Yes. The private sector can ably fill the void.
Peter Wallison is co-director of the American Enterprise Institute’s financial policy studies program.
Wallison has long advocated junking those jalopies better known as Fannie Mae and Freddie Mac and replacing them with a new roadster powered by a private-sector engine that doesn't need any lubrication from the government.
Speaking at a housing forum sponsored by NAHB and hosted by Roll Call on Tuesday, Wallison explained that this transition could be accomplished by reducing the GSEs’ conforming loan limits to a point where “the private sector, through securitization, would pick up these loans.” However, he added that there needs to be “changes” to the Dodd-Frank Wall Street and Consumer Protection Act to make this happen.
As to the question of how much credit risk investors are willing to take on without some government guarantee, Wallison responded: “Our entire economy is financed by people willing to take on credit risk; why shouldn’t housing be the same?” He believes that if the GSEs were eliminated, other private sector entities—banks, insurance companies, pension funds—would fill the void and would make investments on longer-term assets such as housing mortgages.
Indeed, Wallison foresees and mortgage market financed by the private sector as looking pretty much as it does today. He pointed specifically to 30-year fixed-rate jumbo mortgages at 4.75 percent that Wells Fargo offers without government backing as illustrative of how market forces can meet market demands.
He is concerned, though, that the new requirements being written for qualified residential mortgages don’t address underwriting standards. A free market system, he stated, would insist on good credit scores and down payments, which Wallison said the government “stripped out” of the lending process to achieve its affordable housing goals.
No. The private sector is unreliable when faced with uncertain credit risk.
Adam Levitin is a professor of law at Georgetown University Law School.
Levitin, who has written extensively about housing policy, also participated in the NAHB forum, where he challenged on several grounds Wallison’s avidity for turning over housing mortgage financing to the private sector.
He warned that such a dramatic shift would make risk-based pricing far more geographic. If, say, California’s housing market suddenly started reeling again, “you’d have a flight of capital from California. What you’d end up with would be more-volatile regional [mortgage] markets.”
Levitin wasn’t buying the notion that private capital would flood into the housing sector if Fannie and Freddie disappear and the federal government moves aside, mostly because the lack of a viable loan guarantee would greatly alter the credit risk of certain mortgages. “There is only demand right now for nominal credit risk” among investors, he observed.
Levitin was dubious of Wallison’s insistence that popular mortgage instruments would survive under a private financing system. “Has anyone in the audience actually taken a 30-year fixed jumbo?,” he asked sardonically. Using Wells Fargo’s product is not a fair comparison to the current lending environment, Levitin said, because “Wells Fargo advertises it, but are they moving those loans in wide volumes? The answer is clearly no.”
Levitin believes some backstop is essential to retaining a broad-based 30-year fixed-rate mortgage, which he calls “consumer friendly” because it allows families to budget around it and doesn’t lock them into staying in their homes.
Levitin did agree with Wallison, though, about the need to address down payments and credit scores. “We should be careful about ignoring loan-to-value ratios.” But Levitin also suggested more dynamic LTVs that could target the affordable housing customers.
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