It is almost certainly not homeowning, and it is almost certainly not funnelling money into underserved neighborhoods or toward underserved borrowers.
Rather, is has been the transfer of interest rate risk from households to investors. So far as I know, the US is the only country in the world with long-term, fixed-rate, 95 percent LTV loans that do not have prepayment penalties. When interest rates rise, borrowers are protected; when they fall, they are not mad e immobile by yield-maintenance and lockout clauses.The low down payments (and five percent equity seems to be OK) effectively give households with modest incomes access to capital markets. I have written elsewhere that I believe that the peculiar structure of Fannie and Freddie has helped bring about the unique American mortage.
One could argue that the current environment shows that none of this has been worth it. But I would disagree with that argument.
Denmark transfers interest rate risk to investors too - but only at the 80% LTV level.
ReplyDeleteBut the basic propositon is correct.
The transfer of default risk has been from investors to the taxpayers. The 95% LTV doesn't exist in other places because it is not a workable model. Default rates are too high.
ReplyDeleteThat an intelligent person could say it's been worth it indicates how well the RE & Financial industry propaganda has worked.
ReplyDeleteAll that cheap financing has produced is less affordability and unseen household debt levels.
Cavalcade of Risk #60 is up...
ReplyDeleteAnd your post is in it:
http://www.workerscompinsider.com/archives/000935.html
Please let your readers know.
Thanks!