Former Ginnie Mae
presidents Robert Couch and Joseph Murin said the future structure of Fannie Mae
and Freddie Mac
should be based on the agency they used to lead, according to a letter they sent to Republican lawmakers last week.
In the letter sent to Sen. Richard Shelby (R-Ala.), and Reps. Spencer Bachus (R-Ala.) and Scott Garrett (R-N.J.), the former Ginnie chiefs expressed concern over the health of the secondary mortgage market and its weight on the economic recovery.
"Any effort to replace Fannie Mae and Freddie Mac with a new framework must be designed to provide a steady flow of mortgage finance to consumers in all economic cycles while protecting taxpayers from undue risk," Couch and Murin wrote. "We believe the Ginnie Mae guarantee program provides an effective model to achieve these objectives."
Outside of fringe and sometimes duplicitous
reforms, Congress has yet to take up meaningful legislation to revamp the future housing finance system. Even though the Obama administration submitted three options for winding down Fannie and Freddie in February, news reports surfaced
last week that some within the administration may be opting to maintain a large government role.
The Treasury Department maintains
its commitment to the original options.
Regardless, it grows increasingly unlikely that Congress will pass GSE reform before 2013, leaving plenty of time for proposed plans.
Couch and Murin said an ideal solution would be remove the federal government altogether but the current financial market could not fill the void and support long-held features of the housing finance system such as the 30-year, fixed-rate mortgage.
"Until financial markets settle down, federal credit backing is required," they write. "In the meantime, based upon our experience, we believe that it is possible to design a guarantee that sustains the long-term mortgage market while protecting taxpayers from undue risk."
All this they said can be borrowed from Ginnie Mae, which guarantees the timely payment on securities backed by Federal Housing Administration
and Department of Veterans Affairs
They suggested placing a guarantee only on securities backed by the safest loans. They said shareholders and credits in the private replacements of Fannie and Freddie should be wiped out before the guarantee is triggered.
The guarantee pricing would also be increased to protect against a possible 20% to 25% drop in home prices as opposed to what Fannie and Freddie charged, which covered a 10% decline.
In many areas, the housing downturn cut prices in half since 2007.
Couch and Murin suggested also including a "recoupment" provision requiring other firms to step in and repay taxpayers should catastrophe strike.
"Without properly protected private investors, we would not have a reliable market for long-term financing of mortgages," Couch and Murin write. "As the Ginnie Mae example continues to show, a limited federal guarantee would ensure a steady flow of mortgage finance and can be designed and priced to shield taxpayers from undue risk."
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