A Three-Minute Guide to Mortgage Reform

Posted by  on May 24, 2010

Not the Best Mortgage Lending Structure

When the House Committee on Financial Services met recently, there was pretty much universal agreement that the current system for underwriting and selling mortgages is far from perfect. But that's about as far as the concurrence went.

The initial hearing, which centered around the future roles of Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that currently prop up the mortgage loan market, were distinctly partisan. The Republicans poured blame on the government for its continued meddling, lack of urgency, and seemingly limitless financial support. The Democrats pointed to the fact that it was the Bush administration that first seized control of the two bodies, and accused Republicans of lacking credible alternatives.

Mortgage Brokers Urge Hybrid

The Mortgage Bankers Association's chairman-elect, Michael D. Berman, offered the committee a hybrid public/private way forward. This would see private investors putting up the cash to buy mortgages, while the government would retain a role by guaranteeing the credit risk element of the debt in many cases. He said:

The government guarantee would be similar to the one provided by Ginnie Mae--guaranteeing timely payments of interest and principal to bondholders and explicitly carrying the full faith and credit of the U.S. government. This government wrap will help provide affordable financing rates. These guarantees would be supported by a federal insurance fund, capitalized by risk-based fees charged on the supported securities, which also could be a vehicle for an affordable housing fund.

Realtors More Wary

The National Association of Realtors took a more cautious approach. Vince Malta, one of the association's vice presidents, told the committee:

The housing recovery is still too fragile for the government to completely step away, and any disruption in the marketplace now by doing something too radical would be harmful… Neither a fully privatized entity nor a fully nationalized structure for the secondary mortgage market giants effectively addresses the critical issues of loan availability and taxpayer protection. A fully private entity would foster mortgage products more aligned with business goals rather than the nation's housing policy for consumers. In difficult markets, like today's, private lenders have not been willing to make loans without government backing.

Best Mortgage Lending Still a Way Off

According to the Boston Globe, "Fannie and Freddie own or guarantee more than half the country's mortgages, around $5 trillion worth..." And the report goes on: "Since the economic crisis, the two companies have financed nearly all new mortgages, as the private market has evaporated."

So any restructuring of the mortgage-backed securities market is something that legislators really must get right. Whether that justifies the Obama administration's recent statement that it doesn't plan to publish proposals for a restructuring until next year is for you to decide.



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