The country is still waiting to learn the fate of Fannie Mae and Freddie Mac in the now overdue mortgage finance overhaul previously slated for the end of January as part of the Dodd-Frank bill. Reforms are expected to reduce the federal government’s role in mortgage backing from the current 90% of new mortgages in the U.S. However, while most participants agree that the government’s role in subsidizing housing finance needs to be diminished, the general consensus also holds that completely cutting out government support of homeownership at a time when the housing market is still fragile could be catastrophic. What remains to be seen is how large a role the government will take in promoting homeownership over the long haul.
Mark Zandi, chief economist at Moody's Analytics, and Cristian DeRitis, a director at Moody's, published their solution in a special report, "The Future of the Mortgage Finance System," proposing a public-private hybrid. As reported by The Wall Street Journal, the hybrid system would create five to 10 privately owned, government-chartered mortgage bond insurance companies (MBIC), which would buy eligible loans from the mortgage originators, bundle them, and then offer government-guaranteed mortgage-backed securities through a mortgage securitization facility. MBICs would be required to maintain a reserve of capital large enough to withstand a 25% decline in home prices, and would pay risk-based fees to fill a bailout fund, which would be managed by a federal regulator.
Zandi anticipates this plan will keep mortgages rates 0.9 percentage points beneath what they would be in a completely private market while raising them 0.3 percentage points from where they were before the mortgage meltdown. Compared to a fully private system, he believes his model would produce 375,000 more home sales each year, lead to an 8% increase in median home prices, and boost the homeownership rate by one percentage point.
Both The New York Times and The Washington Post have raised questions about the validity of the idea that federal government backstops are needed to promote homeownership, pointing to other developed nations that lack America’s financial incentives for owning a home and yet have higher ownership rates and lower mortgages. However, Zandi discounts such comparisons, telling The Wall Street Journal that "mortgage lending [in Canada and Europe] is dominated by the banking system, which is generally very concentrated, and as can be seen in Europe, much too big to fail." In addition, finding enough political support to do away with the nation’s beloved homeownership-promoting tax breaks may prove a difficult matter.
The Treasury is expected to release a paper on housing finance’s future this week. FBR Capital Markets predicted in a press release today that changes in the near term will include a lowering of maximum loan limits to $625,000, down from today’s $729,750, and an increased focus on affordable rental housing. It also anticipates the government will cut back its involvement from the current level of fueling 90% of new mortgages to a level as low as 50% over a period of at least five years.
Claire Easley is senior editor, online, for Builder magazine.
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