My Mortgage Blog

Watch out. In spite of the recent good news about Egypt and about our economy, we need to be mindful of the landmines spread beneath our feet. This is truly a difficult time that, if we don’t stay awake to the problems, could cause each of us many problems—or, equally, create many opportunities. (I hate to discuss potentially bad news, hate to be the messenger some readers may want to shoot—but I am committed to keeping us all as aware of potential crises as we can be.)

Exhibit #1. Though there is a great temptation to join the dancing in the street and declare that democracy won against the police state in Egypt, the jury is still out and the problems are still vicious. The symbol of despotism has been removed. The people have effectively declared their wishes. But the reality is that the army is still very much in control.

Consider a few things: Many of the richest men in Egypt are high officials in the army. They will hold on to their villas and their power with the same kind of tenacity that Mubarak demonstrated in trying to hold on to his position and pride. Already, the military has announced that it’s not going to help create a democracy unless and until elections move the country in that direction. (And it’s impossible not to worry about how the military maintains its power even after an election pushes the nation further in the direction of democracy.)

Another problem: There isn’t much wealth to go around in Egypt at this point. Accumulating wealth and power could once again become the primary political game there. The country no longer has an oil trade now that it is a net importer; it is the world’s largest importer of wheat; it imports about 40% of its food; its water sources are few; its raw materials aren’t very inspiring. What does it have? It has the largest Arab population of any nation; it has an important geographical and political location; and it has a history (but tourists have been busy crossing Egypt off their lists). Even without the potential chaos of trying to bring a new form of government to this ancient land, making economic progress would be hugely difficult.

We cannot, therefore, assume that the future will be bright in Egypt. The potential effects on the price of oil and myriad other goods are very sobering, indeed.

Exhibit #2. And while we are sobering up, consider this quotation from Daniel Mudd, the former chief executive of Fannie Mae. “The cost of mortgages is probably going to go up, and homeownership is going to go down. Both of those things arguably could be a good thing.”

Oh? Good for whom?

The sorry truth is that Fannie and Freddie are, as you doubtless know, being propped up at taxpayer expense, and this can’t continue very much longer. Here, as articulated by Matt Phillips in The Wall Street Journal, is the key problem that must be addressed: “There just ain’t enough cash in the U.S. banking system to keep the mortgage market as big as it has been.” We have reached the point where there is more money in mortgages than there is money in banks. For this reason, former mortgage officials are starting to make dismal, defeatist utterances.

Change is ahead. There is a powerful movement to phase Fannie and Freddie out of the business and, in the process, to greatly reduce the government’s role in the writing and backing of mortgages. (Then there are the calls for eliminating the mortgage interest deduction, and other significant potential changes. We’ll look at these another day.)

I believe there will be remarkable opportunities for those who remain as aware as possible of what is coming. But this is not at all a good head-in-sand moment, whether the sand is in northern Africa or Southern California.