Attempts at Relief and Reform

Ending Federal Subsidies for Mortgages

Posted on Wednesday, January 5, 2011

Could the government stop subsidizing mortgages altogether? Probably not in real life. But that is where the debate over reforming Fannie Mae and Freddie Mac, as well as righting the public-private sector balance in housing, should begin.
This unlikely dream imagines the government out of the business of guaranteeing home financing within 10 years. That should be long enough to phase out subsidies slowly, preventing the still fragile housing market from dropping further. It would give private sector banks time to absorb an estimated $5 trillion of government-backed mortgages. And it would wean homeowners gently off the subsidized financing they have grown accustomed to. Just as important, though, a decade is short enough to focus minds now.
The Treasury Department, which is to propose some sort of changes for Fannie and Freddie in January, has been equivocating for two years. And the indecision has made the two giants more powerful. They currently guarantee more than 60 percent of home mortgages, the highest proportion seen in the last 20 years, according to Barclays. They enjoy unlimited access to taxpayer money and have expanded their affordable housing mission to include the well-off.
By laying out a clear exit plan in 2011, legislators could reverse the expansion that has already sucked down more than $150 billion of taxpayer money. It would also make it easier to pull back emergency measures put in place at the height of the recent crisis.
For example, Fannie and Freddie are still guaranteeing loans of roughly $730,000 in high-cost areas even though the private sector is robust enough to provide loans to rich home buyers. Without a deadline, such temporary measures risk becoming permanent.
While they’re at it, lawmakers should consider ending the deduction of mortgage interest for tax purposes. It’s another subsidy for home ownership, though it probably partly defeats itself by making homes more expensive at the same time as it makes mortgages cheaper.
Most important, though, is to start by re-examining the policy goals underlying today’s subsidies: how far should the government push home ownership, and how much support for affordable housing should be focused on buying rather than renting.
The usual Washington tinkering with the status quo isn’t enough. To create a new, sustainable American dream, lawmakers need first to wake up.
Bidding on Bankers
This might seem like an unlikely time for a bidding war for investment bankers. After all, the industry’s high-paying culture is still under scrutiny from regulators, the public and politicians. And new capital rules and economic uncertainty mean returns may be lackluster again in 2011. So why is Wall Street limbering up for a battle for talent?
Strange as it may seem, anemic earnings have much to do with it. In recent quarters, the likes of Goldman Sachs and JPMorgan’s investment bank generated a return on equity in the low teens at best, barely beating the cost of equity. That puts the onus on executives to squeeze as much from their franchises as possible.
Some of that will come from cutting costs, like laying off employees who aren’t productive or using expensive capital in smarter ways. But lower returns also mean any firm with pretensions of being a top tier player (in other words, all of them) will want the best people. And not just traders. Relationship bankers should be hot properties, too. Outside Europe, the advisory and underwriting business has been fairly robust. It’s also less capital-intensive.
Some firms took advantage of the crisis to lure bankers from defunct or wounded rivals. Jefferies has been a big beneficiary, as have boutique advisory firms. Morgan Stanley has hired around 400 traders over the last year. But the so-called burning platforms like Bank of America Merrill Lynch, Citigroup and UBS have largely recovered and are expanding again.
What is more, many bankers have far less skin in the game than before the crisis. Stock grants made in the boom have either mostly vested or are still out of the money. Much of the equity awarded in last year’s bonus round has fallen in value.
That will embolden executives to go on the hunt. It must seem to be an embarrassment of potential riches for both sides. The danger, however, is that this will just drive up costs across the industry at a time when revenues are under pressure. If the bidding wars get out of hand, there could be red faces, and red ink, all around.

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