Priming the Private Mortgage-Guarantee Sector (Very Carefully)
Amid all the tough talk about the need to wind down Fannie Mae and Freddie Mac and privatize mortgage underwriting, even many of the tough-talkers say that the existing system still offers a variety of loan products well worth guaranteeing, and a few other products at least worth preserving in formaldehyde.
In a recent essay published by The Weekly Standard, Arnold Kling, an adjunct scholar at the libertarian Cato Institute and member of the Mercatus Center at George Mason University, doesn’t advocate banning adjustable-rate loans, for example, but he says there is no reason for the government to provide backing for them. Rather, guarantees should be limited to the original meat and potatoes of the mortgage market: 15- and 30-year loans whose customers have put down 20% or more, or have at least purchased private mortgage insurance if their down payments are under 20%.
Of course, Kling says that loans whose contrivances constitute the “booze of dubious lending practices” – those which greatly accelerated overborrowing – should forever be ineligible for government guarantees: loans to non-owner-occupied borrowers; loans offered on down payments of less than 10%; cash-out refinances; negative amortization agreements; and, basically, any loan agreement with ridiculously lenient terms.
About that excess inventory …
Fair enough. But even conservatives realize the need to proceed cautiously on this, since it will take time – years – to ramp up the private market while Fannie and Freddie phase out by, for example, raising their guarantee fees enough to allow private firms to compete, by gradually reducing the Fannie/Freddie market share, and by limiting the kinds of mortgages they can guarantee.
And yet even advocates of lending prudence and privatization will acknowledge an immediate housing-market problem that continues to itch like a hair shirt: foreclosures, whose persistence is aggravated by, of all things, tight credit.
Yes, the National Association of Home Builders’ favorite topic. But the subject has lots of other industry groups thinking hard about to deal with it, and maybe exploit it.
As noted this week in the Boston Globe’s Boston Real Estate Now blog, one of the pioneers of the private mortgage-backed securities market, former Salomon Brothers bond trader Lewis Ranieri, has been warning that the push toward privatization for mortgage guarantees and its accompanying credit strictures could tear the housing market “apart at the seams.” He suggests setting up special financing programs aimed at investors eager to snap up the backlog of bank-owned properties.
Of course, as the Globe points out, that sounds like a Wall Street guy calling for help with a nice little market-making project that probably would benefit Wall Street more than any other sector. To be honest, though, it wouldn’t be that surprising if Wall Street followed through on the idea, with or without the government’s help.