WASHINGTON (CN) – A panel of economists and housing market experts advised lawmakers on Wednesday that the government should scale back its role in the housing finance market by reducing the mammoth portfolios of Fannie Mae and Freddie Mac and turning more mortgage securities over to private firms.
“There is strong political and economic will to decrease government involvement in finance,” Tom Deutsch, executive director of the American Securitization Forum, told members of the House Financial Services Committee.
Panelists testified that the large holdings of the government-sponsored enterprises Fannie Mae and Freddie Mac, the two biggest government providers of mortgages, contributed to the ballooning of credit that helped cause the 2008 financial collapse.
Housing experts advised Congress to preserve what’s good about the current housing finance system, such as government securitization of assets and the TBA, or To Be Announced, market, and get rid of what poses a danger to the economy. Maintaining the TBA market, which enables the pooling and sale of mortgage-backed securities, allows originators and investors to hedge themselves, giving borrowers peace of mind, Deutsch said.
Most of the nine panelists proposed skimming down portfolios of Fannie Mae and Freddie Mac but still providing a government guarantee for mortgage-backed securities.
Ed Pinto, a real estate financial services consultant, voiced the strongest opposition against continued large-scale government support of private mortgages.
“A government guarantee always ends up with the privatization of profits and the socialization of losses, period,” he said.
“When you’re an alcoholic and you’re hooked on leverage … there is no time like now to stop taking that drink,” Pinto said.
He said the government should send a message to the market that it will stop rolling forward guarantees in order to give the private sector room to reassert itself.
But skeptics of Pinto’s plan argued that the liquidity of Fannie Mae and Freddie Mac was so large that it would be impossible for private firms to compete.
Pinto said the market worked successfully with private sector involvement in 1990 before the 1992 Government-Sponsored Enterprises Act “destroyed it.”
He said that if the private sector were not forced to meet artificial housing goals set by the government and were allowed to use instruments such as prepayment penalties, the market could shift back to including more private mortgage firms.
He said such a shift would require would-be homeowners to make sizable down payments, assert proof of sufficient income and perhaps face penalties.
But Pinto said such measures would be necessary, because the private sector will not go up against a “brick wall,” a phrase he used to describe the nearly 90 percent market share of government-backed mortgages.
He said housing had a place in the free market like other critical needs, such as food and clothing.
“You have so nationalized this process that if you were running the food chains and they all looked like post offices … you’d be hard-pressed to figure out how to bring Giant and Safeway into being,” Pinto said.
He predicted that it would take 10 to 15 years to get back to a system with large private-sector participation.
Deutsch said the strong political and economic will to decrease government involvement in housing finance made change possible. Noting that 89 percent of mortgages established in the first half of 2010 were guaranteed by government-sponsored enterprises, Deutsch said, “There isn’t a shortage of opportunity to achieve this goal.”
Michael Farrell, CEO of Annaly Capital Management, supported a continuing government guarantee on housing market assets to keep prices from changing radically during the shift to a private capital-based system, arguing that “there isn’t enough capital in the universe” to fund the current housing holdings.
Christopher Papagianis, managing director of the nonprofit economics research group e21, warned that future government bailouts were imminent if incoming private firms were not required to have sufficient capital.
“These are the early innings of reform debate,” he said.