An article in American Banker from Richard M. Kovacevich, the retired chairman and CEO of Wells Fargo and William M. Isaac, former chairman of the Federal Deposit Insurance Corp., a senior managing director and global head of financial institutions at FTI Consulting and the chairman of Fifth Third Bancorp.
One of the priorities of Rep. Jeb Hensarling, Chairman of
the House Financial Services Committee, is to end the conservatorship of Fannie
Mae and Freddie Mac and let the private sector take the primary role in
operating the residential mortgage industry. No other country in the
world has the equivalent of the hybrid government/private-sector model of
Fannie and Freddie, which has already cost taxpayers more than $150 billion.
The private sector provides mortgages in practically every
other major country with little difference between homeownership rate in the U.S. and other
developed countries. The U.S.
needs a new system that never places taxpayers at risk again, promotes homeownership
at affordable levels, and transitions from the current model without disrupting
the housing recovery taking place.
Some positive steps have been taken. Federal Housing Finance
Agency Acting Director Edward DeMarco has proposed combining the back offices
of Fannie and Freddie to reduce costs and increase efficiency. The merged
operation would be available for use by the government or sale to the private
sector after Fannie and Freddie are gone. The GSEs' huge portfolios are
gradually shrinking, and Chairman Hensarling will hold hearings on what to do
with Fannie and Freddie.
Yet, concern still exists among some politicians and
industry participants that the housing industry cannot prosper without
government support. We disagree.
The U.S.
cannot afford another financial crisis like 2008-9 – a crisis that started with
subprime mortgages and would never have grown so large so as to threaten the
whole U.S.
economy if we had a market-based mortgage structure.
Subprime mortgages existed for decades. But they made up a
very small percentage of the mortgage market until Fannie and Freddie reduced
credit standards to gain market share and to meet low income and minority
homeownership targets mandated by Congress. By 2007 nearly 50% of all mortgages
originated in the U.S.
were subprime and alternative-A types with Fannie, Freddie and other agencies
guaranteeing about 70%, according to Edward Pinto of the American Enterprise
Institute.
Without these government guarantees, the subprime bubble and
the resulting financial crisis would not have happened. Bank regulators and
industry experts warned Congress for decades about Fannie and Freddie and their
increasingly large and risky portfolios, but Congress failed to heed the
warnings.
The solution now is straightforward: abolish the
public/private hybrid of Fannie and Freddie, sell or liquidate their existing
business, and privatize the mortgage market.
This can be done in an orderly way in a few easy steps.
Fannie's and Freddie's portfolios of mortgages should be sold at a rate of
about $75 billion a year until they reach zero. The $625,000 size limit on new
mortgages guaranteed by Fannie and Freddie should be reduced by $100,000 per
year, so that Fannie and Freddie would be out of the mortgage guarantee
business within six years. The liability for any outstanding guarantees should
be managed by the conservatorship of Fannie and Freddie until they run off or
are sold.
If the government still wants to be in the mortgage business
for low income families or minorities, the liabilities should be on budget and
transparent. The Federal Housing Administration can fulfill this mission.
Some speculate that without Fannie and Freddie mortgage
rates would skyrocket and the 30-year, fixed-rate mortgage would be a thing of
the past. We disagree.
Nonconventional or jumbo 30-year mortgages not guaranteed by
Fannie and Freddie have existed for decades. In the decade preceding the
financial crisis, the interest rate on these jumbo, non-conventional mortgages
averaged just one quarter point higher than similar guaranteed mortgages, a
difference of a little over $40 a month on a $200,000 mortgage. Shouldn't
Americans, like homeowners throughout the world, pay an extra $40 or so per
month so taxpayers aren't on the hook for hundreds of billions to bail out
Fannie and Freddie? The additional interest is even tax deductible in the United States .
Some are understandably worried that this change may be too
abrupt. If the market doesn't adjust fast enough after the process starts, it
can be slowed so the transition takes longer.
The U.S.
mortgage market should be privatized. It's time for Congress to do what it
should have done decades ago and give the FHFA a clear road map so that it can
manage the process at the lowest cost to the taxpayer and with a smooth
transition to the private sector. Get the government out of the mortgage
business so taxpayers are never again at risk.
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