2020 and the first three quarters of next year that will guide the bond market. Don’t expect the 10-year yield over 2% or mortgage rates over 4% in 2021 until we get a vaccine, approved treatments and more disaster relief. Remember, we have near 17 trillion in negative yields around the world as the world is dealing with the economic ramifications of COVID-19. As we can see with the recent jobs report, we have a lot of work to do here in America to get us back to the employment level before COVID-19.
To say that we have a lot of drama events that are about to occur from now to the end of the year would be an understatement between the election, rising COVID-19 cases and the dispute on more disaster relief. It’s a lot on the plate for the last 11 weeks of the year. Plus, the family talks at Thanksgiving this year! Even if it’s a zoom event, there might be a lot of intense family discussions.
Just remember, the bond market will get ahead of consistent economic growth, even if it’s between 1% -2.5%. We want to see higher bond yields and higher mortgage rates as that would indicate the last few economic sectors damaged by COVID-19 are healing. Once we can get the 10-year yield above 1%, then I can check my last variable in the America is Back economic model.
However, don’t forget: higher or lower mortgage rates in 2021 will be about the level of economic growth, positive or negative. What I discussed above are some factors that can play into that for the rest of the year.
Ivanka Trump is going to be spending a lot more time in the D.C. area in the coming years, so it makes sense that she and her family have a place to stay.
The new digs are located close to the White House, in D.C.’s Kalorama neighborhood. Interestingly enough, that’s the same neighborhood that the Obama family will be moving into in a few weeks.
It hasn’t been verified whether or not the $5.5 M home was bought or if they will be renting it. With 6,870 square-feet, 6 bedrooms and 7 baths, there’s enough space for everyone in the family to relax comfortably.
The home has all of the most current appliances, five wood-burning fireplaces, a master suite and a stylish deck/patio.
Check it out:
[huge_it_slider id=”17″]
All photos via Zillow
Carter Wessman
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
It didn’t always feel like it, but 2016 was a pretty good year for the housing market. From Brexit to Trump, there were several surprises, but ultimately, we’re heading into 2017 with a solid footing underneath us.
No one knows exactly what will happen in the new year, and with a new administration taking office in January, it’s not easy to make detailed predictions. However, there are several data points that we can use to point us in the right direction.
So what’s in store for the housing in market in 2017? Here are 5 things to watch out for.
1. Mortgage rates will move higher
The 2016 housing market was fueled by extremely low mortgage rates. We saw rates bottom out last year at near record levels (around 3.5%) after the Brexit vote. Post-election, they’ve skyrocketed over seventy basis points (one basis point = 0.1%), mostly due to expectations that the Donald Trump administration will boost the economy with its infrastructure spending plan. While the quickness with which rates rise might soften somewhat, it’s widely expected for mortgage rates to continue on their ascent next year.
The Federal Reserve’s Federal Open Market Committee (FOMC) just recently raised the benchmark interest rate by a quarter-point for the second time in a decade.
The FOMC will meet at least eight times in 2017, and fed officials have stated that they believe it will be appropriate to raise the federal funds rate around three times throughout the year. It’s true that the FOMC does not directly control the direction of mortgage rates, but it can play a large role in influencing which way rates are headed.
So how high will mortgage rates rise?
It’s not unfathomable to suggest that mortgage rates could be somewhere between 4.75%-5.0% in the fourth quarter of 2017. Long-term interest rate speculation should always be taken with a grain of salt though. Many, many things could happen between now and then.
Click here to get today’s latest mortgage rates.
2. Millennials will buy more homes
In 2016, Millenials (ages currently 18-34) surpassed Baby Boomers as the largest living generation in the United States. While rising mortgage rates might price some of them out of the market, they are still poised to be one of biggest demographics of home buyers (some estimates are saying they will account for up to 33% of home buyers).
Marriage and children are no doubt on the way for many of them, and those are two key life events that often precede the motivation to purchase a home.
One other interesting trend for millennials in 2017 is the decision to settle in the Midwest. Apparently, the affordability and the proximity to big universities is enough of a draw in to keep millennials from heading to the coast.
3. Home price growth will soften
In 2016, home prices rose around an estimated 5%, putting them back to where they were before the housing bubble burst in 2008. While that may be great news for home owners, it’s not something every prospective home buyer is crazy about.
