Arithmetic and the Fannie/Freddie Fix

[Donnachaidh]

http://www.smirkingchimp.com/node/34309

Arithmetic is a skill that is in short supply among economists in policymaking positions. The Obama administration is about to come out with its plans for replacing Fannie and Freddie. The word in the media is that the administration will propose a range of options, with one option maintaining a Fannie/Freddie type structure and one option going to a completely private system for the main sector of the housing market. (Presumably the Federal Housing Authority would remain in place even in the private system to provide credit to moderate income households.)

The third option, that apparently many Washington policy wonks are smiling upon, is a hybrid system with private institutions buying mortgages with a government guarantee standing behind them. (Depending on the construction, the government may either guarantee the institution or the mortgage backed security -- more likely it will be the latter.) According to a new paper by Moody's, this sort of hybrid system will reduce the cost of a 30-year mortgage by 90 basis points (9/10ths of a percentage point) compared to a purely privatized system. The Moody's analysis also calculates that it will raise house prices by 8 percent compared to a privatized system.

There are some reasons for skepticism about the Moody's estimates of the cost advantages of the hybrid system, most notably that the spread between jumbo mortgages, which are not bought by Fannie and Freddie, and conformable mortgages that go into the Fannie and Freddie pools has generally been just 25 basis points. Even in the current environment, it is just 75 basis points, so a spread between mortgage rates in a purely private system and hybrid of 90 basis points seems somewhat high. But let's just take the Moody's estimates at face value and have some fun with numbers.

The median house price is currently around $170,000. Prices are still falling, but let's assume for the moment that we freeze them at their current level. Let's see what the picture looks like.

More at the link --

[DCKit]

1. Corporate socialism? Right out in the open? Wow. nt