GSEs (Fannie/Freddie),FHA&HUD

Zandi: Here’s How To Revamp Fannie, Freddie

Posted on Monday, February 14, 2011

Mark Zandi, the chief economist at Moody’s Analytics, is out with a paper that tries to quantify the impact of various overhaul proposals for mortgage giants Fannie Mae and Freddie Mac on the housing market.
In it, he outlines his own plan, which calls for five to 10 privately owned but federally chartered entities to issue mortgage-backed securities that would be explicitly-backed by the government.
The paper is the latest from a growing cross-section of economists and academics that calls for a continued government role in the mortgage market.
Mr. Zandi, an influential centrist economist, has made clear that he’s no fan of government policies that have contributed to over-investment in housing. But he argues in this paper that the risks of a fully privatized market are significant and that the policy makers should be able to construct a government-backstop that doesn’t expose taxpayers to too much risk.
Zandi outlines several arguments against privatization:
[F]ull privatization is much more plausible in theory than it would be in practice. Regardless of what policymakers say, global investors will almost surely continue to believe the U.S. government would backstop a badly foundering mortgage finance system. This is particularly true since in the wake of the financial panic, the U.S. government came to [Fannie and Freddie’s] rescue despite saying it would not for years…
A disadvantage of a privatized mortgage finance system would be much higher mortgage rates and a much less stable source of mortgage funding. The 30-year fixed-rate mortgage, the bedrock of mortgage lending since the Great Depression, would likely decline as well….
Looking overseas for guidance to determine the impact of mortgage rates of a privatized mortgage finance system is not very helpful. While few advanced economies provide direct government support to their mortgage finance systems, many provide substantial indirect support through their banking systems. Mortgage lending is dominated by the banking system, which is generally very concentrated, and as can be seen in Europe, much too big to fail.
Instead, he proposes a system that would allow privately owned firms to buy mortgages from banks and other originators, as Fannie and Freddie did, and to repackage those loans into securities that would be sold to investors. The firms would be required to hold much more capital than Fannie and Freddie, and they wouldn’t hold giant investment portfolios.

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