Do We Really Need This Sort of Thing?

The Federal Housing Finance Agency, according to The Wall Street Journal, is looking at the development of a system that could replace both Fannie Mae and Freddie Mac, whose continued financial existence is an open question.

Given the lack of coherence in Congressional or Executive support for reform in this arena (beyond agreeing that “something” ought to be done “real soon now”), the FHFA wants to maintain flexibility in its own views of how deeply the government should support the $10.3 trillion mortgage market.

One of the things the FHFA is considering is combining the several forms of mortgage-backed securities (all those MBS, CMOs, etc. of not-so-long-ago fame) that Fannie Mae and Freddie Mac write into a single, standardized (mortgage-backed) security that each would issue.  The idea is that with this single instrument issued by both, it would be easier to eliminate both FMs in favor of a single agency.  Simplification is a step in the right direction, but this seems just a variation on a theme, and not real reform—it would retain the concept of a government agency in the mortgage business.

Another option under consideration is the transfer of mortgage portfolio responsibility to a third-party investment firm, but FHFA says that doing this would likely be more expensive and come at higher risks for the regulator.   But this perpetuates the myth that a government regulator should be involved at all.

In the meantime, in the administration’s usual vague manner, Treasury Secretary Timothy Geithner “pledged to lay out more detail on the administration’s approaches to reforming the U.S. housing finance system this spring.”

Why not carry out real reform, and get government out of the housing market entirely, while freeing the lenders to lend according to actual risk assessments, with no favoritism forced for government-approved groups of borrowers?

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