The extent that the federal government should guarantee mortgages—and indeed, which mortgages should be guaranteed—was the focal point of an animated, if sometimes arcane, discussion among housing and financing experts that kicked off Tuesday’s Conference on the Future of Housing Finance in Washington, D.C. The Obama administration organized this day-long event to help it develop comprehensive reforms to present to Congress by next January.
Treasury Secretary Timothy Geithner, who moderated the first panel, set the tone by laying out four questions he believes need to be answered before reforms can be formulated:
• Should the federal government provide a form of guarantee or insurance against losses to maintain stability in the housing finance system?
• What role should the government play in providing financial support to improved access for affordable housing?
• How intrusively should the government regulate mortgage securitization?
• How does the country best manage the transition to a new housing finance system?
Geithner, of course, has his own prescriptions for these questions, which revolve around weaning markets away from government programs to make way for more private sector involvement, keeping interest rates low, and winding down Fannie Mae and Freddie Mac—both currently government conservatorships—but making sure they have adequate resources to meet their current commitments.
He and other panelists were in general agreement that Fannie and Freddie, whose bailouts have already cost taxpayers $145 billion, are untenable in their current operating form. But without some kind of government backing of mortgages, Geithner also foresees “more severe” future recessions because the financial markets wouldn’t have the capital to support mortgage lending “on an adequate scale.”
The panel was basically in sync as well that the government’s role in housing finance needed to be more “limited.” What that means, though, depended on who was speaking. Susan Wachter, a professor at the University of Pennsylvania’s Wharton School, and Barbara Desoer, president of Bank of America Home Loans, were among the panelists who favor the continuation of FHA as a mortgage underwriter. There was also unanimity among the panelists about developing reforms that bring more private-sector liquidity into the housing finance sector. But, according to Wachter, those reforms need to move private capital into a “first-loss position” to minimize the government’s risks and losses.
Ingrid Gould Ellen, a professor with New York University’s Furman School of Real Estate and Urban Policy, thinks the government should “ratchet down” its involvement in housing finance to where it covers only catastrophic losses. “I think such a guarantee, even limited, could provide the kind of liquidity” that would be necessary to reinvigorate housing finance.
The panel’s most compelling proponent of government’s limited role in the housing finance sector, though, was Alex Pollack, a resident fellow at the American Enterprise Institute (AEI), who wants government guarantees to be limited to the median house prices in each geographic market, and those guarantees to be adjusted as house prices change. He reiterated AEI’s long-held position that Fannie and Freddie be eliminated eventually. And he would like to see the government’s involvement in housing finance to drop under 30% of the total secondary market, compared to 95% today. Pollack also wants reforms that include “counter-cyclical” loan-to-value ratios, and support a strong private securitization market.
On the other side of this debate was Bill Gross, co-founder and co-chief investment officer for PIMCO, the global investment firm. “In an $11 trillion secondary market, with the government [holding] a good portion of that,” he asserted that it’s “unrealistic” to imagine the private sector stepping in and replacing Fannie, Freddie, and Ginnie Mac. He said the government’s ongoing position in housing finance is “a necessity” and warned that without government guarantees, mortgage rates would be three or four percentage points higher, which would prolong the housing recession for years to come.
Gross cautioned that without some form of government backstop, PIMCO would not buy any portfolio of mortgages that was privately insured unless those mortgages required a minimum of 30% down payment from their borrowers. (He also recommended that the government refinance all housing-related loans with interest rates between 5% and 7% by reducing them to 4%, which he estimates could produce a $50 billion to $60 billion stimulus.)
The government’s role in supporting affordable housing didn’t receive a full hearing at the panel discussion. But Mark Morial, president and CEO of the National Urban League, reminded the panelists and the audience that reforms can’t shrug off the housing affordability issue. “One thing I don’t want is for homeownership to become available to the few, and we create a class of renters,” he stated. Morial also seemed to favor the continuing existence of several housing-related agencies, as opposed creating one mega-agency. What he wants to avoid, he said, was “for everyone going to the altar of FHA.”
John Caulfield is senior editor with BUILDER magazine.
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