Housing Finance System Future Is Wide Open

The White House, which this year punted on reorganizing Fannie Mae and Freddie Mac, is open to suggestions from the public on how to reshape the entire U.S. mortgage industry.

On April 15 the Treasury Department will issue a list of questions seeking public comment on the role government should play in residential finance and priorities for federal housing policy. In addition, the agency will seek input on the characteristics of mortgage products the government should guarantee and best practices to ensure consumer protection.

Treasury secretary Timothy Geithner wants all stakeholders to participate in the development of a comprehensive housing finance reform proposal that likely will be presented to Congress next year. "We are at the moment now where there is a huge compelling need to make sure we design a successful system," Geithner told a House panel.

Treasury is currently funneling billions of dollars of taxpayer money into the conservatorships of Fannie and Freddie, with the government standing behind the GSEs' corporate debt and mortgage-backed securities.

Fannie and Freddie, to date, have tapped Treasury for $127 billion in assistance with the agency saying the government is facing "substantial losses on the inherited commitments" of the two. Geithner blames the GSEs' large investment portfolios for these losses, saying the two failed to charge appropriate guarantee fees on low quality loans.

"We are going to have to take a careful look at how to design a better form of guarantees," the secretary said, so they are "carefully calibrated" and "appropriately priced."

The Mortgage Bankers Association recently proposed using Fannie and Freddie's infrastructure to create a handful of newly chartered mortgage credit guarantor entities that would aggregate mortgages for securitization.

A new Ginnie Mae-type entity would provide a federally guaranteed wrap for the mortgage credit guarantor entities' mortgage-backed securities. The MCGEs would pay a risked-based fee for these wraps and depend on risk-retention from lenders and private mortgage insurance to cover their guarantee on the individual loans.

MBA president Michael Berman favors the Obama administration winding down Fannie and Freddie now. He suggested a good bank/bad bank strategy would help retain the best people, processes and infrastructure from the GSEs.

Creating two MCGEs at the beginning is "probably an easier way to a smooth transition," Berman said. Later, the new housing finance regulator could charter more privately capitalized MCGEs to increase competition and avoid another Fannie/Freddie duopoly.

Treasury has made no comment on the MBA's idea, but Geithner said it is critical to "make sure you don't have institutions with private shareholders taking advantage of a subsidy from government that leaves the taxpayer exposed to the risk of financial losses."

In recent testimony Geithner also noted the Federal Home Loan Banks are facing "challenges" and their role in the housing finance system needs to be examined, too.

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