My colleague, Sam Wylie, has written an excellent opinion piece in today’s AFR on Fannie Mae and Freddie Mac. I wish it was available online so I could share it in its entirely. In the article, he makes several points. First, even today, loans through the GSEs are 1.25% lower than loans elsewhere with the main beneficiaries being low and middle income households. Second, the bailout, if it occurs, will cost $25 billion which is a drop in the ocean given the savings each for households in terms of lower interest rates. Third, in any case, all of the issues with the GSEs have fallen on shareholders. Finally, that charging the GSEs an explicit premium of 0.2% would more than cover any future (or current) bailout costs and so, if there is a problem, it is with implicit rather than explicit guarantees (here that banks in Australia). He concludes:
Australians who believe that the Fannie and Freddie model is a failure should ask themselves two questions. First, why are prime mortgage rates consistently 1 percent or more lower in the US thaan in Australia, even after adjusting for the lower Treasury yields in the US? Second, why do US households have access to 30 year fixed-rate mortgages, which can be refinanced without penalty, when Australian households do not? The answer is that the US has effective government-sponsored agencies and Australia does not.
Treasurer Wayne Swan has stated that he has reviewed the mortgage agency models of other countries and does not wish to introduce the “failed” model of the US GSEs into Australia. It will be interesting to hear the Treasurer’s views on the utility of a mortgage agency if the banks do not decrease interest rates after the next RBA cut.
That is as clear as you get. See also Ross Gittins:
But competition may yet come to the rescue. The first bank to pass on the rate cut in full would get favourable publicity and the others would have to match it.
Failing that, the Rudd Government could discipline the banks by authorising the Office of Financial Management to start buying mortgage-backed securities in the market. This would reduce the borrowing costs of the non-bank mortgage originators and allow them to resume their competition with the banks.
Which is yet another version of a GSE. All paths lead in a single direction here.
[Update: Westpac is calling for a 0.5% cut in the RBA rate. If it isn’t passed on in full, this is just a call for a subsidy to bank profits. Then again unlike the other banks, the government carries an actual stick when it comes to Westpac — you know, that merger approval — so maybe we will see it used or, I guess, not used; sticks are better if they can continue to be kept behind your back.]