Nevertheless, home prices are expected to continue to rise over the course of the new year, albeit by a slightly lower margin. Zillow’s Chief Economist Svenja Goodell is predicting home prices will increase by 3.6% next year. That’s right about where other economists are predicting, give or take a few basis points.
Of course, in a nation as large and varied as the United States, not every housing market is created equal. Some markets will continue to march forward with strong growth while others will slow down and falter. For instance, cities in the western United States are predicted to outperform their eastern counterparts (just as they did in 2016) next year. As you can see below, five of the top ten cities in the graphic below are located out west.
Taken as a whole, though, home price growth will moderate somewhat compared to 2016.
4. New home construction gets more expensive
The construction industry struggled to find workers in 2016, and that trend is expected to continue. According to the National Association of Homebuilders, there are an estimated 200,000 vacant positions in the construction industry right now.
It’s not just confined to one position either. Employers are finding it extremely difficult to find both entry level and experienced workers alike. With less laborers competing for jobs, companies are forced to raise wages in order to attract talent.
Those extra costs will inevitably get passed on to customers, resulting in an increased cost for new construction. Not only that, this shortage of labor means that fewer houses are being produced.
Wild Cards
Fed overplaying their hand
Not everyone is so optimistic about the housing market and the economy in general. A recent report from the Financial Times shows that many economists are extremely doubtful that the Federal Reserve will wind up proceeding with multiple rate hikes in 2017. Instead, they believe that the Fed will raise rates once at their June meeting.
It’s definitely reasonable to be fairly skeptical of fed rate hike predictions, seeing how some fed officials were touting up to four rate hikes this year and in the end they barely pulled one off.
Doubts about Trump stimulus
While the stock markets surged after Donald Trump came out and stated that he has plans for substantial fiscal stimulus, some experts believe the path ahead won’t be so smooth. Euro Pacific Capital CEO Peter Schiff has come out recently as one of the few economists to question the efficacy of Trump’s plan. Here it is in his own words:
“The Federal Reserve is going to have to step up to the plate big league if Donald Trump is going to want to move forward with the tax cuts and spending increases that he has promised the electorate. That’s where the markets have it wrong. They somehow think that fiscal stimulus is a substitute for monetary stimulus. It’s not. If we’re going to have larger deficits, it’s impossible to finance them unless the Federal Reserve does it. That means they’re going to have to be launching another round of quantitative easing that is much larger than the ones we’ve had in the past. Rather than being dollar positive, this is a negative for the dollar … If currency traders actually understood what was happening, higher inflation is very bad for the dollar because the Fed cannot fight it.”
Bottom Line
Trying to predict the future is often more a mental exercise than it is an actionable guideline. There are just too many unknowns to hang your hat on anything more than several months out. It’s still important to go through the data and try to gain a better understanding of things to come. While there’s no guarantee that any of these predictions will come true, borrowers, investors, and onlookers that are aware of the expectations are better suited to adapt to whatever unfolds in the 2017 housing market.
Data for the graphic via Realtor.com
Carter Wessman
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
According to the minutes from the Federal Open Market Committee (FOMC) meeting on Jan. 31-Feb. 1, Federal Reserve officials think that an increase in the federal funds rate might be appropriate “fairly soon.” Here is the main quote that financial market participants have picked up on:
“Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the committee’s maximum-employment and inflation objectives increased.”
Much of the discussion during the Fed’s two day meeting was focused on what kind of influence potential policy changes from the Trump would have on the U.S. economy. That makes sense when you consider that this was the first FOMC meeting since Trump was sworn into office. Several Fed officials argued that deregulation and corporate tax cuts could stimulate the economy and usher in the need for the Fed to raise rates.
Click here to get today’s latest mortgage rates (Aug. 15, 2023).
However, not everyone was so optimistic. Some Fed officials felt that the policies that are being talked about might not even come to fruition, meaning that there would be less pressure to raise rates in the near term. Clearly, the Fed is still grappling with the uncertainty brought about by the Trump administration.
With so much talk recently about a March rate hike, many investors were hoping for a strong hint in the minutes. That did not happen. Instead, they got some classic fedspeak. Because when it comes down to it, the Fed saying that it might be appropriate to raise rates “fairly soon” is something that doesn’t mean much. After all, they were saying that all last year and only wound up hiking rates once in December.
Click here to find out how the federal funds rate affects mortgage rates.
