U.S. role at heart of housing debate
Wednesday, August 18, 2010
Top Obama administration officials opened a conference on the future of housing by making clear Tuesday they are considering a limited range of options that would reduce but not eliminate the government's role as a provider of funding for home loans.
Treasury Secretary Timothy F. Geithner, while promising "fundamental reform," said the government must continue to play a role in insuring new home loans. "There is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns," he said.
Housing and Urban Development Secretary Shaun Donovan said the current housing finance system -- under which the government-backed mortgage finance companies Fannie Mae and Freddie Mac and the Federal Housing Administration stand behind nine out of 10 new home loans -- cannot continue. "The government's footprint in the housing market needs to be smaller than it is today," he said.
The Cabinet secretaries, who are leading the housing overhaul effort, said they envision a hybrid system that relies far more on private companies to provide funding for home loans but still features a government backstop for those loans. The remarks by Geithner and Donovan -- and their selection of like-minded panelists from industry, think tanks and other sectors -- suggested that the administration is not prepared to embrace more radical proposals offered by a few of the conference participants.
Bill Gross, who runs the world's biggest bond firm, Pimco, argued that the mortgage market should be completely nationalized.
"We are skeptical of other public-private models currently being considered . . . because they're more expensive, primarily, resulting in higher mortgage rates," he said. "They have the potential to replicate abuses of the past. They, in fact, to my way of thinking, are clones of Fannie and Freddie."
Gross's proposal could ensure that mortgages remain affordable for home buyers. That's because the government, which would borrow money to finance the mortgages, faces a relatively low interest rate in the markets. The downside is that taxpayers would be on the line for losses.
By contrast, Alex J. Pollock, a fellow at the American Enterprise Institute, suggested the government not play any role supporting housing finance, except narrow programs run out of HUD to provide funding to low-income people.
"You can either, in my view, be a private company or a government agency -- one or the other, but not both," he said. "There is a verse in the book of Proverbs which addresses guarantees . . . and it goes like this: 'He who stands a surety for the debts of another shall smart for it.' "
Pollock's proposal would protect taxpayers. But on the other hand, banks and other private lenders might charge more than borrowers are used to for a 30-year fixed-rate mortgage.
For years, the beauty of Fannie and Freddie was that they were able to split the difference between these poles. The companies took loans made by lenders, pooled them into investments, guaranteed them and then sold them to the market, providing a stream of money for lenders to make new loans and keeping mortgage rates low.
The firms were shareholder-owned. But because they were set up by Congress, Fannie and Freddie carried an implicit guarantee of government support. That let them be run cheaply. They made large profits, which offset modest losses on home loans.
The system worked until the companies bought too many bad loans during the recent housing bubble. When the housing market took a nose dive. The companies collapsed into the arms of the federal government, which has pumped in about $150 billion to keep them afloat.
The administration is now trying to recreate what was good about Fannie and Freddie without returning to what was overly risky. An emerging consensus, including among many of the panelists at the conference, favors maintaining Fannie and Freddie -- or several similar entities -- as heavily regulated companies that offer a guarantee to investors in high-quality mortgage loans. The federal government would stand behind that guarantee.
Under this scenario, the companies would charge mortgage originators a fee for the guarantee and use some of the money to cover mortgage investments that go bad. Part of the fee would be contributed to a separate insurance fund that would be tapped if one of the companies fails and can no longer stand behind the mortgage investments it guaranteed. Investors, the thinking goes, would remain confident in the mortgage securities and continue to buy them.
But the task would not be easy. For starters, it will take years for the government to absorb the hundreds of billions of dollars in bad loans Fannie and Freddie already guarantee.
The administration is required under the new financial overhaul law to present a plan for the future of housing policy by January.
The conference also highlighted the greater emphasis the administration is putting on rental housing
"It means ensuring that financing is available for those who will build the rental housing that we need to provide choices for those families for whom homeownership may not be the best option, " Donovan said.