10 Reasons We Should Create the Texas Mortgage Guaranty Corporation
If you’re a mortgage lender of any type, or a Realtor, a builder, a homeowner, an elected state official, a school teacher, or if you have anything to do with the Texas housing and real estate industry in any way, listen up. This has something to do with you and you need to know about it.
We Texans have a once in a lifetime opportunity to do something truly important.
It’s a game changer, and it has the potential to benefit all of us in a number of ways. But the window of opportunity is small, and a great number of us need to become aware of and get behind this effort right now for it to become successful.
To get your mind around this effort, it’s helpful to have a basic understanding of the flow of mortgage money.
The borrower applies for a long-term home loan with a mortgage originator who funds the loan through a bank. Most banks operate with short-term money, typically on a 24 hour to two year basis. When they make and hold on to long-term mortgages, they run the risk of losing money if short-term interest rates rise above the interest rates of their long-term mortgage loans. So if the loan conforms to Fannie Mae’s or Freddie Mac’s credit guidelines, the bank sells the loan to one of them for cash. Fannie or Freddie then pools the loan with large numbers of other loans, or securitizes them, and sells them as income producing securities to institutional investors (e.g. public and private pension funds). It’s this securitization process that keeps the system running or “liquid” in financial terms. Fannie and Freddie buy long-term loans from short-term lenders and sell them to long-term investors. This process replenishes the banks’ funds and also passes the risk of fluctuating interest rates to the investor. It ensures systemic liquidity between the two most important parties – the borrower and the investor.
Now Fannie Mae and Freddie Mac are going away.
The Treasury Department/HUD Report to Congress made it clear they want to wind down Fannie and Freddie and gradually hand over the securitization process to the private markets (also known as Wall Street firms). What they don’t say, though, is that the reason is because Washington politicians and Wall Street profiteers required Fannie and Freddie to buy and hold over $1.5 Trillion in sub-prime loans as the investor from 1996 to 2007. Those loans currently have a market value of roughly $300 billion, so right now Fannie and Freddie are over a TRILLION DOLLARS in the hole. But they also currently buy over 90% of all mortgage loans made in the U.S. every month. The system is still functioning through Fannie and Freddie, but their losses are the biggest political boondoggle in the history of political boondoggles. The best I can figure, they make over $12 billion per year from their securitization operations, but at that pace it will be decades before they can recoup their losses. They just announced another fee increase, and they’ve made it clear that borrowing costs are going up even more and their credit requirements are now stricter than ever.
I am proposing we create our own Texas mortgage securitization company, with a few key differences.
It will be a Non-Profit Corporation, removing the risk of shareholder pressure for profits and with legislation to prevent political meddling. The State of Texas will need to sponsor it to assure investors it is properly regulated and totally transparent. All of its net operating profits will be banked in an ever increasing Guaranty Reserve Fund. It will have a maximum conforming single family residential loan amount of $750,000. Human underwriters, not software, will have final decision making authority to determine a borrower’s ability and willingness to repay the mortgage loan. Underwriting guidelines will be tailored to Texas markets. The securities it produces will have an explicit AGENCY guarantee only.
The Benefits are Many:
• State property tax revenues will increase without having to raise tax rates. When the crisis hit in 2008, Fannie and Freddie raised their maximum conforming loan amount to around $729,000 mainly on the east and west coasts. Texas was passed over and they kept our conforming amount at $417,000. Non-conforming, or Jumbo, financing above that amount then disappeared almost completely, and the financing that has become available since then is much more restrictive and expensive. Subsequently, home values in the $500,000 to $1 million range have dropped substantially due to the severe lack of available and affordable financing. For example, data kindly shared by the Travis Central Appraisal District shows that in the Austin ISD alone, assessed home values fell by $817,333,346 between 2009 and 2010 in the $500k to $1 million price range. At a 1.227% tax rate, their revenues fell by $10,028,680. Austin ISD is currently facing a $7.1 million budget shortfall and is laying off teachers. Had these home values not fallen they would possibly have had a $3 million budget surplus this year. Providing reasonable, affordable financing in this price range will help to restore these lost home values and school revenues, helping to save education jobs and supporting our schools.
• State sales tax revenues will likely increase as well without having to raise tax rates. With a more normalized lending environment, more people who obtained loans during easier times will be eligible to refinance to lower rates and payments. This will free up more disposable income for them to spend, resulting in higher sales tax revenues.
• It will boost the Texas economy and job creation. Not only will a more normal lending environment reflective of the somewhat healthy Texas economy support the entire range of our state’s property values, it will have a spillover effect into other areas as credit expands and growth is stimulated. It will stabilize and strengthen our economy.
• It will keep our borrowing costs low relative to the rest of the country. With Fannie and Freddie raising fees to cover losses and Wall Street waiting until the price is right to get back in the game, a state-backed, totally transparent, sub-prime free Non-Profit Corporation’s securities from a healthy Texas real estate market will be an attractive investment to global investors. This demand will ensure lower interest rates for our borrowers and market liquidity for our securities.
• It will not cost or risk any taxpayer funds. Because of its non-profit status, it will be exempt from state and federal income taxes and will not have to distribute profits to shareholders. Start-up capital can be raised from Texans making tax-deductible contributions as well as a possible loan from the state to be repaid quickly. Texas does roughly $35 billion per year in home loans. If this company can achieve just $12 billion per year in securitizations, it could add over $100 million every year to its Reserve Guaranty Fund. With solid credit standards and an ever growing reserve fund, defaults will be minimized and taxpayer risk will be eliminated over time. It can become the Fort Knox of our mortgage banking system.
• With its excess reserves, it can do many wonderful things. At some point the company will have far more in reserves than it needs to guarantee investors they will get their investments back. These extra funds can be used for many benevolent purposes such as financial education programs, down payment assistance programs, interest rate subsidies, payment coverage in disaster areas, and assistance to other state housing initiatives. It will support and strengthen our state-wide housing markets.
• It will reduce our dependence on the current system. Not only will it allow us to reduce our dependence on the now very restrictive Fannie Mae and Freddie Mac, it will provide some much needed competition to their current monopoly. We all win when we have a choice.
• It will help avoid a currently brewing systemic risk issue. After the 2008 financial crisis, a substantial amount of money flowed from the big banks to smaller community banks and credit unions. Those institutions are now making more and more of the common sense loans that are ineligible for sale to Fannie and Freddie. There currently is no secondary market for these institutions, and if rates rise they will lose money just like our savings & loans did in the late ‘70’s. This company will help alleviate that possibility by purchasing their performing loans.
• It can be used as a model to be duplicated across the country. Creating this company could allow Texas to lead the nation’s mortgage industry to a much better place than Wall Street. Other states or regions can simply copy the model and adjust it to meet the needs of their respective markets.
• We should do this because we can do this. It fulfills the intent of the national reform guidance, we have the economies of scale, our markets are healthy enough and will benefit even more, we have much of the regulatory framework already in place, and the timing is right.
I’ve already met with officials from the Texas Association of Realtors, the Texas Department of Housing and Community Affairs, and the Texas Department of Savings and Mortgage Lending. They all believe the concept has merit and deserves serious consideration. This week I’m meeting with the economists at the Texas A&M Real Estate Center to try to gain their support. We need to persuade the Texas Legislature to file the charter needed to create this company within the next two months. If you are interested in supporting this initiative, please spread the word and encourage anyone with ties to state office-holders to bring this to their attention and ask them to consider the concept. You can also show your support by becoming an email subscriber to my mortgage blog at http://goodcapitalism.wordpress.com. Please play a part in making this happen.