Will Private Industry Replace Fannie and Freddie?

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March 12 (Bloomberg) -- Edwin Groshans, managing director at Height Analytics, and Bloomberg's Nela Richardson discuss the fate of housing finance reform with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Senior economist.

And the analytics managing director.

The way this will work, it sounds like once your losses as a private lender exceed 10%, the government steps in to bail you out.

Our were not running the same exact moral hazard we arty have had?

It is the same, just less.

It -- they're looking for investors to take the 10%. the banks will not be involved.

If your losses exceed 10%, the government stepping in here to help you out.

If your losses are at nine percent or eight percent, are you not somewhat incentivized to make riskier and riskier loans because of that point, you might as look at the government into help out?

Class the way they in -- they try to resent that, we will hopefully x out all pay loans from entering the mix.

That is the attempt.

Will this help bring a little bit more discipline into the housing market?

Is that the thinking?

It is hard to tell.

The 10% would likely get ratcheted town were 25% after all the lobbying pressures getting through with the bill.

We're probably not going to see a 10% attachment rate.

The underwriting standards will be in effect, but the most pertinent is down payment.

They require a 20% down payment or primary mortgage insurance have to be paid.

Five percent down payment.

We have taken down a lot.

One of the prime indicator is a risk by lowering the down payment.

Class is the idea behind all this to try to prevent another 2008 catastrophe from happening again?

Are we trying to make in an environment where it is harder to get alone as oppose to use.

Go -- opposed to easier?

Class it is definitely hard to get alone.

No doubt.

They increased the cost of the guaranteed fee.

Making it more unaffordable.

At the end of the day, there are other issues here.

There are concerns about enriching hedge funds and who came in late to the game and get rewarded.

They want to ask that out and create a whole new system, not necessary.

Why not just say, to heck with fannie and freddie altogether and let's just allow people to get loans on their own from banks from private investors?

If the bank or private investor is willing to take on the risk, that is their own deal and we do not need the government they're ready to backstab anything.

We tried that in the 1980's. no system is perfect.

That is why you need regulation.

Is that not the way it always was?

You think that the 1950's. if you needed to get a loan from the bank, you went to your local bank and you put 20% down -- down and the bank permitted that on you and that is where the loan lived, as opposed to the syndication market.

Is that all unraveled in 2008, we know the consequences of it.

What about going back to the way things were?

There is always the fantasy world where we want to go backwards instead of forwards.

Securitization has provided a lot of benefits to our financial system.

I am not in favor of on modernizing the financial system.

The question is whether private capital can fill the gap left by fannie and freddie if they were limited.

Funding for mortgages has dried up.

The funding is not there the way it used to be.

Banks are reluctant for a variety of reasons.

The likelihood they would step in now just because of this bill is not exactly a foregone conclusion.

Class a good point.

Could we actually have private industry here and take over for fannie and freddie?

With a be willing to take on the risks?

Class they would, but not for poor -- not for 4.5% mortgage.

That is the issue also three requires a lot more capital to be held against mortgage assets.

There is no way a bank will hold a 4.5% with capital requirements unless you have a lot of assets behind you.

Class is going up if you do not have fannie and freddie there.

What is wrong with that ultimately?

There is a policy in place that has been in place since the 1970's to allow people with less moderate means to require homes.

That is a big policy shift to move away from that and i do not think we will get there with this administration.

I think the hedge funds are in limbo.

We are waiting for the lawsuit.

June 21 is the first hearing for that lawsuit.

A lot of people think hedge funds have a good case and there is a good shot they will win.

We will wait and see.

From a legislative standpoint, it was nice they put out the bill again.

It is not going anywhere this year.

Maybe they will pick it up next year.

The white house seems to be getting a little more involved.

They were involved in the latest addition.

What is the chance of some polite this happening?

No chance at all.

No incentive for the federal government to eliminate freddie and fannie.

They are piggy banks, cash cows, returning profits at a big rate to the government and paying down the deficit.

There is no incentive for the white house to do reform.

They can back up a plan they do not expect to happen and that is what i think they did.

Class i concur.

Wouldn't also be a bit of a disaster?

You think of how it plays out.

It would look as though the obama administration is saying, we do care about average homeowners.

You're on your own when it comes to getting alone.


This is an election year.

The midterm elections.

Congress will not do a lot during the span from now to november, especially something as controversial.

And as big.

$11 trillion market.

Class i would point us to canada.

You can look at a country like canada, which does not have this in effect.

They do not have the same real estate issues.

Not anywhere near the same extent here.

Real penalties in canada.

For not paying your mortgage.

We do not have the same penalties.

We let a lot of people walk away.

They came out with the new servicing rules.

As a service or, you cannot just foreclose on someone.

You must actively seek out a

This text has been automatically generated. It may not be 100% accurate.


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