Mortgage Industry Changes: Look For Federal Government To Restructure Fannie And Freddie, Levy Heavy Fines On Industry For Violations, And “Explicitly Guarantee” Conforming Loans

31 08 2010

  • A cry for serious litigation. Certain panelists wanted everyone, including underwriters and originators, to know that they can be touched by the long arm of the law. Litigation is expensive, even for the government, but I suspect heavy fines in face of litigation will come a common practice.
  • Fannie Mae and Freddie Mac should be fundamentally restructured rather than abolished altogether. They may not even bear their current names, so I’ll refer to them as those government-sponsored mortgage entities (GSMEs). A majority of their worth was apparently held in the (free) implied government guarantee offered for anything they bought and sold into the secondary market — more specifically Wall Street. On Wall Street, the word implied is akin to ‘Exploit my loophole, please.’ Done and done.
  • An explicit government guarantee. Such a guarantee was stated and accepted as essential to keeping interest rates, underwriting standards, as well as the cost and accessibility of credit within reach of the relative many, specifically the “under-served borrower.” Major private sector investors dodged the responsibility of taking on any additional risk by making it clear that mortgages without such guarantees in some form will cause them to demand larger down payments and substantially higher rates, thereby limiting the size of the consumer pool to those relatively few wealthy, qualified individuals. Not an option for this or any future political administration.
  • Guarantee to be very limited in scope.  Nobody on Capitol Hill wants to be saying “So, what we had meant was…” a second time around. According to Tim Geithner: “We’re not going with a system where private gains are subsidized by taxpayer losses.” Read: The GSMEs drop their government/private hybrid model and go straight-up government for total control over the process.
    This actually kind of makes sense. The GSMEs, whatever their names end up being, may return to the role they were always meant to serve: to create affordable housing for the masses and mitigate risk on their behalf. They’re able to dictate policy across the housing finance market while claiming to better regulate Wall Street’s nefarious exploitation of people who live on Your Street — an obvious prerequisite to any policy the Fed presents Congress. A government guarantee will insure the actual security or mortgage and not the business entities that hold them, eliminating such an entity’s incentive to profit from homeowners’ losses.

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