> it buys them from the banks and the banks know this going into the loans
This isn't how the mortgage market works. Qualifying mortgages are guaranteed by Fannie and Freddie. The Fed's participation in the mortgage market has been for liquidity, not credit, purposes.
Kill Fannie & Freddie and the 30-year mortgage goes away. Ban the Fed from buying mortgage securities and rates go up a bit.
> Kill Fannie & Freddie and the 30-year mortgage goes away.
Probably not; without them, the norm wouldn't have been created, but while rates for them may change those going away won't remove the expectation and, given the expectation, the market will find a rate af which it can fill it.
Mortgages in general will be less attractive, though.
> while rates for them may change those going away won't remove the expectation and, given the expectation, the market will find a rate af which it can fill it
Fixed-rate 30-year mortgages don’t exist, except for the very rich, in most of the world. The unsubsidised price of the instrument likely collides with popular conceptions of usury.
I don't follow. Jumbo loans exist now even without support from F&F, why can't smaller loans exist without F&F? F&F are not some charities, they make profit on their mortgage business. If they did not exist what would have prevented another firm taking over the same business (securitizing mortgages)? I mean, there are plenty non-conforming loans, which are not jumbo, written right now. It's just hard to compete with the F&F on the conforming loan market so nobody does that otherwise there is nothing magical about conforming loans.
> If they did not exist what would have prevented another firm taking over the same business (securitizing mortgages)?
It doesn’t work without the implicit guarantee. If you run a neutral pricing model, you’d get a rate roughly double where they’re priced now. The only solution is to let the rate periodically reset.
> Whatever model you run is most probably wrong because jumbo loans are not priced double and actually are priced pretty close to the conforming loans
Modelling non-jumbo loans provided without support. I have a jumbo mortgage. I also had substantial assets when I took it out, substantial income and opted to put 25% down. Remove those factors and your credit component starts interacting with duration in complex ways.
Remove that part of the market--the massive number of guaranteed, conforming mortgages--and the securitisation and hedging infrastructure that supports jumbo fixed 30-year loans falls apart [1].
It's great that you have substantial assets but neither that, nor the article "model" anything. Also you are now changing your argument from "remove F&F" to "remove securitization and hedging infrastructure". As I already pointed out, if F&F did not exist, another firm could have done exactly the same securitization, as many do on non-government controlled markets right now.
I was showing why 30y-fixed jumbos exist as a result of F&F. You argued an incorrect connection between jumbos within the current system as a proxy for unsubsidised mortgages in a non-F&F system.
> if F&F did not exist, another firm could have done exactly the same securitization, as many do on non-government controlled markets right now
Show me a single one that does for fixed-rate 30-year mortgages to average Americans at scale. Or a single other country that does this.
F&F can do that at the scale they do because they have an implicit guarantee. That creates securitisation and hedging infrastructure for that product that niche firms, like those doing jumbos, can piggyback on. Take out F&F and there isn’t the mass market which means you lose the product. (And no, another firm can’t trivially mint an implicit guarantee from the U.S. government.) Going back to the original point of this thread: they’re far more critical to this process than the Fed.
Genuine question: have you or someone you know traded mortgages?
>I was showing why 30y-fixed jumbos exist as a result of F&F. You argued
I understood that. But showing that something is a result of something else needs some kind of logic, stating both things exist does not establish a casual relationship. You can try it for yourself by applying your own argument in the reverse direction: if your logic had been sound then it would also be true that F&F exist because of 30 years fixed jumbo loans.
>F&F can do that at the scale they do because they have an implicit guarantee. That creates securitisation
What? Securitization is turning something into securities, it's a process that is not caused by any guarantees, you can do it yourself.
This isn't how the mortgage market works. Qualifying mortgages are guaranteed by Fannie and Freddie. The Fed's participation in the mortgage market has been for liquidity, not credit, purposes.
Kill Fannie & Freddie and the 30-year mortgage goes away. Ban the Fed from buying mortgage securities and rates go up a bit.