Posted on Tuesday, January 4, 2011
Treasury Secretary Timothy F. Geithner will report to Congress this month on how to rebuild the U.S. mortgage finance system amid a growing consensus that Fannie Mae and Freddie Mac won’t be dismantled anytime soon.
Though Republicans have won a stronger hand in Congress, their push to end Fannie Mae and Freddie Mac’s dominance in the mortgage market is unlikely to succeed before the 2012 elections, lawmakers and analysts said.
While some lawmakers want to end all government mortgage guarantees, Geithner has indicated he may support a limited federal role in line with proposals being circulated by banking regulators, policy shops and business groups. What unites nearly all players is the view that the housing market is too fragile at the moment to function without Fannie Mae and Freddie Mac, which own or guarantee more than half of all U.S. home loans.
“If you could do it in one year, that would be great,” said Representative Randy Neugebauer, a Texas Republican who favors an incremental transition to a fully private system. “I don’t think you can do it in a year.”
Neugebauer, who will chair the oversight and investigations panel of the House Financial Services Committee, said he was concerned about the potential damage from hasty legislation. “We have to do it in such a way that we don’t blindside the marketplace,” he said.
Until September 2008, Washington-based Fannie Mae and Freddie Mac of McLean, Va., were private companies backing home mortgages with an implicit government guarantee and large portfolios of mortgage-backed securities. Billions of dollars in losses stemming from subprime mortgages pushed them to the brink of collapse. The federal government placed them in conservatorship and took almost an 80 percent stake in both.
Firms with a financial stake in the housing market are paying close attention to the debate over the future of Fannie Mae and Freddie Mac. While lenders such as Wells Fargo & Co., Bank of America Corp., JP Morgan Chase & Co., and PHH Corp. are testing the waters for home loans without government guarantees, their role is small. The two government-supported firms, the Federal Housing Administration and other government agencies guarantee more than 96 percent of the U.S. mortgages now being written -- more than double what the government backed before the credit crisis.
The two firms’ portfolios of loans and mortgages mushroomed to $4.77 trillion at the end of the third quarter from $463 billion three years earlier, according to company filings.
Price to Taxpayers
That has come at a price to the Treasury. Since the government seizure the firms have received more than $151 billion in aid, following $240 billion in losses, and have returned about $17 billion in dividends to the government.
Republicans railed against Democrats for leaving the two government-supported firms out of last year’s overhaul of financial rules. Instead, the Dodd-Frank Act requires only that Geithner deliver a blueprint to Congress in January.
“Taxpayers are continually losing money on these failed enterprises, and at some point, we must say enough is enough,” Representative Scott Garrett, a New Jersey Republican, said last May during the debate over finance rules. Garrett, who sponsored legislation to phase out Fannie Mae and Freddie Mac, said he found it “mind-blowing” that Democrats delayed the discussion.
Congress had no choice but to delay, said Martin Baily, former chairman of the Council of Economic Advisers under President Clinton and leader of a group organizing studies for a new housing-finance market at the Brookings Institution. “The truth is that Fannie Mae and Freddie Mac are all we have right now in the mortgage market,” Baily said.
As Treasury prepares its blueprint for the future, policymakers are examining outside proposals. Among them are plans outlined in a staff paper from the Federal Reserve Bank of New York; a report by the Washington-based Center for American Progress, a policy group; and a study by the Financial Services Roundtable’s Housing Policy Council.
Each aims to bring more private capital into the mortgage market while providing an explicit government guarantee that would preserve investor confidence in mortgage-backed securities and support the continuation of the 30-year fixed-rate mortgage.
“A reasonable fraction of investors would not want to invest in the securities without that guarantee, and that could restrict credit in the mortgage market,” said Akiva Dickstein, a managing director in charge of mortgage portfolios at BlackRock Inc., which manages $3.45 trillion in assets.
“That does seems to be the consensus, that the government role should be limited but that they should be the insurer of last resort,” he said.
The plans have some common elements. They would replace Fannie Mae and Freddie Mac with companies that would purchase standardized 30-year mortgages from loan originators and bundle them into a few types of securities.
Those new firms, which would be tightly regulated, could be privately owned, mutually owned or cooperatives controlled by the mortgage originators. Unlike Fannie Mae and Freddie Mac, they wouldn’t maintain large investment portfolios. They would only purchase mortgages in which borrowers had made substantial down payments, perhaps 20 percent or more.
The down payments and the capital of the companies securitizing the mortgages would be two cushions against losses by investors in the bundled securities, as well as any private mortgage insurance borrowers might purchase. Another guarantee, provided by a federal agency, would kick in only after those cushions were exhausted, according to the plans.
“What we want is a federal backstop only on the mortgage- backed securities, not the agency issuing them,” said John Dalton, chairman of the housing policy council of the Financial Services Roundtable and former president of another government mortgage insurer, the Government National Mortgage Association, known as Ginnie Mae.
Under the proposals the new federal agency would charge fees or premiums to build a reserve fund to cover losses, similar to how the Federal Deposit Insurance Corp. operates, and those costs would be passed to the borrowers.
“Those are all layers of protection that weren’t mandated in the past,” said Sarah Rosen Wartell, executive vice president of the Center for American Progress. “In that system you have put 95 percent of the risk on the private sector, in contrast to where we are today.”
In addition, the companies securitizing mortgages would no longer have a responsibility to finance affordable housing for lower income families, as Fannie Mae and Freddie Mac were expected to do in return for their implicit government backing. The Fed paper suggested that could become the duty of the Federal Housing Administration.
Geithner, who has not publicly discussed the details of the plan Treasury is drafting, suggested the direction when he spoke in August to a conference on the future of housing finance.
“I believe 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 mortgage finance, even in future economic downturns,” Geithner said. “The challenge is to make sure that any government guarantee is priced to cover the risk of losses, and is structured to minimize taxpayer exposure.”
Peter Wallison, a former general counsel at the Treasury Department and member of the Federal Crisis Inquiry Commission, denied there was any consensus on a role for government and said he was organizing Republicans to fight the idea.
“There is no such thing as a ‘limited’ role if there’s a crisis, which we just saw,” he said. “Fannie Mae and Freddie Mac should be gradually reduced in size and importance by slowly reducing the upper limit on conforming mortgages.”
However the issue is decided, there is a consensus on the timing.
“Nothing requires that Congress do anything before the 2012 election,” said Wallison.
Wartell agreed. “I don’t think it’s likely we’ll have legislation in the next two years,” she said. “This is an evolutionary process.”
Daily Business Review