The political party that has the most influence over the size of Americans' monthly mortgage payments didn't get a single vote. That's because the Chinese Communist Party wasn't on the ballot.
Every day, we Americans buy more foreign-made stuff than we peddle to other countries. And every day, we consume more government services than we are willing to pay for via taxes. The cash to pay for these things has to come from somewhere, and in recent years America's most enthusiastic lender has been China's central bank. Japan, the United Kingdom, South Korea and "petro-nations" are other big creditors.
These countries lend us money by buying myriad types of bonds: U.S. Treasury notes, mortgage-backed securities and corporate bonds. If investors didn't want these bonds, yields would have to be high to entice buyers. But the world overflows with investors who want to buy U.S. Treasuries and mortgage-backed securities. With lenders eagerly lining up for the privilege of extending credit, we can pay them low yields. That keeps mortgage rates low, too.
What if ...
No one knows for sure how much higher mortgage rates would be if foreigners curtailed their purchases of Treasury notes and other debt, but that doesn't stop people from guessing.
Kenneth Thomas, a lecturer in finance at The Wharton School at the University of Pennsylvania, says international investors push long-term U.S. rates down half a percentage point or more.
"So if you're paying, let's say 6.5 percent on a mortgage, or 6.75 percent, you might be paying 7 or 7.25 if it wasn't for the Chinese," Thomas says.
The doomsday scenario would happen if China abruptly stopped buying American debt. Interest rates would zoom upward. It's not in China's interests to do that because Americans would have less cash with which to buy Chinese-made goods. But Thomas says the Chinese might feel provoked into doing something radical if Congress passes a bill that would impose a 27.5 percent tariff on Chinese imports if China doesn't revalue its currency quickly.
The bill, S. 295, was introduced in early 2005 by Sen. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., and has 13 co-sponsors from both parties. It hasn't gotten anywhere, but Thomas worries about the fallout if the bill makes some progress in the next session of Congress.
When it comes to housing and mortgage issues, two of the most important members of the next Congress will be Democrats: Rep. Barney Frank of Mass., who probably will be chairman of the House Financial Services Committee, and Sen. Chris Dodd of Conn., in line to be chairman of the Senate Committee on Banking, Housing, and Urban Affairs.
Lobbyists for the mortgage and housing industries say both men are knowledgeable and collegial. If the lobbyists didn't say that, they might have trouble getting their calls returned.
Observers expect Frank to take a more active approach than Dodd on housing-related issues.
Kurt Pfotenhauer, senior vice president for government affairs and public policy for the Mortgage Bankers Association, says: "Frank is a real housing advocate who's got a fairly well-articulated vision of where he wants to go and is very eager to pass legislation while he has that gavel in his hand."
Pfotenhauer speculates that among Frank's priorities will be enacting stricter oversight over mortgage giants Fannie Mae and Freddie Mac, reforming the Federal Housing Administration Mortgage Insurance Program and combating predatory lending.
Fannie Mae and Freddie Mac are government-sponsored enterprises, or GSEs -- corporations that exist to keep money circulating in the mortgage market. When you get a mortgage, your lender can sell the loan to Fannie or Freddie, freeing up money so the lender can underwrite a mortgage for someone else. Both companies have been involved in accounting scandals, and some members of Congress worry that they have grown too big to fail and that they should focus more effort on putting more money into the hands of low- to moderate-income borrowers.
A GSE reform bill would be designed to keep Fannie and Freddie stable over the next few decades.
More for low-income housing
"I think the one immediate impact we'll see when we get a bill passed is the creation of a housing trust fund that will push a little bit more capital into low- and moderate-income housing," Pfotenhauer says.
Frank has expressed support for a proposal to let the FHA charge more to insure the mortgages of the riskiest borrowers, and to give discounts to less risky borrowers. But he wants those riskiest borrowers to get some of the money back if they keep current on their mortgage payments for five years.
That proposal was nixed by the Republicans, but it will have renewed life with Frank as committee chairman.
As for predatory mortgage lending, the term is difficult to define. Several states and cities have enacted anti-predatory lending laws that limit interest rates and ban lenders from extending mortgages that can't be repaid. Some observers expect Frank to depart from liberal dogma and accept a national standard that would pre-empt state and local anti-predatory lending laws.
"Frank has always recognized that it's counterproductive to limit the availability of credit," says Paul Leonard, vice president of government affairs for the Housing Policy Council of the Financial Services Roundtable. "He recognizes you need a uniform standard that protects consumers but doesn't have the unintended consequence of lenders pulling back on consumers."
Advocates wait
Consumer advocates take a wait-and-see attitude about the liberal representative from Massachusetts.
"I think Barney Frank will be good in some respects and not as good in others," says Bruce Hahn, president and CEO of the American Homeowners Grassroots Alliance.
The good: Hahn believes that there's a better chance that Congress will make private mortgage insurance payments tax-deductible. "I think it's going to help expand homeownership among low- to moderate-income borrowers," Hahn says. "Prospective buyers would be able to deduct more and, therefore, afford more."
For years, the mortgage insurance industry has been pushing for tax deductibility. It has come close a few times, only to be denied. Perhaps not to jinx its chances during the lame-duck session, the industry is keeping a low profile right now.
Hahn sees another positive coming out of a Frank chairmanship: more scrutiny of title insurance companies, possibly resulting in more reasonable rates for home buyers.
As far as the "not as good" aspects of a Frank chairmanship, Hahn is circumspect. So is Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. "I would look for hearings," Fishbein says. "I would look for oversight and scrutiny of federal enforcement of lending practices."
Playing defense
After years of Republican domination of Congress, consumer advocates are accustomed to playing defense. Now the housing and mortgage industries might find themselves in the same position.
"Housing is one of the most heavily regulated industries in the world," says Jerry Howard, chief executive of the National Association of Home Builders. "What that basically means is we have issues we try to advance and we try to defend regardless of which party is in power."
Democrats are likely to give looser rein to Fannie and Freddie and to be more supportive of subsidized housing, Howard says.
Those stances please home builders. Environmental regulation is where Democrats find themselves at odds with home builders.
"We believe that land-use decisions are best made at the lowest possible form of government," Howard says -- cities, townships, counties. "However, there are a great many federal statutes that have serious ramifications for land use." One of the chief bugaboos is strict enforcement of the Clean Water Act. Democrats are more likely to embrace "extreme interpretations" of that law, Howard says.
"In a Republican-controlled Congress, we think many of those questions are likely to be answered in a more balanced way, rather than in a Democrat-controlled Congress, where they are more likely to be answered in an overzealous way."
Presidential election looms
Soon, attention will turn away from Congress and focus on the presidential election, the first in decades in which none of the candidates are running for re-election or are vice presidents looking to step up. That means there will be a lot of uncertainty, and that's bad for financial markets, says Thomas, the finance lecturer at Wharton.
Thomas doesn't foresee a recession in 2007. "If we're going to have a major slowdown, we'll see it at the beginning of '08, and the reason will be simple uncertainty about who will control the White House," he says.
Will that uncertainty be good or bad for interest rates and the housing market? The answer is -- you guessed it -- uncertain. |
