Commission recommends killing Fannie and Freddie

(MoneyWatch) Are we ready for a mortgage market without Freddie Mac and Fannie Mae?

The Bipartisan Policy Center, based in Washington, D.C., says we should be. It recommended a number of federal housing policy changes in a report released this morning, including the near erasure of government-backed lending and encouraging more private lending to credit-worthy homebuyers.

The report, "Housing America's Future: New Directions for National Policy," set out guidelines to establish a number of policies designed to rebuild the private mortgage market and provide better access to housing for homebuyers and renters.

Chief among the recommendations was eliminating government-sponsored enterprises Fannie Mae and Freddie Mac and replacing them with a completely government-owned entity called the Public Guarantor. This new entity would operate similar to Ginnie Mae, guaranteeing the timely payment of principal and interest payments on residential mortgages without buying or selling mortgages or issuing mortgage-backed securities.

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While it was necessary for the government to step in when the market collapsed about five years ago, the government's current role in financing housing has ballooned beyond what is sustainable, the commission argued.

And in fact Fannie Mae, Freddie Mac or the Federal Housing Authority now support 90 percent of single-family mortgages, a business model that "has failed and should not be repeated," according to the report, a statement backed by recent news that the FHA faces billions of dollars in potential losses for the first time in its nearly 80-year history.

But the process of transitioning from a government-dominated mortgage system to a private one will take between five and ten years and include several steps along the way.

"It's not going to be a radical dramatic change," said commission co-chair Mel Martinez, a former Republican senator from Florida, who is also a former secretary of the U.S. Department of Housing and Urban Development.

The federal government would reduce the size of the GSE portfolios, move pricing structures closer to what one might find when private capital is at risk and lower GSE loan limits so that bigger loans do not qualify for a government guarantee and are moved instead to the private market.

"Far more private risk-bearing capital must flow into our nation's system," Martinez said during the press conference.

The government's role through the Public Guarantor would provide a limited guarantee for catastrophic risk, the likes of which we've only seen in the recent housing crash. The government's role in guaranteeing mortgage-backed securities would only be triggered after all private equity is wiped out.

"Our new model clearly delineates the respective roles of the government and the private sector, and establishes a clear expectation that private firms suffer the consequences of poor business decisions by losing their capital, with no bailout for private shareholders or bondholders," the report states.

This government-guaranteed money would also come from a pre-established fund, not money allocated by Congress in an emergency, Martinez said.

Furthermore, the commission wants to see the FHA move back toward its traditional mission of primarily serving first-time homebuyers who don't have enough money for a sizable down payment and have limited access to housing.

In the report, the commission also expresses concern that far too many creditworthy people are being denied housing due to overly strict underwriting standards.

"The credit pendulum has swung from one extreme to the other," said commission co-chair, George J. Mitchell, a former Democratic senator from Maine.

The average qualifying FICO score for a Fannie Mae or Freddie Mac loan has increased by 40 to 50 points over the past decade, from around 710 to 715 in 2001 to 760 by today's standards, according to data in the report obtained by CoreLogic.

The report points to "unnecessarily rigid down payment, debt-to-income, and credit score requirements" as one of the obstacles facing potential homebuyers today.

"We believe these issues must be resolved before the housing market can be fully recovered," Martinez said.

The Bipartisan Policy Center is a non-profit organization largely filled by former Democratic and Republican politicians that promotes policy recommendations to Congress and the president's administration. The recommendations must still be adapted by the president or a member of Congress, so it may be a while before we see any of these recommendations -- in one form or another -- pop up for a vote in Congress.

[chop2013]

Hong Kong had similar experience in 1997. Housing properties dropped 60-70% in value and it took more than 10 years to fully recover. We did not collapse, because all banks in HK were restricted from innovative investment ideas such as sub-prime MBS or risk transfer to insurance companies. Sharing HK experience, US government may be drawing a wrong conclusion to the housing crisis. F&F is not the root cause. If US government is to allow the sub-prime MBS and risk transfer to AIG, the same will happen again with or without F&F.

F&F are beneficial to the house owners. They paid about 1.5-2% less in mortgage rate for many years.

[nick0841]

This is the right move. Let's give the mortgage lending divisions of the banks that caused the economic mess more power to enrich themselves and permanently tank the economy and the rest of us!!

[taylorsucram]

Precisely ... let's go "ALL-IN" and gut this country once-and-for-all.

[Jaylah54200]

I don't think the federal government ever had any business getting into the mortgage loan business.

I can understand VA loans. You normally have to be in a job for several years before a mortgage lender will give you a home loan. For the men and women who have been in our military, if they've got enough money to make a down payment on a home once they leave the service, the fact that they've just recently "changed jobs" shouldn't be held against them.

I do believe that all Americans have a right to fair and decent housing. So I don't oppose local governments having rental housing statutes, or the federal government having a fair housing law.

But I know of nothing that states that all Americans have a "right" to own their own homes.

[jschm2681]

WOw- So Dodd and Frank protected these guys and collected loads of campaign funds. They said as late as July 2007 F and F were great companies and didn't need more regulation. Democrats on the take prevented further regulation of 2 companies that had a major part in the subprime mess. And these 2 jokers get to write regulations in Fin Reg that the regulators haven't even finshed writing the rules for. The Democrats cause the problem and then they blame Republican and get to create regulation that is killing the economy. What a joke

[sandiegopete]

Not so sure another government agency is the answer. Then again, today's financial institutions have zero interest in making home loans. The have zero interest in making business loans. Today's banks make money by taking deposits and using them to engage in things like derivative trading. That is more profitable than making loans. Of course, there is much larger risk but why should the banks care about risk? After all, they are gambling with other peoples' money. Bank executives reap the benefits of high risk gambles and the depositors take the fall if the gambles lose. It is the new American banking culture: fast and loose.