Experts Offer Proposals for Housing Finance Reform at Hearing

Experts Offer Proposals for Housing Finance Reform at Hearing

03/19/2013 BY: ESTHER CHO

Three industry analysts gave testimony before a Senate committee on housing finance reform Tuesday. While all three experts expressed support for more private capital and less government involvement, the proposed degrees of government support varied.

“It’s been more than four years since Fannie Mae and Freddie Mac were placed under government conservatorship, yet there is still no clear path forward,” said Mel Martinez, co-chair of the Bipartisan Policy Center’s Housing Commission, in his written testimony.

To move forward, Martinez recommended more private participation to protect taxpayers.

“The dominant position of the government in the market is unsustainable,” he said. “Yes, private capital is flowing through the system, but it absorbs very little of the system’s credit risk.”

Currently, about 90 percent of single-family mortgages have some form of government backing.

Martinez recommended the elimination of the GSEs over a period of about 5-10 years and the creation of a limited, government guarantee called the “Public Guarantor.”

The entity would have a similar model to that of Ginnie Mae and ensure timely payments of principal and interest on qualified mortgage-backed securities. The public guarantor would be the fourth in line before taking a loss, with borrowers, private credit enhancers, corporate resources of the securities’ issuers and mortgage servicers coming before the guarantor.

He also stressed that the model of the GSEs should not be reproduced.

Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, argued for a private system based on prime mortgages with no direct financial support from the government.

“Our proposal is based on the simple idea that the housing finance market will operate steadily and stably if a high preponderance of the mortgages it processes through securitization are prime loans,” he said.

Although the proposal permits only prime mortgages into the securitization system, subprime mortgages could still be made, but they would be held on private balance sheets and not securitized, he explained.

Janneke Ratcliffe senior fellow at the Center for American Progress, expressed support for 30-year, fixed-rate mortgages as the “gold standard for a safe and sustainable mortgage market,” but said without government support, the product is likely to be of the past.

Ratcliffe also stressed for more than just access to safe, affordable mortgage financing, but for a reformed multifamily finance system to meet the demand for affordable rental as well.

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