Limited Mortgage Finance Role for U.S. Government Gains SupportJody Shenn and Clea Benson
A bipartisan panel including former secretaries of the Department of Housing and Urban Development and retired U.S. senators is preparing to release a proposal for scaling back the government role in mortgage finance that would put taxpayer dollars at risk primarily under catastrophic circumstances.
The blueprint, which the Washington-based Bipartisan Policy Center is scheduled to release Feb. 25, is an attempt to jump-start the stalled debate over shrinking the government role in the $9.5 trillion mortgage market, according to three people familiar with the plan. The document was drafted over the past 16 months by a 21-member commission including industry representatives, consumer advocates, and former policy makers.
The panel will recommend that the U.S. replace Fannie Mae and Freddie Mac, which package loans into securities with guaranteed interest and principal payments, with mortgage-bond guarantees that kick in only after private firms take the initial losses, according to the people, who asked not to be identified because the report isn’t yet published.
The commission is hoping the plan will “elevate housing to the top of the national policy agenda and provide a foundation for action in 2013,” according to the website of the organization, which was founded in 2007 by a group of retired senators.
The panel is lead by Mel Martinez, who was HUD secretary under President George W. Bush, and Henry G. Cisneros, HUD secretary under President Bill Clinton, as well as former Democratic Senator George J. Mitchell and former Republican Senator Christopher “Kit” Bond.
Ashley Berrang, a spokeswoman for the commission, declined to comment on the contents of its report before its release.
The report will suggest government guarantees could come from a new entity similar to Ginnie Mae, the U.S.-owned corporation that currently backs bonds with loans insured by U.S. agencies including the Federal Housing Administration, the people said.
That entity could replace Fannie Mae and Freddie Mac, which were publicly traded companies with no explicit government backing before they were seized in 2008 after investments in risky loans pushed them to the brink of insolvency. The two companies have since drawn about $190 billion in taxpayer aid and paid Treasury $50 billion in dividends.
The proposal comes as housing-finance reform has failed to gain traction in Washington, in part because Democrats and Republicans remain divided over alternatives, and as Fannie Mae and Freddie Mac have returned to profitability, sapping momentum for change. At the same time, taxpayers continue to bear the risk on about 90 percent of new home loans through agencies including FHA, the Department of Veterans Affairs and the two government-sponsored enterprises.
President Barack Obama, who has called for Fannie Mae and Freddie Mac to be wound down and replaced, has yet to release a detailed plan. Likewise, Congress has yet to move forward with comprehensive legislation.
The Obama administration’s most significant contribution to the debate was a 2011 Treasury report that laid out three options, ranging from almost total privatization to a new and more limited government role as a catastrophic reinsurer. The BPC commission’s proposal offers further indication that consensus may be building around the reinsurance option.
The commission’s recommendations will echo plans put forward by the Mortgage Bankers Association, the Housing Policy Council, researchers at the Federal Reserve Bank of New York and Jim Millstein, who helped oversee the U.S. bailouts of firms including insurer American International Group Inc.
The idea stops short of a dramatic government exit, and the details would be crucial to gauging the potential impact on various housing industry sectors, the relative effect on large and small lenders, the cost of credit for home buyers and the risk borne by taxpayers.
The approach has critics. The government would still need to correctly price risks and taxpayers could be exposed to losses from borrowers who don’t need the backstop, said Joshua Rosner, an analyst at Graham Fisher & Co. and co-author of “Reckless Endangerment,” a book which focused on Fannie Mae’s role in the housing crisis.
Like Fannie Mae and Freddie Mac, the new arrangement could also pass government subsidies through private firms that may abuse the system to maximize profits, Rosner said.
“Proponents of the idea are basically saying, ‘Let’s sweep all that under the rug, claim a victory and go home,’” he said.
Absent other action, the Federal Housing Finance Agency, the overseer of Fannie Mae and Freddie Mac, is proceeding with its own plans for shrinking their footprint.
The firms last year almost doubled the fees they charge to guarantee mortgage securities, making other lending more competitive, and began to work on deals in which they would share the risk of initial losses on some of their portfolio with private capital. Broad use of that approach could transform the companies along the lines of some reform proposals.
The housing market’s continued dependence on government makes change difficult, Robert Bostrom, who served as general counsel for Freddie Mac for five years through 2011, said last month at a securitization conference.
“It’s kind of like having a heroin addict with a needle in his arm,” he said. “If you take it out, he dies. If you leave it in, he dies. What are you supposed to do?”