They came from banking, Wall Street and from advocacy groups for low-income families, but they showed remarkable agreement on one point: Big Government will have to play a big role in the post-meltdown housing market for years to come.
“Unfortunately, the government is part of our future, not only for the mortgage market but for other markets as well,’’ said Bill Gross, chief executive of PIMCO, the world’s biggest bond investment firm, at a conference on the "Future of Housing Finance" at the Treasury Department on Tuesday.
The conference, held in the Treasury’s ceremonial Cash Room, marked an opening effort by the Obama administration to reform the federal government’s huge entanglement in the $11 trillion home mortgage market. The administration hopes to unveil a plan next year. Some items would have to make their way through an angry Congress full of suspicion about the lending giants Fannie Mae and Freddie Mac.
The federal government currently guarantees more than nine out of 10 new home mortgages in the country, a dominating role that Democrats and Republicans alike say poses long-term risks to taxpayers.
private gains are subsidized by taxpayer losses.”
But in his opening remarks on Tuesday, Treasury Secretary Tim Geithner provided a surprisingly blunt defense for preserving a central government role in the mortgage market.
“Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale,” Geithner said as he opened the conference. “House price declines could be more acute, with even greater damage to financial wealth and economic security.”
To be sure, Geithner said the system needs fundamental change. “We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support,’’ he said. “We will not support a return to the system where private gains are subsidized by taxpayer losses.”
Geithner also endorsed a “wind-down’’ of the companies’ gigantic investment portfolios, which currently hold $1.6 trillion in mortgage-backed securities. Those portfolios generated huge profits during the housing bubble, because Fannie and Freddie were able to finance them with money borrowed at much lower rates than private-sector competitors. But when the mortgage market collapsed, the losses were staggering.
But Geithner cautioned that “reform’’ was about “more than designing an elegant funeral for Fannie and Freddie.” The real problems, he said, stemmed largely from failed regulation, which he said the government has already begun to address. The new Dodd-Frank financial reform bill, he added, will tighten rules even further.
The Root of the Problem
About two-thirds of all mortgages are bought and guaranteed by Fannie Mae and Freddie Mac, the giant “government-sponsored enterprises.” Another 30 percent of new mortgages are backed by the Federal Housing Administration and yet more by the Veterans Affairs Department.
Though Fannie and Freddie are now believed to be earning healthy profits on new mortgages, which are based on much tighter lending standards and higher fees, they are still losing billions from mountains of bad mortgages issued during the bubble.
In the two years since Fannie and Freddie were nearly wiped out by the housing bust, the Treasury has propped up both companies with about $160 billion and the final tab is likely to be twice as high. That tab would end up worsening the U.S. deficit picture.
Geithner’s approach is already drawing fire from Republicans in Congress, some of whom want to pare back or even eliminate Fannie Mae and Freddie Mac over the next several years.
Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee, accused Geithner on Monday of excluding “free market advocates” from the conference.
“Virtually all the participants are proponents of a continued Federal government role in backstopping the residential mortgage market, which implies a continued role for taxpayers in bearing losses in times of crisis,’’ Bachus complained.
pool of mortgages unless the borrowers had
all made down payments of 30 percent.
Compared to the sentiment at Tuesday's conference, however, calls for abolition or worry about deficit impact sounded like they came from a debate in an alternate universe. A wide range of experts, including several legendary players in the financial markets, echoed Geithner’s defense of government guarantees.
Gross, of PIMCO, warned that the absence of government guarantees would send mortgage rates soaring and proposed that the government refinance all mortgages at lower interest rates as a way to stimulate the economy. He said he wouldn’t dream of buying a purely private pool of mortgages unless the borrowers had all made down payments of 30 percent.
Lewis Ranieri, who pioneered mortgage-backed securities at Salomon Brothers more than 30 years ago, said the mortgage meltdown stemmed less from quasi-government institutions like Fannie Mae than from private lenders who developed and sold increasingly dangerous mortgages.
“We kept pushing the envelope further and further,’’ Ranieri said. Fannie and Freddie, he said, were guilty of struggling to keep up with the booming growth in exotic private-label mortgages.
Mark Zandi, chief economist at Moody’s Economy.com, said the government is currently “over-subsidizing’’ the mortgage market and warned that taxpayers couldn’t afford it. But Zandi also insisted that the government had to play a central role.
“There are some significant commonalities,’’ Zandi said in summarizing the views of many conference participants. “One of those commonalities is that the government will have to play a role in the future.”
A One-Sided Argument?
The conference included a few vocal critics who complained that most of the participants were insiders with a stake in the status quo.
Mark Calabria, director of financial regulation for the libertarian-leaning Cato Institute, said he would get the government out of housing almost entirely. He would dismantle Fannie Mae and Freddie Mac, do away with most government guarantees and slash subsidies for low-income housing.
Calabria, a former top Republican staffer on the Senate Banking Committee, said he felt like a complete outsider at the conference. “Two thirds of these people are from industry,’’ he grumbled. “They all want to make money without taking any of the risk. I mean, why even bother to have lenders if the government is going to take all the risk?”