That seems to be what investors are thinking, as the odds of a March rate hike via the Fed Fund futures are only slightly above their pre-minutes position of 17.7%, at 22.1%. That means that if the Fed were to go ahead and raise at their March 14-15 meeting, it would catch the markets off-guard, and cook cause a bit of mess.
Of course, there is still time between now and then for the Fed to bolster rate hike sentiment, but time is definitely running out.
Carter Wessman
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
On January 27th, new cuts to the FHA’s mortgage insurance premiums were supposed to go into effect.
That won’t be happening now, though.
Earlier in the month, Julián Castro, the outgoing Secretary of the Department of Housing and Urban Development, announced a 25 basis point cut in mortgage insurance for FHA borrowers. “After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” he said in a press release.
However, Castro said at the time of the announcement that his administration did not consult with the Trump administration on the decision, as it involved market-sensitive information.
The Trump administration evidently took issue with being left out of the loop. On inauguration day, Trump issued an order freezing any new or pending regulations from the Obama administration, insurance cut included.
What does that mean for you?
FHA loans are intended to encourage first-time and medium-income borrowers to enter the housing market–especially those who have lower credit scores or have smaller down payments. Unfortunately for those buyers, a lot is up in the air right now.
While it’s possible the Trump administration will choose to re-enact the cut after giving it more consideration, it’s unlikely. If a premium cut is a deciding factor for you and your family, stay tuned for any developments. Given that Trump has tried to position himself as a leader for the working class, his policies should begin to reflect that sooner or later.
If a premium cut was just a nice bonus, though, it’s safe to say you shouldn’t put your buying plans on pause.
President Donald Trump’s administration is teasing real estate investors with the possibility of significant tax breaks when they buy properties in “distressed economic areas” that have since been labeled as “opportunity zones” by the U.S. Treasure Department.
Steve Mnuchin, the Treasury’s Secretary, said the newly designated zones could attract as much as $100 billion in investment.
The idea for the tax breaks is to tempt investors to inject new capital into areas of the U.S. that have fallen behind the rest of the country since the Great Recession. The plan is that capital gains in a certified opportunity zone can avoid taxation through the end of 2026, or until the investment is sold, whichever comes first. Any gains would be permanently shielded from being taxed if the investors holds the asset for at least 10 years. In addition, after a seven year period, the initial investment will be discounted by up to 15 percent for taxation purposes.
The Treasury Department also says that “large scale” projects could possibly qualify for tax breaks. For example, those who invest capital for startup business in opportunity zones could be exempt. Also include are individuals, corporations, businesses, REITs and estates and trusts. More guidance will be issued at the end of the year, the Treasury Department said.
The Treasury Department has published a full list of “Opportunity Zones”, available here.
“The creation of opportunity zones is one of the most significant provisions of the Tax Cut and Jobs Act,” Mnuchin said earlier this year. “Incentivizing private investment into these low-income communities can be transformational, stimulating economic growth and job creation across the country. This administration will work diligently with states and the private sector to encourage investment and development in opportunity zones and other distressed communities so that they may enjoy the benefits of robust economic growth.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
President Donald Trump’s administration is teasing real estate investors with the possibility of significant tax breaks when they buy properties in “distressed economic areas” that have since been labeled as “opportunity zones” by the U.S. Treasure Department.
Steve Mnuchin, the Treasury’s Secretary, said the newly designated zones could attract as much as $100 billion in investment.
The idea for the tax breaks is to tempt investors to inject new capital into areas of the U.S. that have fallen behind the rest of the country since the Great Recession. The plan is that capital gains in a certified opportunity zone can avoid taxation through the end of 2026, or until the investment is sold, whichever comes first. Any gains would be permanently shielded from being taxed if the investors holds the asset for at least 10 years. In addition, after a seven year period, the initial investment will be discounted by up to 15 percent for taxation purposes.
The Treasury Department also says that “large scale” projects could possibly qualify for tax breaks. For example, those who invest capital for startup business in opportunity zones could be exempt. Also include are individuals, corporations, businesses, REITs and estates and trusts. More guidance will be issued at the end of the year, the Treasury Department said.
The Treasury Department has published a full list of “Opportunity Zones”, available here.
