Congress has decided to put legislation on resolving the GSEs either on a fast track or on a backburner, depending on what you read. After all the shenanigans of the past few years, it is hard to believe the Do-Nothing Congress will agree on anything!
Elsewhere on this page is a sober, reasoned look at the GSE problem by James Lockhart, a former GSE regulator. He puts in a good word for the Corker-Warner legislation and the proposed Federal Mortgage Insurance Co. He also says Congress must act to reduce mortgage market volatility, and that the GSEs should not be allowed the power to do systemic damage.
All well and good. A trial balloon floated about reducing the GSEs’ loan limits is a step in the right direction, but probably too modest ($400,000 versus $417,000). Fannie and Freddie bought no subprime mortgages, but they did contribute to the crash (and taxpayer loss) by investing in securities backed by these feckless mortgages. They should not be allowed to invest in such risky products, ever again.
Reducing the volatility of housing finance—there’s a lofty goal. One thing that might help would be to reduce our national debt to zero, or as close as possible to that. (Not very easy to do, of course.) That might help interest rates be less subject to the supply and demand swings of issuing debt and take some of the wind out of the wonderful roller coaster ride of volatility.
We’re kidding ourselves if we think any private insurer is going to pay for catastrophic losses. These will be incurred again by the taxpayer. And the outlook here is that it will happen again, hopefully not for many more years.
Meantime, it will be best to streamline the agencies. Why not go from three to one? Let’s call the combo Ginnie Mae, since that one hasn’t cost the taxpayers and in fact runs on a profit to the government. Low-mod lending, with a modest top line on loan limits ($325,000?) should be its mandate.
This will increase the size of the jumbo mortgage market, surely. But with jumbo yields lower than conventionals recently, all the perceived wisdom can be thrown away, and a brave new world ensue.