As the mortgage industry waits with bated breath for the Treasury Department to present its fix for Fannie Mae and Freddie Mac, it’s good to remember that thoughtful people already have been suggesting solutions for this intolerable $150 billion chit against taxpayer dollars that the two represent.
A recent poll conducted on our website found that by an overwhelming margin, industry observers don’t think Treasury can even meet its Jan. 31 deadline. That inspires confidence in the process, doesn’t it?
We think the government will come up with a plan in two weeks’ time, but will it be a good one? There may not be a good solution, only a series of less bad ones.
An intriguing idea is to combine Freddie, Fannie and Ginnie into a “super Ginnie Mae.” Why, after all, have three? Freddie Mac came into being, for instance, to support thrift liquidity, not a pressing problem these days. Why not put all the eggs into one basket?
The obvious disadvantage to this solution is that it also puts the risk all in one place—ultimately, the taxpayers. Now, Ginnie Mae makes money for the government, by charging for its guarantee, and the Federal Housing Administration, the biggest source of Ginnie Mae loans, has never lost a dollar.
Of course, that doesn’t mean FHA won’t lose money in the future! Its capital is nearly depleted now.
The reason for the government’s big exposure on mortgages is that it is backing the industry’s entire play currently. The mortgage industry has been effectively nationalized. The nonconforming market vanished in the Great Recession and has not reappeared. It used to be a clear progression—a borrower’s first loan would be an FHA, for a starter home, then they’d step up to a conventional loan for a bigger home to start a family, and then, if successful in life, move on to a jumbo mortgage.
Having a “super Ginnie Mae” would let the government pick what range of home it is interested in subsidizing, to decrease its involvement (say, to 75% of the current conforming limit) and leave the rest to the private market.
The downside of that is there is no such market today. Will it reappear? Yes, but slowly. So there would probably have to be a time frame established for the switch, and not dump it all at one time on a market that has no capacity.
