Industry Weighs in on Administration’s Housing Finance Proposal

Organizations from every corner of the mortgage industry are weighing in on the ""proposal put forth by the Obama administration"":http://dsnews.comarticles/obama-administration-lays-out-plan-for-winding-down-fannie-and-freddie-2011-02-11 to reform the nation's housing finance system.

[IMAGE]

A central piece of the government's overhaul plan involves phasing out the nation's two largest mortgage companies over the next several years to build up the private sector's role in housing finance. The agency charged with overseeing ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com acknowledges that the two firms can't continue in their current form.

In a statement issued following the release of the administration's proposal, Edward DeMarco, acting director of the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) said, ""The conservatorships of Fannie Mae and Freddie Mac…were put in place to provide near-term stability to the mortgage market and to give policymakers an opportunity to evaluate the role of the government in housing finance.""

DeMarco assured the market, ""As debate over the future of the housing finance system progresses, FHFA will continue to meet the goals of the conservatorships, which include retaining value in the enterprises' business operations and maintaining their support for the housing market.""

The administration's ""proposal lays out three options"":http://dsnews.comarticles/housing-finance-seven-years-down-road-2011-02-11 for what might succeed Fannie and Freddie, without throwing its vote behind any one approach.

In response to critics who are saying the government ducked its responsibilities by not advocating a single, more clearly defined route, Treasury Secretary Timothy Geithner has stressed in several public appearances since that Congress instructed the administration to provide alternative choices, not a final plan. Geithner says the administration is looking to lawmakers to explore the options further and reach a general consensus on direction before hammering out the details of how to proceed.

A large number of industry groups are throwing their support behind option No. 3 in the administration's report, which provides an FDIC-type insurance guarantee for certain mortgage securities.

A group of private companies would provide guarantees for securities backed by mortgages that meet specific underwriting standards. A government entity would then provide reinsurance to the holders of these securities, which would be paid out to investors in the event the original guarantor company goes under, like the deposit

[COLUMN_BREAK]

coverage the FDIC provides to consumers whose banking institution fails.

The Financial Services Roundtable's ""Housing Policy Council"":http://www.fsround.org/media/htm11/HPC_statement_on_admin_proposal_for_GSE_Reform.html says this option three is ""the most viable and realistic.""

John H. Dalton, president of the Housing Policy Council, says his organization ""advocates a new privately based structure that minimizes the risk to taxpayers … [and] helps guarantee liquidity for the market through a catastrophic backstop by the government which is the final safeguard behind many layers of private capital.""

Michael D. Berman, chairman of the ""Mortgage Bankers Association"":http://www.mortgagebankers.org/NewsandMedia/PressCenter/75650.htm (MBA) described the proposal as an ""important milestone on the road to stabilizing the mortgage market.""

Berman said he was ""gratified"" that concept No. 3 closely tracks a proposal put forth by his organization 18 months ago, which envisions an explicit, but limited, government guarantee of lower-risk mortgage-backed securities. He said this is the ""most prudent approach"" and will directly address the problems that caused the failure of the Fannie Mae-Freddie Mac system.

David Min, associate director for financial markets policy at the ""Center for American Progress"":http://www.americanprogress.org/ says his organization also supports the third option of government reinsurance for higher quality mortgage bonds. Min said his major complaint with the proposal was that the administration gave ""undue credibility"" to the other two options, which his organization sees as ""essentially unviable.""

""This will all come down to an empirical question,"" Min said. ""Can private capital fill the hole and still provide the consumer-friendly products we've gotten used to, like the 30-year fixed-rate mortgage â€" that's our concern.""

There are some industry groups who say the private sector can’t fill Fannie and Freddie’s shoes.

The ""American Land Title Association"":http://www.alta.org/press/021111_ALTA_response_to_GSE_reform.pdf (ALTA) has issued a statement warning the Obama administration and Congress that any plans to significantly alter or eliminate the GSEs will have “a severe impact on consumers as mortgage rates would increase and small businesses would be pushed out of the market.”

Anne Anastasi, president of ALTA, says while privatization of Fannie and Freddie may seem like an alluring option, it should be noted that “[for] decades Fannie and Freddie have provided funds in order to make homeownership available and affordable. Instead of terminating their existence for falling into the subprime lending trap in an effort to make significant profits, their roles should be curbed to providing stability in the secondary market for residential mortgages,” Anastasi said.

The ""California Association of Realtors"":http://www.car.org/newsstand/newsreleases/gsefuture/ (C.A.R.) says it believes Fannie and Freddie should be converted into government-chartered, non-profit corporations.

“[D]uring economic downturns, the housing market needs government involvement to ensure capital stability,” said C.A.R. President Beth L. Peerce. “History has shown the private market is incapable and unwilling to step in during the hardest of times and meet the demands of the nation’s home buyers.”