Proposals for mortgage financing future

Georgia Senator Johnny Isakson recently introduced The Mortgage Finance Act, The Street reports, legislation that would end the government conservatorship of Fannie Mae and Freddie Mac and transition to a fully privatized mortgage market in a decade.

Georgia Senator Johnny Isakson recently introduced The Mortgage Finance Act, The Street reports, legislation that would end the government conservatorship of Fannie Mae and Freddie Mac and transition to a fully privatized mortgage market in a decade.

Fannie and Freddie would be placed into receivership within 18 months, and a new Mortgage Finance Agency would be created to manage aspect of the transitional period. This agency would be fully part of the government, but come into being with a decade time limit in place.

During that decade, it would create and maintain a new fund, similar to the Federal Deposit Insurance Corporation's, which would be funded entirely by the housing finance industry and receive no assistance fro the federal government.

The fund would be the destination of capital accrued by the agency, which would buy mortgages from lenders in exchange for guarantee fees. Those fees would be the same for all lenders, and would also support the expense of supplemental private insurance as time passed.

Eventually, the agency would be sold to the private sector, the source notes. Profits of that sale would then be used to pay residual obligations and expenses associated with Fannie, Freddie and the Mortgage Finance Agency. If any proceeds remain, they would be used to pay down the national debt.

For the most part, legislators seem unprepared to address the question of long-term GSE policy at the moment, with too many other concerns competing for their attention. The Mortgage Bankers Association's (MBA) president and CEO, David Stevens, did raise the topic at a recent hearing on Mortgage Market Reform, however.

"We believe the financial crisis proved that some form of government support is required to keep the mortgage market open during times of severe distress," Stevens stated. "The current dearth of activity outside of government-supported liquidity channels exemplifies the transient nature of private capital. When the market becomes unstable, private investors will exit. And they will be less apt to buy assets even in good times if they doubt their ability to sell them in bad times."

The government, according to Stevens, should promote liquidity in the market through an FDIC-type insurance structure, funded by risk-based fees from private capital. Taxpayer funds would only be used when the securitizing entity and insurance fund both run out of money, and would be returned when possible.

Noting that Fannie Mae and Freddie Mac were protected by the government despite the lack of a federal guarantee beforehand, Stevens suggested the market and taxpayers would be better served by an official and clearly defined government role.



blog comments powered by Disqus