Congress' Next Mortgage Screw-Up

Written By Briton Ryle

Posted December 4, 2013

Ready, fire, aim.

It’s a funny phrase… until you realize that’s how our government operates. Mistakes multiply and unintended consequences abound.

The rollout of Obamacare has been a perfect example. Website failure, canceled policies, higher premiums…

Or how about the drone warfare we wage in Pakistan and Afghanistan? Sure, we’ve taken out a few bad guys. But just last week, we also killed another innocent child, and the anger over such collateral damage is the best recruitment tactic Al-Qaeda ever had.

If devastating unintended consequences were a sport, our elected leaders would be superstars.

As it happens, they are currently leading us into another disaster that could permanently cripple the housing market and the U.S. economy.

It started with the housing bubble…

When the housing bubble burst in 2008, the mortgage-dealing Government Sponsored Entities (GSEs) Freddie Mac and Fannie Mae needed $187 billion in bailout money.

The average American was appalled. How could supposedly responsible companies screw up so badly?

The answer was clear: Politicians in Washington had encouraged the housing bubble by using Fannie Mae and Freddie Mac to backstop increasingly lax lending standards in order to turn the attractive campaign promise of “affordable housing for everyone” into a reality.

It worked. More and more Americans bought houses, pushing prices higher and higher. The ranks of credit unworthy homeowners swelled right along with home prices until a wave of loan delinquency was inevitable.

So it all came crashing down, with the GSEs left holding the bag.

It shouldn’t come as a surprise that Congress would vote to use billions of taxpayer money to cover up its mistake.

You also shouldn’t be surprised to learn that, rather than learn their lesson, Congress and the Obama administration are about to make the housing/mortgage situation much, much worse…

The End of the 30-Year Mortgage

Backlash against the “too big to fail” bailouts led to the mass “occupy Wall Street” protests. It also gave birth to the Tea Party, which scares the daylights out of incumbents.

So, to placate the voters, Congress and the Obama administration vowed “never again” on the bailouts. The plan is to wind Fannie Mae and Freddie Mac down into non-entities by 2018.

But they haven’t answered one important question: Who’s gonna hold 30-year mortgages when the GSEs are gone?

Banks aren’t. The last thing they want is money tied up for 30 years at 5%. Without Fannie Mae and Freddie Mac to buy up loans, banks won’t have any incentive to lend for 30 years. We’ll be lucky if there are even 15-year mortgages.

Suddenly the promise of homeownership could go up in smoke… unless you have a lot of cash on hand.

In this scenario, home values will go down. And it will be very difficult to use a refi to tap home equity that supports so much spending.

Yes, winding down Fannie Mae and Freddie Mac might sound good on the campaign trail. But it could be an outright disaster for the U.S. economy. Spending would crater, unemployment would skyrocket…

Unless, of course, the Fed decides to expand QE3 to the point that it takes the place of Fannie Mae and Freddie Mac. God only knows what the unintended consequences of that would be…

Buy This Dip

I’m going to switch gears here because I want to address something I shared with you last week. And frankly, this mortgage topic is a little depressing.

You may recall the chart I shared last week – one that shows global manufacturing activity has picked up, but analysts have not yet revised their earnings estimates higher to reflect the change. Here it is again:

pmi

What we have here is a sweet spot in time. The current weakness in the stock market is creating a good entry point for profits. After all, we haven’t had one for 8 straight weeks…

By the end of this week, you should be ready to pull the trigger and buy this dip. It may be the last one we get for a few weeks.

Until next time,

brit''s sig

Briton Ryle

follow basic @BritonRyle on Twitter

follow basic The Wealth Advisory on Youtube

follow basic The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

Angel Pub Investor Club Discord - Chat Now