Housing regulator cites doubts over federal role

By Zachary A. Goldfarb
Wednesday, September 15, 2010

The federal regulator of mortgage finance giants Fannie Mae and Freddie Mac raised concerns on Tuesday about the Obama administration's approach toward housing, questioning whether the government should continue to play a significant role in helping borrowers get home loans.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, became the first major voice within the government to express reservations about the administration's strategy for revamping the nation's housing policy.

"Recently there has been a growing call for some form of explicit federal insurance to be a part of the housing finance system of the future," DeMarco says in prepared testimony, scheduled to be delivered before the House Financial Services Committee. "The potential costs and risks associated with such a framework have not yet been fully explored."

The committee is set to hold a hearing Wednesday on the future of housing finance - the machinery that takes money from investors and gets it to borrowers seeking a mortgage. Assistant Treasury Secretary Michael Barr is also scheduled to speak.

Though the administration has yet to say explicitly how it wants to revamp housing policy, senior officials' views have emerged in recent testimony and speeches.

The administration is slated to deliver a proposal by January on how to remake the housing finance system. A breakdown in that system helped cause the financial meltdown that sent the nation's economy into recession.

The mortgage market has been effectively nationalized since September 2008, when the government seized Fannie and Freddie and bailed them out to prevent insolvency. Those two firms and the Federal Housing Administration are now insuring nine in 10 new home loans.

Many administration officials, financial industry executives and academics have said the government should play a smaller but still significant role to ensure that the mortgage market stays healthy and can continue to offer 30-year fixed-rate mortgages to borrowers at affordable interest rates. The role would probably take the form of a government guarantee to investors who put up the money for home loans.

"Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale," Treasury Secretary Timothy F. Geithner said in August. "House price declines could be more acute, with even greater damage to financial wealth and economic security."

DeMarco doesn't explicitly endorse or oppose such a role for the government in his testimony, but he outlines several concerns.

First, he rejects the notion that no private firm would risk funding a 30-year mortgage, "at least at any price that most would consider reasonable." Rather, he asks "whether there is reason to believe that the government will do better? If the government backstop is underpriced, taxpayers eventually may foot the bill again."

Second, he says he worries that a government guarantee could allow politicians to favor some areas or demographic groups. The government "would likely want a say with regard to the allocation or pricing of mortgage credit for particular groups or geographic areas," he says.

Finally, he says a guarantee would shift capital toward housing, which already benefits from other government support.

Despite these risks, Geithner has argued that there is a strong case for the government to continue guaranteeing mortgages, but with tighter regulations. He has said the government will have to make sure that it can cover potential losses by charging borrowers and banks a high enough fee for the guarantee.

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