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U.S. should step back from mortgage business, industry leaders say

By Zachary A. Goldfarb
Washington Post Staff Writer
Monday, February 7, 2011; 10:34 PM

ORLANDO - A group of Wall Street professionals meeting here Monday posed a central question facing the Obama administration: How do taxpayers get off the hook for supporting new home loans without doing damage to the struggling housing market?

It is a multi-trillion-dollar question. And it's gaining currency as the administration prepares to unveil this week a white paper on overhauling the nation's mortgage system, which, as a result of the financial crisis, relies on the government to insure almost every home loan made today.

At the annual conference of industry trade group American Securitization Forum, virtually every speaker said the government should move toward a smaller role, or no role at all, in the housing market.

But participants also warned that the mortgage system needs the government for the foreseeable future or the supply of 30-year, low-interest home loans could dry up - a disaster for the housing market.

"It will take a Michelangelo to design a transition," said Jason Kravitt, a leading industry lawyer and co-founder of the forum.

Before the financial crisis, more than half of home loans were made without any government guarantee. Today, fewer than 10 percent are. Meanwhile, the federal seizure of mortgage-finance giants Fannie Mae and Freddie Mac has cost taxpayers more than $130 billion.

The administration is expected to suggest baby steps such as reducing the maximum size of a mortgage that can be guaranteed by Fannie and Freddie, from $729,750 to $625,500. The hope is that the private sector would begin offering mortgages without government support to people in need of loans over $625,500.

"If we are going to begin reducing the government's role, that would be a game-changer and a big factor in getting the private markets back and going," said Martin Hughes, chief executive of real estate investment company Redwood Trust.

The loan limit will decline automatically in September unless Congress acts to maintain the current level.

Rep. Scott Garrett (R-N.J.), who recently took over a House committee overseeing housing finance, endorsed the idea of lowering loan limits in a keynote address to the conference Monday morning.

Garrett said he wants the government to exit the mortgage market entirely, though he acknowledged it was a long-term proposition. "I realize that this will not be an easy or immediate goal, but it is one I feel strongly about," he said.

Lowering loan limits is just one of the ways the government can begin to reduce support. Others include increasing fees for government-backed mortgages.

Jaret Seiberg, an analyst at MF Global, said in a report Monday that such measures are likely to make mortgages cost between a half-percentage point and full-percentage point more. "Higher financing costs translate into downward pricing pressure on home values," he wrote.

The Obama administration has been debating whether the government should guarantee mortgages in the long run, with some officials questioning whether any more taxpayer dollars should be put on the line.

But some participants at the conference warned that a government withdrawal from the market might scare off investors, who are the source of funds for banks that make loans to home buyers. Many investors are especially nervous after the financial crisis, when they took major losses on loans that weren't backed by the government. "The wounds are too fresh," said Kevin Palmer, a Freddie Mac executive.

Eliminating the government's role might also undermine the $5 trillion market for mortgage-backed investments, some conference attendees said. In this market, investors are willing to trade in mortgage-backed investments regardless of whether they know what loans underlie them and whether those loans are overly risky.

"If they're on the line for every originators' quality, I think it would be very problematic," said Ronald Mass, portfolio manager at Western Asset Management.

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