A better future for housing finance?
The Treasury has come up with some good ideas about reforming housing finance.
Today was a big one for housing finance. Treasury kicked things off with its much awaited report to Congress on “Reforming America’s Housing Finance Market.” And then the Brookings Institution hosted a full day conference on “Reforming the U.S. Mortgage Market.“
Both Treasury’s report and the conference showed that there’s still important debate about the potential merits and demerits of a continued government backstop in the prime mortgage market. Treasury’s three options, for example, run the gamut from no guarantee to a backstop guarantee that kicks in during bad times to a permanent, broad-based guarantee. I’ll have more to say on these options in the future.
For now, I’d like to highlight several other aspects of the Treasury report and the discussion at Brookings that I found encouraging. Based on what I heard (and what I read between the lines of the Treasury report), there appears to be near-consensus on five important issues:
- The multi-trillion dollar investment portfolios of Fannie Mae and Freddie Mac were a mistake. As the Treasury report puts it: “Fannie Mae and Freddie Mac were allowed to behave like government-backed hedge funds, managing large investment portfolios for the profit of their shareholders with the risk ultimately falling largely on taxpayers.” Such government-backed portfolios have no place in our future mortgage finance system.
- Any future government assistance must be better targeted. For example, the conforming loan limit (and its FHA counterpart) need to come down.
- If there are any future government guarantees for prime mortgages, they must be protected by greater private capital.
- If there are any future government guarantees for prime mortgages, they must be explicit, and financial firms must pay at least actuarially fair rates to purchase them.
- Affordable housing programs should be transparent and on budget, rather than embedded in regulatory requirements on Fannie Mae, Freddie Mac, or any successors.
Each of these would be a substantial improvement from the old GSE system.
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