The government's once again going around the block regarding the mortgage market, and what to do with Fannie Mae and Freddie Mac. Because, right now, the Feds own or insure 90% of all U.S. mortgages. And the main issue seems to be, whether or not Federal guarantees should continue, and if so -in what form?
The reason the subject's of interest to me (no pun intended) is because I spent most of my working life providing equipment financing for businesses. And although never involved in mortgage funds, I think the fundamental premise of all financing is pretty much the same. You can only survive as a lender if borrowers pay you back as agreed.
Another aspect of financing is, although the individual transaction amounts may be huge, the bulk of the funds goes to pay for whatever is being financed. So, if a home costs three million dollars, the mortgage lender may have completed a seven figure deal but themselves only earn the yield the financing provides -the three million itself goes to whomever owned and sold the home.
So, since most lenders only earn the "spread" between what funds cost them and the rates they ultimately charge, and are in a highly competitive business to boot, they're actually earning very thin margins on each individual transaction. Therefore, it takes a lot of solid deals, where borrowers pay as agreed and on time, to cover the costs of bad ones.
Continuing my very primitive example, it really isn't very hard to figure out that if you flood your "portfolio" with weak or bad transactions, you can't survive as a lender for very long because you can't earn what you can't collect from borrowers.
And, to me, that's the flaw in the government's system. Because it's pretty simple to determine if borrowers are credit-worthy or not. And, in a general sense, the very need for guarantees themselves says a lot. Because creditworthy borrowers don't need them.
So, I think that while the government's wish, that more folks be able to own their homes, may be lofty, I don't think it's only a financial issue at all. Because if you're knowingly going to lend funds to folks who can't prove they're actually able to pay you back, it's not a loan, it's a gift. And I for one have absolutely no problem with that, provided it's not done with my money as a taxpayer and without my consent in every individual case.
That's it for today folks.
Adios
No comments:
Post a Comment