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Donovan: Eliminating GSEs May Threaten Fragile Recovery

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Noting that "recovery remains fragile," US Department of Housing and Urban Development (HUD) secretary Shaun Donovan told the House Financial Services Committee today that reform of mortgage finance should be done carefully. He noted in opening testimony that the US Treasury Department and HUD published a list of questions today on reforming the housing finance system and the government-sponsored enterprises (GSEs). "We believe it is time to engage in a full and thoughtful dialogue," Donovan told the Committee. The tone of the hearing set in early with a comment by ranking member Spencer Bachus (R-AL) that the list of seven questions indicates the administration "has no real plan for housing finance and the GSEs." "It's time for action," he told Donovan. "The time for questions and dialogue—we've been doing this for 18 months." Committee members asked the HUD secretary what would happen if the government were to act quickly and abolish the GSEs, whose conservatorships are often criticized as costly. "Hasty action to quickly change the composition of the GSEs or to eliminate them would further drive down this housing market and cause taxpayer losses to increase," Donovan said. Whatever policies are ultimately adopted in response to the mortgage finance crisis, he said in written testimony (download here) there are nine principals that the administration will consider. These include an alignment of incentives for securitization issuers, mortgage brokers, rating agencies and insurers. He said the administration will also focus on avoiding "privatized gains funded by public losses." The key principles for consideration also include strong regulation, standardization, support for affordable single- and multifamily housing, as well as diversified investor base and sources of funding. Additionally, Donovan noted that accurate and transparent pricing will be a key focus, along with secondary market liquidity and clear mandates for institutions operating with government support. Write to Diana Golobay. Disclosure: the author holds no relevant investment positions.

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