Last week, I spotlighted three ominous trends in consumer banking. The last one spotlighted a brewing war “between the private bank sector and the government over who exactly controls the allocation of consumer credit in this country.”
By far, the most important front in this battle is over the future of housing finance. Today, the government is underwriting or assuming 100 percent of the credit risk on practically every new mortgage that’s originated. With regard to outstanding mortgages, the government is responsible for 100 percent of the default risk on about $6 trillion of the roughly $10 trillion market.
Thankfully, there is some real hope that a somewhat clandestine reform effort is about to commence that would start to shift a portion of this credit risk back to the private sector. The leader of this effort is the much-maligned regulator of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. After Fannie and Freddie were bailed out and then taken over by the government in 2008, Edward DeMarco was named acting head of the Federal Housing Finance Agency (FHFA) and conservator of the GSEs. He was tasked with a nearly impossible balancing act or mission:
mitigating Enterprise losses, which ultimately accrue to taxpayers; ensuring families have access to mortgages to buy a home or refinance an existing mortgage; and offering borrowers in trouble on their mortgage an opportunity to modify their loan or otherwise avoid foreclosure.
Most of the criticism that DeMarco has received to date has come from those who wish he would prioritize making mortgage refinancing or modifications easier, even if there are questions about whether some of these actions may lead to more taxpayer losses. Taxpayers have already bailed out the GSEs with more than $150 billion.