“The creation of opportunity zones is one of the most significant provisions of the Tax Cut and Jobs Act,” Mnuchin said earlier this year. “Incentivizing private investment into these low-income communities can be transformational, stimulating economic growth and job creation across the country. This administration will work diligently with states and the private sector to encourage investment and development in opportunity zones and other distressed communities so that they may enjoy the benefits of robust economic growth.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Last Month: Markets think Mnuchin wants privatization
Earlier last month, Donald Trump’s pick for Treasury Secretary Steven Mnuchin stated that getting Fannie and Freddie out of government control is “on the top 10 list of things that we’re going to get done.” He went further, stating:
“It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.We’ll make sure that when they’re restructured, they’re absolutely safe and they don’t get taken over again. But we gotta get them out of government control.”
Treasury and mortgage markets went into a bit of a tizzy when they heard that, and both Fannie and Freddie’s stocks shot up over 40%.
Now: Mnuchin backtracks
Mnuchin had his confirmation hearing before the U.S. Senate Finance Committee a few days ago, during which he was asked about these statements. In a somewhat surprising turn of events, Mnuchin backtracked a little and stated that it was not his intent to come off in support of “recap and release” (i.e. the recapitalization of Freddie and Fannie and the release of control back to shareholders).
He went on, saying that:
“I start with the standpoint [that] the status quo is not acceptable, of just leaving them [Freddie and Fannie] there. I believe we need housing reform, and we need to make sure that, whatever the outcome is, one, we don’t put the taxpayers at risk and two, we don’t eliminate capital from the housing market.”
Understandably, stock prices for both companies fell about 10% after the news broke. But while Mnuchin may have retreated a bit during his confirmation, he still maintained that change is coming. It’s unsure what exactly that change will look like, especially if Mnuchin is trying to get both sides of the aisle on board.
Still, right now is a good time to take a look at some of the issues around housing reform and how it might affect home buyers.
How the mortgage market works right now
The secondary market
A quick primer: It come as a surprise at first, but mortgage lenders don’t earn a profit from the interest on the mortgages they lend out. Instead, they sell the mortgages out to buyers on the secondary market.
It makes sense when you realize that it can take up to 30 years for some mortgages to be paid off. Businesses need cash in order to operate effectively, and having to wait 30 years for a full return on an investment would stagnate their cash flow and ultimately be unfeasible. After all, they need money right now to be able to loan out money to other clients.
Hence, the secondary mortgage market was born.
There, we have multiple entities all competing for primary market loans, which they then package up into mortgage-backed-securities (MBS) (think a mutual fund filled with mortgages). Packaging multiple (sometimes hundreds) of mortgages into a security decreases the threat of default that would be more prevalent if it were just one mortgage. After all, if your only investment defaults, you’re out of luck, but if one out of five hundred defaults, it’s not that bad.
Fannie and Freddie Mac as GSEs
There are a number of different entities buying mortgages on the secondary market, but by far the two largest purchasers are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Both of these organizations have been Government Sponsored Enterprises since their inception, and have been under conservatorship since the financial crisis in 2008. As such, they operate under a mandate to purchase loans from mortgage lenders across all economic conditions in order to ensure lenders have enough liquidity.
Currently, with the government’s implied support, securities bought and packaged from Fannie and Freddie have the government’s stamp of approval. They’ve met the underwriting requirements of the FHFA, and investors like that.
One way to think about the situation is that the United States government essentially acted as a co-signer for riskier borrowers. That is basically the big difference between Fannie and Freddie and the other entities on the secondary mortgage market. They have no such co-signer, and are therefore unable to purchase some of the riskier mortgages.
Privatization of Fannie and Freddie
Even when everyone thought that Steven Mnuchin wanted to privatize Freddie and Fannie, it wasn’t as if he would have been able to walk into his office on his first day as Treasury Secretary and make it happen with a few simple phone calls.
In fact, thanks to legislation passed in 2015, the federal government cannot end conservatorship without the approval of Congress until after 2017. It also might have been extremely challenging for Mnuchin to get not just Democrats to sign off on a privatization bill, but Republicans who want to completely abolish (not just privatize) the two mortgage giants.
Even after 2017, when there will be more leeway for Mnuchin to affect change, he would still have do deal with several issues in order to make privatization happen.
So what will Mnuchin do?
Mnuchin stated on Thursday that he is not in favor of recap and release, but he did say that Freddie and Fannie cannot be left alone.
The main question that lawmakers will have to answer over the next four years is how much government involvement in the mortgage industry there should be. Mnuchin and the rest of the Trump administration seem to be leaning toward decreasing government’s presence in the secondary market, but there’s no easy way to go about that.
Housing reform is a contentious issue among Republicans and Democrats, making it difficult to find a solution that everyone agrees on. However, the fact that Mnuchin is eager and willing to go after bipartisan reform is hope that some sort of change will take place.
Of course, Mnuchin has yet to be nominated, and took some serious heat on Thursday from Democrats about his days at OneWest Bank. It’s possible that they block his confirmation, and Mnuchin’s housing reform would become a moot point, but that path seems unlikely.
Bottom Line
Treasury secretary nominee Steven Mnuchin seems set on changing the way Fannie and Freddie Mac operate, but it’s unclear how exactly he will seek to change things. It’s important for homeowners to keep an eye out to see if a) he gets confirmed and b) what kind of bipartisan legislation he will try to get passed.
Carter Wessman
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
My wife — the NPR addict — pointed me to a Marketplace commentary by Amelia Tyagi. Tyagi says not to focus on small expenses, but to focus on big expenses. You can listen to the piece in RealAudio format from the NPR web site, or read this transcript:
Clip those coupons. Shift to that cheap, scratchy toilet paper. And whatever you do, don’t buy any more lattes at Starbucks.
You’ve heard it before. Some famous financial advisor, shaking his finger and telling you how all you have to do is save $5 a week and all your financial problems will disappear. Before you know it, you will be debt free, investment rich, and lighting cigars with Donald Trump.
Yeah, right. The bottom line is, the little stuff really doesn’t add up. Unless you live to be 500 years old, saving five bucks a week is not going to pay for a retirement home in Tahiti.
The real advice is that the big things add up. The fact is, one-third of Americans live in a house they can’t really afford. Even more of us drive a car we can’t afford. Fifty percent of us aren’t saving a single dollar for retirement, let alone the 10% of our salaries that most experts recommend. So clipping a few coupons isn’t going to build that nest egg.
If cutting the lattes isn’t going to fund a comfy retirement, why do we hear that old advice so much? Because it is easy. It is easier to pack a brown bag lunch than to sell your car. It is easier to give your husband a haircut at home than to move to a smaller apartment. And it is easier to boil your own beans than to sell your house.
But of course, just because it’s easy, doesn’t mean it’s right.
So the next time some expert shakes a finger at you for enjoying a lunch at an upscale restaurant, go ahead and roll your eyes.
Just try not to roll your eyes when it’s time to make the real money decisions.
Tyagi’s advice on big expenses is great. Some people spend so much time sweating the small stuff that they miss the big stuff. They’re penny wise and pound foolish, negating their daily scrimping and saving through stupid financial choices that burden them for years. (My wife told me yesterday of a co-worker who wants to sell his Ford Expedition, which he bought new last summer. The problem? He owes $43,000 on it but can only get $23,000 in trade-in. Ouch.)
But I don’t like Tyagi’s advice on the little stuff.
Her Marketplace piece is basically a condensed version of passages from her book All Your Worth: The Ultimate Lifetime Money Plan. Here’s a paragraph directly from the book’s first chapter — compare it to her opening sentences above:
We are […] not going to say that if you’ll just shift to generic toilet paper and put $5 a week in the bank, all your problems will instantly disappear. A few pennies here and a few pennies there, and the next thing you know, you will be debt-free, investment-rich, and lighting cigars with Donald Trump. Nope, we’re not selling that brand of snake oil.
The problem is: neither is anyone else. In Tyagi’s revised version of that paragraph, she makes a direct swipe at David Bach’s latte factor. What has she got against Bach? And what has she got against saving money? Yes, many people — including myself — advise you to exercise frugality, and warn you of the danger of small expenses, but nobody’s claiming that these are quick paths to wealth. They’re tools in a toolbox. When used in conjunction with other techniques, they can help you establish sound financial habits.
It turns out that Tyagi doesn’t have anything against saving money on the little things. In fact, she believes that some people need to cut the little expenses, which she terms Wants. She recommends a budget structured thusly: 50% of after-tax money spent on Needs, 30% on Wants, and 20% on Savings. She says that if any of these are out of balance, you’re not financially healthy. (Note that this is a refinement of the Andrew Tobias three-step budget.)
I’m reading All Your Worth for a future review here, and I like it (in fact, I love parts of it), but I don’t like the way Tyagi presented her condensed version on Marketplace.
Sure, give up the big things, but pay attention to the small stuff, too.