Freddie or not
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The new top regulator of Fannie Mae and Freddie Mac thinks the U.S. needs more mortgages. Mel Watt, the head of the Federal Housing Finance Agency (and ex-Democratic congressman), gave a speech at Brookings this week sharply diverging from his predecessor’s goal to wind down the mortgage giants. The goal going forward is to relax regulation to make it more likely banks will lend to homeowners with less-than-perfect credit. The WSJ has a great chart comparing credit score distribution of people who qualified for loans in 2001 and 2013. Needless to say, it’s a lot harder these days.
“What could go wrong?” the Economist writes, calling Watts’ plan the “return of the toxic twins”, whose risky investments (and loose credit standards) helped inflate the housing bubble prior to 2008. But a Bloomberg View editorial argues that Watt’s proposal makes sense: “It’s unclear how much the changes will boost mortgage lending or the housing market, but there’s no need to worry that they’ll bring back the crazy lending of the boom years”. For one thing, they say, “delinquency rates on loans guaranteed since the crisis have been close to zero”.
Watt says his goal isn’t permanent conservatorship of the government-sponsored enterprises, but just keeping things on the right track until Congress can get its act together. “Our role is to maintain an efficient credit market, and as private capital demonstrates that it will come into this market, it will be clear that Fannie and Freddie will step back”, he said in his speech.
There are several bills in Congress that attempt to wind down Fannie and Freddie, but none of them have much hope of passing. Tim Johnson (a Democrat from South Dakota) and Mike Crapo (a Republican from Idaho) have gotten the closest, with a bill that was voted out of committee onto the Senate floor Thursday. It “would construct a new market system in which private investors would take initial losses on mortgage securities that would carry government reinsurance”, writes Nick Timiraos. Barry Ritholtz calls it an “idiotic proposal”. Matt Levine suggests that in order for private capital to take over for Fannie and Freddie, the government will need “to go a bit of the way toward understanding what private capital wants — something that it does not seem to have done very much of, judging from the Johnson/Crapo proposal”.
Regardless, it’s unlikely to get enough Democratic support, especially before the upcoming midterm elections. “In the meantime, attention will shift to federal courts”, says Timiraos. Fannie and Freddie are fighting shareholders over profits, which because of a 2012 ruling, currently go almost entirely to the Treasury department (Matt Levine explainer here).
Ben Lane cites analysis from Keefe, Bruyette and Woods, who don’t think GSE reform is going to happen until 2017. The analysts “suggest that the legislative efforts for reform may eventually evolve into turning the GSE’s into a government-run utility similar to Ginnie Mae to guarantee mortgage-backed securities”, he says. — Shane Ferro
On to today’s links: