Friday, October 14, 2016

Does The Government Own Your House?

In a previous post, "Why The Fed Isn't Getting Inflation", I mentioned the amount of Mortgage Backed Securities the Federal Reserve now owns. If you don't understand what that is I'll explain briefly. We will also look at a long changing trend of who actually owns our mortgages, and in theory all of our houses.

Mortgage Backed Securities are basically groups of mortgages(such as those on your house) bundled together and sold as an income generating bond like asset. The bundled up mortgages produce income from the interest you pay on your home. That interest ends up as profit to someone, which is normally the lender, or future owner of your loan.

If you asked most people they expect banks own the majority of mortgages. After all that is where virtually everyone gets their loan from. Oddly banks are not the majority holders of our mortgage debt.
If you've bought a home you have an idea of how this works. After you close on your house, most people get a letter stating your mortgage has been sold to another entity or bank. In some cases your loan might be sold multiple times resuling in multiple letters to you.  Many times it ends up at one of the Government Sponsored Entities(GSE) such as Fannie Mae, Sallie Mae, or Ginnie Mae.

There is currently $13.9 trillion worth of outstanding mortgages in the USA. The total value hit a peak right at the beginning of the financial crisis with $14.7 trillion. After a 5 year decline the total value has started to creep back up.




The debt is held by just 4 groups according to the grouping classifications of the Federal Reserve data. They are Federal Agencies & GSE's, Major Financial Institutions, Mortgage Pools and Trusts, and Individuals and Others. A rational person might think 4 groups is a low number, and it is misleading to an extent which I'll explain.

Here is a quick synopsis of each group. As you can see each grouping contains many stakeholders.

  • Major Financial Institutions are your banks and insurance companies. 
  • Federal Agencies consist of the FHA, FDIC, Fannie Mae, Freddie Mac, Farmer Mac, and others. 
  • Mortgage Pools and Trusts generally consist of more government agencies, and some private holders(investment companies). The caveat is that all debt in this grouping is actually guaranteed or insured by the government, or one of it's agencies. So even if a private company holds this debt the government is on the hook in some way.  
  • Individuals and Other's are usually investment companies, trusts, pensions, etc.
Looking at the historical information we can see back in the 50's & 60's  the majority of mortgage debt was held by Major Financial Institutions. These used to be your local bank, and insurance company. Their share hit a peak in 1965 at 81.09%.  The low was hit in 2011 at 32.51%. Individuals and Others have also been in a long term downtrend with a high of 23.59% in 1951, to a low of 7.20% in 2013.

Federal and Related Agencies at their low held only 3.82% of all mortgages coincidentally in 1965. The high is much more recent with 37.62% of all mortgages held in 2013. That actual figure is a bit mis-leading. Since the Mortgage Pools and Trust category includes debt held, guaranteed, or insured by Government Sponsored Entities this whole amount can be considered "Government Held Debt".

With that in mind we can effectively categorize mortgage debt as either held by the Public Sector, or Private Sector. Over the decades we see a vast change in the composition of who holds actual mortgage debt in our country. Public Sector debt would consist of Federal & Related Agencies plus Mortgage Pools & Trusts. Private Sector held debt would be Major Financial Institutions, and Individuals & Others.  So lets bring the 4 groups down to 2 groups to see the total percentage over time.



It's perplexing to see this long term switch in trends. Why is it in the 1950's to 1960's the public sector only held 4-5% of all mortgage debt, but now it has snowballed into 56%? Why doesn't the private sector hold onto this large income generating asset? After all they do originate a large portion of these mortgages. At one point it clearly made sense for them to hold onto the mortgages with the large 90%+ ownership in the 60's which now stands at 43%.

In the 60's the private sector effectively held over 90-95% of all mortgage debt. It wasn't until the mid-70's when the rate fell below 90% the decline really started to accelerate.

Coincidentally this transition in trends coincides with the creation of Ginnie Mae(1968), Freddie Mac(1970), and 1970 was also the year Fannie Mae(founded 1938) transferred from a GSE to an actual publicly traded company. Although now Freddie and Fannie are both back under government ownership. These entities were created to help promote home-ownership for all Americans, and they have a huge presence in the industry. It makes you wonder if the banks are responding to the government, or the government is responding to the banks. Or maybe it's both relationships playing a role.

I guess time will give us more answers.

Back to present day. Remember in the last article I noted the Federal Reserve now owns $1.7 trillion worth of MBS. We see from the chart above the governments current share of debt equals 56%.

Let's take a look at the current mix of holders if we include the Federal Reserve.

 



The Federal Reserve actually owns over 12% of all mortgage debt now.  As I said the government, or in essence all of the taxpayers, hold $7.8 trillion(56%) worth of debt versus the private sectors $6.1 trillion(44%).

For most people this doesn't affect our business or personal finances very much. But it does potentially affect all of us. Collectively the government has deemed taxpayers are on the hook for 56% of the entire national housing market. If there were ever another financial crisis the end result is taxpayers will bear the losses. The losses will eventually manifest into higher TAXES for everyone.

I presented this data in a couple different ways in hopes that you will retain it. To be good students of the economy and investing we need to be aware of larger trends in our nation and world. Please share with others, and comment with any information you have.

That will help us all become better informed individuals.

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