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How Pimco Is Holding American Homeowners Hostage

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As overlord of the fixed-income finance market, it generates billions annually in effort-free profits. Now it wants to make things worse.

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Sadly, there isn't a shred of evidence that all of this largese serves any legitimate public purpose whatsoever, and plenty of evidence that the HIDC boom has been deeply destructive. But the intellectual cobwebs spun by the housing cronies so obfuscate these truths that the only way to grasp them is through an examination of the contra-factual -- a postulated world without Freddie/Fannie/FHA and the $100 billion annual tax subsidy on mortgage interest.

In that world, households would be tax-indifferent as to whether they acquired shelter services through renting or owning, and appropriately so. There's simply no evidence that home ownership produces any externality or "public good," such as making people better citizens, causing them to work harder or aspire higher, turning them into better neighbors, or even growing hair on their chests. Housing is a commodity like furniture and automobiles, and inducing citizens to buy more of it is no business of the state.

Moreover, to the extent that households prefer the cultural intangibles associated with home ownership, they'd have to bear the full economic costs. This would mean mortgage rates priced to the specific risk profile of individual borrowers rather than homogenized through the Federal guarantee machine, and down payments of 40% or more to create loan-to-value spreads capable of encompassing -- without risking the moral hazard of strategic default -- what we now know to be the true range of housing price fluctuation. It would also mean that benchmark mortgage rates would be several hundred basis points higher because a Fed not in the thrall of the HIDC propaganda on the virtue of inflating housing investment, employment, and asset prices would never dream of jamming its thumb on the scale to the tune of its recent $1.4 trillion purchase of GSE mortgages and debt.

Apart from the readily refutable canard that the massive HIDC subsidies benefit the poor (see below), the truth is that subsidized mortgage interest rates and terms confer strictly private benefits, and shower them among American households in an utterly capricious manner. Thus, there are about 110 million households in America. Among them are 35 million renters and another 30 million who own their homes debt-free. These citizens get comparatively nothing from the HIDC gravy train

By contrast, the remaining 50 million households (45% of the total) have mortgages they shouldn't have gotten in the first place, or enjoy the benefits of a more "affordable" mortgage than the private market would provide -- meaning that they have money left over for widescreen TVs and pedicures thanks to the taxpayers. If this is justice, it's the same league as the ancient ritual of sacrificing firstborn sons.

Dismantling the HIDC subsidy system would dramatically reduce the nation's mortgage debt burden as existing paper matures and new mortgages were written far more sparingly, and at market rates. It would also have profound, and mainly salutary affects on the real economy.
No positions in stocks mentioned.

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