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We've Nationalized the Home Mortgage Market. Now What?


The home loan market was nationalized in a slapdash fashion and is now riven by conflicts of interest and competing goals. To solve it, a consensus is forming to head down the path of the least resistance but greatest risk.

At the height of the 2008 financial crisis, the country heatedly debated whether to nationalize the failing banking system. Both the George W. Bush and Barack Obama administrations rejected that path as excessive government intrusion into the marketplace.

Yet since then, with little planning and paltry public discussion, the government has almost completely taken over the American home mortgage market. Banks and other for-profit financial services companies lend money to homeowners, but without the guarantees and other support the government provides, the housing market would barely be functioning now.

Fannie Mae (OTC:FNMA) and Freddie Mac (OTC:FMCC) the taxpayer-controlled housing giants, guaranteed 69 percent of new mortgages in the first nine months of the year, up from about 27 percent share in 2006, according to Inside Mortgage Finance. Meanwhile, the Federal Housing Authority and the Department of Veteran's Affairs currently back another 21 percent of mortgages, up from just 2.8 percent in 2006. Altogether, 9 of every 10 new mortgages are backed by the U.S. taxpayer, up from three in 10 in 2006, when the government share hit a decade-low, according to the publication.

"It is creeping nationalization," says Jim Millstein, an investment banker who worked in the Obama administration's Treasury Department as the Chief Restructuring Officer.

The problem isn't just that the market is nationalized. It was nationalized in a slapdash fashion so that now it is riven by conflicts of interest and competing goals.

The possible solutions are well known and have been for years. But during its first term, the Obama White House made a tactical decision 2014 politically astute but tinged with calculation, some say 2014 not to push for change. Now with the election over, a bipartisan centrist consensus is forming to head down a path that offers the least resistance but could be the most dangerous: returning to what existed before the housing market imploded.

After taxpayers pumped $187.5 billion into them starting in 2008, Fannie and Freddie exist today in a limbo state, under government "conservatorship." They aren't fully private, profit-seeking entities, but neither are they explicit arms of government policy. They act both as profit-seeking businesses and as public agencies.

Freddie and Fannie's main business is insuring mortgages, and they back $5 trillion or about half of the American mortgage market. They buy mortgage loans and bundle them to create mortgage-backed securities, earning fees. If a borrower stops making mortgage payments, Fannie and Freddie step in to continue the flow of payments to the mortgage-backed securities investors. The two companies also invest in mortgage-backed securities.

But Freddie and Fannie are also chartered by Congress to implement public policy goals, such as keeping home ownership available for Americans.

The goals of making a profit and enacting public policy create a deep-seated conflict of interest. Under conservatorship, the conflicts and problems have become amplified.

In recent years, Freddie Mac made it harder for homeowners to refinance their high-rate mortgages for fear it would cut into the company's profits and hinder its ability to repay taxpayers.

No positions in stocks mentioned.
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