The dominant thread at the conference earlier this week on the future of Fannie Mae and Freddie Mac, hosted by Treasury and the U.S. Department of Housing and Urban Development, was about retaining FHA to ensure finance availability for lower- and moderate-income households and re-shaping Fannie and Freddie into something that backstops losses after private insurers take their lumps.
At least for the near term, most of the academics and business leaders participating seem to agree, some form of government backstopping of the mortgage market is necessary, but it won’t be under the terms that we’ve grown familiar with. Rather, the guarantee would be absolutely explicit, not implicit like we saw with Fannie and Freddie, and, in the view of some, would take the form of a limited, maybe even catastrophic-type, backstopping in which the private sector takes first-risk position.
The government-backed secondary market companies would adjust underwriting and terms to provide counter-cyclical restraints (tightening standards as appreciation rises too far from historical norms) and ensure without question that they would have the reserves to meet their commitments to investors should loans go bad. In a pure market, that would mean costs would rise far too high for most borrowers to afford financing, but with the government’s support, costs would be brought down to a level
appropriate for the great middle of the market. FHA would be retained to play its role making safe, affordable financing available to lower- and moderate-income borrowers.
Would the secondary mortgage market companies be pure government entities like FHA or pure private companies? Not clear, except that Geithner said in his opening remarks that the days of private gains subsidized by public losses — the Fannie and Freddie
models — are over. Perhaps, as Alex Pollack of the American Enterprise Institute said, the GSEs should be divided into three entities: purely private companies for packaging mortgage-backed securities for Wall Street investors, pure government agencies for meeting public policy goals of homeownership, and third entities for liquidating the existing GSEs’ bad debt.
All agree that lack of transparency was one of the great culprits of the mortgage crisis. Borrowers didn’t know what they were borrowing, investors didn’t know what they were investing in, and no one knew whether the federal government would actually step in should a crisis occur. To correct these shortcomings, transparency would have to be a hallmark of any reform. “We need transparency, standardization, and disclosure,” said
Susan Wachter of the University of Pennsylvania’s Wharton School.
Vince Malta, NAR vice president and liaison to government affairs, was present on behalf of REALTORS® on the second day of the conference.
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