The U.S. Treasury Department, hosting a summit tomorrow on how to repair the mortgage-finance system, may get a blunt message from stakeholders in an industry tied to 15 percent of the country’s economy: Don’t screw it up.
The system’s size and complexity mean that a wrong move by the Obama administration could restrict credit, drive down home prices, increase foreclosures and slow the economy, housing advocates and industry participants say. At the same time, some lawmakers say it’s time to close government-controlled loan guarantors and halt limitless bailouts.
“It’s like building an airplane while you’re still flying it,” said David Ledford, senior vice president of mortgage finance at the National Association of Home Builders in Washington. Housing investments and related services account for 15 percent of gross domestic product, according to the group, ranking the industry second to health care.
Central to the effort are Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backed almost 97 percent of U.S. mortgages in 2009.
Government involvement has more than doubled since 2005, when the three companies accounted for about 45 percent of a $2.2 trillion market, according to Inside Mortgage Finance. Since Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, were seized by the government in 2008 amid soaring losses on mortgage investments, taxpayers have injected almost $150 billion to keep them solvent. The Treasury has promised unlimited aid.
The Treasury meeting, to be co-hosted by the Department of Housing and Urban Development, will be attended by mortgage executives from Bank of America Corp. and Wells Fargo & Co., the biggest U.S. home lenders, and Pacific Investment Management Co., which runs the world’s biggest bond fund and ranks among the biggest holders of Fannie Mae and Freddie Mac debt.
U.S. Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, has begun work on overhaul legislation and will hold hearings in September. Treasury Secretary Timothy F. Geithner has promised to deliver a “comprehensive” plan for the housing-finance system by January.
During debate over the financial-regulation overhaul signed by President Barack Obama last month, Republicans were rebuffed in efforts to abolish Fannie Mae and Freddie Mac. Led by Senator John McCain of Arizona and Representative Jeb Hensarling of Texas, Republicans say the firms were driven to ruin by their competing missions -- serving shareholders as publicly traded companies and promoting homeownership among lower-income borrowers as government-sponsored entities.
“We’ve got to come up with the right model here,” Senator Richard Shelby of Alabama, the Banking Committee’s top Republican, said today in a Bloomberg Television interview. “Housing is important to America, but housing at any cost is not something the taxpayers should fund,” said Shelby, who called Fannie Mae and Freddie Mac a “colossal failure.”
Housing advocates and industry participants are urging a cautious approach.
“Housing is a basic necessity. It’s a huge component of the U.S. economy,” said Ken Bentsen, executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association in New York. “The outcome of this debate could be as consequential as health care reform.”
“You’re talking about the whole secondary market,” said Joseph Pigg, senior counsel at the American Bankers Association in Washington. “Get it wrong you derail any nascent recovery in the housing economy.”
The Obama Administration and Congress have bought time by taking interim steps. Under U.S. conservatorship, Fannie Mae and Freddie Mac have stemmed losses by improving the quality of the loans they insure. In 2008, Treasury and the Federal Reserve made good on an implicit government guarantee of the companies’ bonds. The administration has set aside more than $50 billion for foreclosure prevention and mortgage-relief programs.
The Wall Street overhaul Obama enacted in July forces bundlers and issuers of mortgage debt to “keep skin in the game” by retaining risk in the products they sell, a provision designed to discourage lending to unqualified borrowers who are less likely to make payments. The new law seeks to prohibit predatory lending and establishes a Bureau of Consumer Financial Protection. By January, mortgage brokers must pass criminal-background checks and licensing exams.
Today, the Federal Reserve announced a set of consumer protections governing mortgages, including a rule that bans originators from profiting when they sell loans with higher interest rates.
The government guarantees and aid have removed the real estate lobby’s sense of urgency, said Edward Pinto, a former Fannie Mae chief credit officer who has criticized their unlimited bailouts.
“Industry has what they want,” said Pinto. “They have a complete guarantee. There is no ticking clock.”
Omitting Fannie and Freddie from the Wall Street overhaul was “a scandal,” said Alex Pollock, a fellow at the American Enterprise Institute who favors minimizing government’s role. Still, “deliberate speed” is called for because “you’re dealing with the biggest credit market in the world, and one that’s, needless to say, extremely important,” he said.
As talks begin, consensus points have emerged, including agreement that any rewrite should include an explicit government guarantee for mortgage investors against a catastrophic collapse. Hammering out the details may take months or years, said the American Bankers Association’s Pigg.
“World peace sounds like something we can all agree on, too,” he said. “It’s the getting there that’s difficult.”