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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.

Meanwhile, Fannie and Freddie had become politically toxic. Peter Swire, a law professor at Ohio State who was a special assistant for economic policy under Summers in the Obama administration, recalled driving through rural North Carolina during Christmas in 2009. Local talk radio was dominated by diatribes against Fannie and Freddie as symbols of what was wrong with the bailouts. "How the heck do you do any policy work when the topic is so radioactive?" he says.

And so, after the administration issued its white paper in 2011, little happened in Congress or the White House.

Back to the Future

In the meantime, the FHFA is making a series of small decisions that ultimately could shape the future of Fannie and Freddie.

In working to increase the profitability of Fannie and Freddie, the FHFA is restricting mortgage credit and sometimes interfering with homeowner rights, critics say. Recently, the FHFA announced that it was considering a plan to raise its guarantee fee in five states which have high foreclosure costs. One reason for that: These are states where judges oversee foreclosures, which housing advocates argue can provide transparency and due process for homeowners. Without judicial foreclosures, it is unlikely that the banks' "robo-signing" abuses would have come to light back in 2010. In effect, these critics charge, the FHFA is punishing homeowners for living in states that provide crucial judicial oversight of the banks.

In another move, the FHFA has forced banks to put back on their own books the risk on mortgages that Fannie and Freddie have guaranteed. Fannie and Freddie have done this in cases where they later discovered that the firm that originally made the loan violated the terms of its contract. These aggressive "putbacks" have made banks wary of making new mortgage loans, say analysts.

These policies have the effect of working at cross-purposes to other arms of the government, such as the Federal Reserve, which is pushing down rates to increase lending. "The Fed is trying to open up the spigot to bring water to fight the fire. The FHFA is squeezing on the hose, holding credit standards that are tighter than any time in the last 20 years," says Christopher Mayer, a housing economist from Columbia University.

Today, Washington observers think that conventional wisdom is coalescing around something resembling Option 3, a return to the hybrid of a private and public finance market. The view is that private capital is needed in the market. But without a government role, the housing market would wither. Many believe that the 30-year mortgage, a pillar of the American Dream of homeownership, might cease to exist, since banks might be reluctant to offer a loan to be paid back over such a long period without some kind of government insurance.

This time around, private investors would be on the hook for the initial losses and Fannie and Freddie would not in theory charge too little for their insurance, as they did in the lead-up to the crisis.

Given that, Swagel, the former Bush appointee, contends that there is plenty of overlap between the mainstream Democratic and Republican views. A conservative, he agrees that the government should play some role in housing. "That's what the government is there for. Just do it explicitly and do it well," he says.

No positions in stocks mentioned.
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