Congressman Jeb Hensarling writes,
The compromise plan would permanently repeal the Fannie and Freddie charters, ending the monopoly model. In its place it proposes using Ginnie Mae, the government corporation that explicitly backs the payment of principal and interest to investors in Federal Housing Administration and other government-insured loans. The proposal would direct the corporation to guarantee qualified privately insured mortgage-backed securities.
Loan originators would have to acquire coverage from an approved “credit enhancer,” or private mortgage credit guarantor, to use the Ginnie Mae system. That would function as a private capital buffer on the loan, which could then be securitized by any of Ginnie Mae’s more than 400 approved issuers with an explicit, full government guarantee of mortgage-backed securities.
To protect taxpayers from new risks, the credit enhancer’s guarantee would be market-priced and backed by the strength of its balance sheet, which requires bank-like capital. Credit enhancers also would have to use risk transfers to disperse credit risk horizontally and participate in a rainy-day fund to protect against unexpected financial downturns.
The thing that most people don’t realize is that the way that Freddie and Fannie operate right now achieves most of the objectives of this restructuring proposal. That is, the agencies transfer a lot of the credit risk on their securities to private entities.
There are ways I would like to see the current system tweaked: consolidate the loan purchasing functions of Freddie, Fannie, and FHA into a single unit, so they do not create opportunities to take advantage of whichever one offers the most generous terms; eliminate all government support for loans with a purpose other than owner-occupied house purchase or rate-and-term refinances–get rid of support for second mortgages, investor loans, loans for second homes, and cash-out refinances; keep loan limits low, and perhaps lower them from where they are now.
If you wanted to try to steer Americans away from the 30-year fixed-rate mortgage, then you could be more aggressive with reforms. But that is not a fight I can imagine politicians wanting to start.
My guess is that anything Congress initiates to try to improve our current housing finance system will in fact make it more fragile.
It may be brave of me to say this, but I would describe the current state of housing finance in America as, “It ain’t broke, don’t fix it.”
There is no problem so vast or complex that can’t be made infinitely worse by an act of Congress.
Not to belabor a point but the problem with housing in the US is not finance, it is zoning.
Just one tiny thing?
Let us give all the government enterprises and major funds their own Fed account so we can simply a bunch of stuff. Simple to achieve and it makes he Fed have an easier task. The fed allows a lot of this now using a bizarre reverse, repurchase triple play thing. major governments funds, many distinct from each other in form and function, let them keep a cash account at the Fed.
The 2008 banking crisis was ultimately caused by the fact that credit-default swaps were not regulated as insurance, so companies were allowed to issue them without having the reliable capability to pay claims when due. If that situation has not changed — and if it has, I haven’t heard about it — then it can happen again anytime.