Posted on Friday, August 20, 2010
By Robert Freedman, senior editor, REALTOR® Magazine
As I write this, U.S. Treasury Secretary Timothy Geithner is in Washington at the Treasury building discussing with a group of academics and business leaders what the home mortgage finance system should look like after the federal government decides what to do with Fannie Mae and Freddie Mac. The discussion is a first step in the federal government’s congressionally mandated release of a GSE overhaul plan by January 2011.
After about an hour’s discussion, the dominant thread is about retaining FHA to ensure finance availability for lower- and moderate-income households and re-shaping Fannie and Freddie into something that backstops losses after private insurers take their lumps.
At least for the near term, most of the participants seem to agree, some form of government backstopping of the mortgage market is necessary, but it won’t be under the terms that we’ve grown familiar with. Rather, the guarantee would be absolutely explicit, not implicit like we saw with Fannie and Freddie, and, in the view of some, would take the form of a limited, maybe even catastrophic-type, backstopping in which the private sector takes first-risk position.
The government-backed secondary market companies would adjust underwriting and terms to provide counter-cyclical restraints (tightening standards as appreciation rises too far from historical norms) and ensure without question that they would have the reserves to meet their commitments to investors should loans go bad. In a pure market, that would mean costs would rise far too high for most borrowers to afford financing, but with the government’s support, costs would be brought down to a level appropriate for the great middle of the market. FHA would be retained to play its role making safe, affordable financing available to lower- and moderate-income borrowers.
Would the secondary mortgage market companies be pure government entities like FHA or pure private companies? Not clear, except that Geithner said in his opening remarks that the days of private gains subsidized by public losses—the Fannie and Freddie models—are over. Perhaps, as Alex Pollack of the American Enterprise Institute said, the GSEs should be divided into three entities: purely private companies for packaging mortgage-backed securities for Wall Street investors, pure government agencies for meeting public policy goals of homeownership, and third entities for liquidating the existing GSEs’ bad debt.
All agree that lack of transparency was one of the great culprits of the mortgage crisis. Borrowers didn’t know what they were borrowing, investors didn’t know what they were investing in, and no one knew whether the federal government would actually step in should a crisis occur. To correct these shortcomings, transparency would have to be a hallmark of any reform. “We need transparency, standardization, and disclosure,” said Susan Wachter of the University of Pennsylvania’s Wharton School.
Ingrid Gould Ellen of New York University said the federal role in the new GSEs would be strictly limited to covering their mortgage securities, not their corporate bonds, and that the GSEs would guarantee only securities with well-defined loans, like plain-vanilla 30-year, fixed-rate loans, and would charge fees sufficient for them to build up adequate reserves to cover their liabilities.
National Urban League Chief Marc Morial pressed the need for financial institutions to weigh in on any draft plan to make clear how the plan would affect their decision making. His concern is that the new shape of the system not be made based purely on philosophical grounds but with the understanding of how changes would impact the business practices of lenders. He also said it’s crucial that the country’s overall goal of making homeownership achievable for as broad a representation of the population as possible be maintained, because it’s through homeownership that low- and moderate-income households build up the financial security to attend college, save for retirement, and improve their lives. “We don’t want to create a new class of renters,” he said.
Bill Gross of pension-fund investment giant PIMCO said people must adjust their thinking to accept that the private mortgage market we had for the last 20 years will not return any time soon. Given the drop in home prices, the market will not function without some kind of government guarantee (with that guarantee protecting taxpayers through adequate reserves, sufficient downpayments, and solid underwriting and terms).
It’s impossible to know what the administration will actually come out with in January, and it’s plan might not reflect anything said at this opening meeting. But today’s discussion, hosted jointly by Treasury and HUD, provides a guide to the kinds of input it’s getting from at least some of the organizations it’s reaching out to. The agencies have heard from NAR already, and will continue to hear from NAR, which is advocating the retention of some form of government guarantee to help ensure the continued availability of affordable mortgage loans in both good markets and bad.
Robert Freedman NAR