Can housing market survive without Fannie Mae and Freddie Mac?
http://www.nj.com/business/index.ssf/2013/08/can_housing_market_survive_wit.html
In a crowded high school gymnasium in Phoenix, President Obama renewed his call this month to phase out Fannie Mae and Freddie Mac, the government-backed lending giants that needed a $187 billion bailout five years ago.
“For too long, these companies were allowed to make huge profits buying mortgages,” Obama said of Fannie and Freddie, “knowing that if their bets went bad, taxpayers would be left holding the bag. … Private capital should take a bigger role in the mortgage market.”
Fannie and Freddie, along with the Federal Housing Administration, back about 90 percent of the home mortgages in the country. Shifting a burden that size to the private sector could redefine the American dream of homeownership and cause a ripple effect through the economy, housing market watchers say.
Fannie and Freddie are publicly traded companies that buy mortgages from banks and lending institutions and resell them to investors with a federally backed guarantee that the loans will be repaid. When the economy is good, the companies, known as government-sponsored entities or GSEs, make money. When the bottom falls out of the housing industry as it did in 2008, the government insures against their losses, lowering investors’ risks.
Buying the mortgages frees up the banks’ resources to offer new loans.
Together, Fannie and Freddie were taken over by the government during the George W. Bush administration and received $187 billion in bailout money in 2008. They have been paying it back, with interest. Two days after Obama’s speech, Fannie reported a $10 billion second-quarter profit and anticipates it will have paid back $105 billion by the end of the third quarter. Freddie Mac turned a $5 billion profit in the past quarter.
The fear remains, however, that taxpayers are still at risk in another crisis, and most parties agree that ending the government’s dominant role in the mortgage market is an important move.
“It’s a very good idea,” said Ron Shapiro, director of the Center for Real Estate Studies at Rutgers University’s School of Business. “Clearly, it’s an idea the marketplace has had for some time. You don’t want to be in this business if you can find someone else willing to take the risk.”
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• Obama wants to shutter Fannie Mae and Freddie Mac
But he emphasized the move should be made slowly, and with caution.
Fannie and Freddie hold between $9 trillion and $10 trillion in mortgages. Getting private investors to carry that load will take time.
“I don’t think there’s enough private capital out there today to take care of what government agencies are supposed to do,” said Shapiro. “And investors are still a little leery. It’s only been a few years since the economic crisis. It’s a great concept, but finding who in the private sector will want to take those risks may be a challenge.”
Matt Krause, senior director at Integra Realty Resources in Whippany, the largest independent real estate valuation and consulting firm in North America, believes there is enough private capital out there to carry the load.
“A lot of the pension funds and life insurance companies have been sitting on the sidelines,” he said. “They may see an upside in the housing market and they may see it as a good place to put their money.”
As outlined in the Obama administration plan, the government won’t step back completely from guaranteeing the loans will be paid, but will let the private sector absorb most of the risk. When that money evaporates from the market, the government will step in, meaning taxpayers could still be on the hook, but their risk is significantly reduced.
“You need some sort of a federal guarantee to make this market work,” said E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey. The primary goal, he said, should not be about protecting the taxpayers as much as determining the nation’s priorities.
“There has to be a change. The question is, how do we do it and how will it affect the overall objective of providing home ownership in the United States. How important is it to continue the flow of financing for people who otherwise wouldn’t be able to purchase a home? It’s a difficult issue to address, but if there isn’t a big discussion, then you’re making a big mistake.”
Levy said that without a federal guarantee, the risk to investors goes up, which in turn would lead to higher costs for a mortgage, fewer people applying and being accepted, and a drop in home ownership. He added that looking at the issue solely through the eyes of taxpayers is understandable, but it misses the bigger picture.
Clearly, it's an idea the marketplace has had for some time." Ron Shapiro
“My concern is we don’t oversimplify where we’re going,” he said.
The White House proposal mirrors a bipartisan bill sponsored by Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn) that outlines a five-year transition period for phasing out Fannie and Freddie and replacing them with a system that relies more heavily on the private sector, but still allows the government to step in if private capital becomes exhausted.
Rep. Scott Garrett (R-5th Dist.), chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, has been in the forefront calling for the government to wind down Fannie and Freddie, but says he can’t support the Senate version of the bill.
“Not as long as they continue to expose the taxpayer to another potential tens-of-billion-dollar bailout,” he said.
“Their bill continues having taxpayers bear the risk, and we want to end that,” he said. “They say they are providing additional layers of protection, but ultimately if those layers are not adequate, you will get to the bottom layer, which is the taxpayer.”
Garrett said his measure in the House provides a mechanism for government involvement during extreme downturns, but it would be accomplished through reforms to the FHA.
Sen. Robert Menendez (D-N.J.), a member of the Senate banking committee along with Warner and Corker, said, “The question isn’t just what happens to Fannie Mae and Freddie Mac, but what system replaces them. I think we’re seeing a growing bipartisan consensus that there needs to be some kind of government role going forward in order to maintain access and affordability, but that we can’t have a situation where private market actors have incentives to take large risks where they keep the upside and stick taxpayers with the downside.”
Julia Gordon, director of housing finance and policy at the Center for American Progress, said the Dodd-Frank Act, which gives the government more oversight of the industry, is key in turning more of the responsibility over to the private sector and protecting the consumer.
“Dodd-Frank makes it less likely that the mortgage industry can go off the deep end,” she said.
“Where the president is is where the majority of the stakeholders in the industry are,” she added. “What matters to me is that the (Dodd-Frank) safeguards are in place to serve a broad market so both the rich and the poor can buy a home. It’s critical to keep an eye out so that everyone is being served equally.”
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