Who will take on the catastrophic risk associated with making mortgages, a risk that has flared twice since 1989 and has caused the taxpayers hundreds of billions of dollars in losses?
This seems to be the biggest question to emerge out of the question of what to do about Fannie Mae and Freddie Mac. And the answer is, no one wants to take on the risk of catastrophic loss. Not the government. Not private industry.
Lesser risks are easier to plan for. But who wants to go on the line for $150 billion, which is what Freddie and Fannie are costing to date? And there was a similar cost 20 years ago, when the savings and loan industry cratered.
The much-debated future of the GSEs would look a lot more sanguine if the cost of excessive stupidity could be wrung out of the market. Stringent underwriting of mortgages, no credit creep allowed, banning no docs and option adjustables (neg-am loans featured in both mortgage catastrophes) would all help, but who believes we will never see these things again?
Twenty years from now, all the same temptations will be in place and those controlling the purse strings will be too young to remember the disasters.
Maintaining liquidity in the mortgage markets, without putting the Treasury on the hook for the next crisis, are these goals reconcilable? The trouble with private mortgage conduits is that they are not obliged to stay in any market their boards think is undesirable. And they will vote with their feet. That puts liquidity at risk big time, as we have seen in the past several years.
The Federal Housing Administration and the Government National Mortgage Association have done a tremendous job keeping the mortgage market liquid in recent years, in the government reaches of the market, anyway. FHA has never cost the taxpayers a dollar (yet, anyway!) and Ginnie Mae is a reliable money-spinner for the government.
Yet Fannie and Freddie returned billions of dollars to their shareholders, too—until they didn’t any more.
A Ginnie Mae or Ginnie Mae-like entity that catered to first-time buyers and affordable housing, and a private entity that catered to the rest of the market, would be a neat division of the market and the risk. But if you’ve tried to get a jumbo mortgage in the last three years, you will know what the downside of that scenario is.
