Looking back, the housing industry is totally Scrooged

Looking back, the housing industry is totally Scrooged

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Zandi's vision of housing finance means breaking up Fannie, Freddie

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Moody's Analytics Chief Economist Mark Zandi released a report on the future of housing finance Tuesday arguing for a hybrid system where the private sector would fund the most mortgages but is guarded against catastrophe by the government. The first 14 pages of the report, co-authored by Moody's Director of Credit Analytics Cristian deRitis, details the fall of the mortgage system and its two giants Fannie Mae and Freddie Mac. Taxpayers will end up spending $200 billion in cleaning up the government-sponsored enterprises, funding mortgage modification and refinancing programs and three rounds of the homebuyer tax credit, according to the report. Reuters reported that government officials met Tuesday to sign off on the Treasury Department's white paper on the future of housing finance due out this week. Attendees at the American Securitization Forum expect the report Friday. Early leaks show that the government will look to scale back its involvement in the mortgage industry, but like Zandi's report, cannot see a future without some sort of taxpayer-funded backstop. "A hybrid mortgage finance system holds out the most promise for delivering consistent, affordable access to prudent mortgage loans to homeowners, while minimizing costs to taxpayers," according to the Moody's report. Zandi details the ins and outs of fully private and nationalized systems, but he said a mortgage market without any government role will mean borrowers will pay an extra 90 basis points for loans in the future as lenders move to cover any potential losses. This translates to an extra $118 in monthly payments for homeowners. The key to Zandi's proposal (shown above) is the creation of between five and 10 Mortgage Bond Insurance Corporations (MBICs) to purchase conventional mortgages from originators, packing them into securities, and guaranteeing interest and principal payments to investors for a fee. These companies, Zandi said, would be private but backed either explicitly or implicitly by the government with the fees pooled into a reserve modeled on the Federal Deposit Insurance Corp.'s fund in times of "catastrophic risk." A group convened by the Center for American Progress also proposed a similar system of chartered mortgage institutions. Zandi also proposed installing a single mortgage securitization facility by the government. This would administer the securities issued by the MBICs, similar to the relationship between Ginnie Mae and the Federal Housing Administration. Because the MSF is government controlled, it would be exempt from Securities and Exchange Commission rules, thus preserving the TBA market, which allows borrowers to lock in an interest rate before the loan closes. To oversee this system, a centralized regulator is needed to charter MBICs, establish underwriting standards, gauge appropriate sizes of the MBICs portfolios, monitor those entities and administer the catastrophic fund when needed. The Federal Housing Finance Agency, which currently holds Fannie and Freddie in conservatorship, is a likely candidate to take this job, Zandi said. But Zandi is already attracting opponents. Anthony Sanders, a scholar at the Mercatus Center at George Mason University and a real estate finance professor, said the MBICs approach will not solve the problem. "The creation of five to 10 Fannies and Freddies seems appealing to some because it would spread the risk out over a large number of enterprises, but it is likely that they would just mimic each other, as Fannie and Freddie do now,” Sanders said.?? "If we can’t control two entities, the odds that we can control five to 10 are painfully low." Sanders prefers phasing out Fannie and Freddie over the next five years until the private market can recover and take over. But Zandi says a full privitization of the market is more plausible in theory than in reality. "Regardless of what policymakers say, global investors would continue to assume that the U.S. government would backstop a foundering housing market," Zandi said. Despite the report due in the coming days from the Treasury, many analysts believe actual reform, which will require Congressional action could take years, even decades. In the end, Zandi said, no ideological extreme will benefit the market more than compromise. "Success will depend on striking the appropriate balance between the benefits of the private market and the backstop of the federal government," Zandi said. Write to Jon Prior. Follow him on Twitter: @JonAPrior

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