Keep government in mortgage market

Bank execs agree on that, but not the level of support

August 17, 2010 

WASHINGTON — The call from business for less government has a notable exception: the mortgage market.

The Obama administration invited banking executives Tuesday to offer advice on changing the government's role in backing the mortgage market. Although they disagreed on the level of support needed, the group overwhelmingly advocated for the government to maintain a large role in the $11 trillion market.

If the government pulled out, executives said, millions of Americans wouldn't be able to convince banks to take the risk of giving them home loans. Ending government support could lead to a spike in mortgage rates. That could deter many from buying homes, and banks, mortgage lenders and real estate agents would lose money over time.

"It will take on a different form, but there is a role for government," Kevin Chavers, a managing director at Morgan Stanley, said in an interview.

Most attendees agreed the time had come to do away with Fannie Mae and Freddie Mac. Rescuing the two mortgage giants has cost the government nearly $150 billion.

Bill Gross, managing director for bond giant Pimco, suggested Fannie and Freddie should be formally merged into the government. He also called on the administration to allow millions of homeowners to automatically refinance their loans to help stimulate the economy.

A more widely held view at the conference is for government to do away with Fannie and Freddie and instead provide a guarantee that mortgage investors get paid even if borrowers default in droves.

Figuring out a plan for Fannie and Freddie is a political challenge for President Barack Obama and his party. Republicans have seized on the administration's management of Fannie and Freddie to illustrate Democrats' push for growing the reach of the federal government.

Thos in the banking industry has joined Republicans in criticizing the administration for instituting stronger regulations of Wall Street, but they understand the need for government to play a large role in the mortgage market.

"There would be a lot of homeowners who wouldn't be able to afford homes because we'd be dealing with higher interest rates," said S.A. Ibrahim, chief executive of mortgage insurer Radian Group Inc.

Treasury Secretary Timothy Geithner pledged "fundamental change" to the structure of Fannie and Freddie. The mortgage giants profited tremendously during good times but burdened taxpayers with losses when the housing market went bust.

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. They have ensured that millions of Americans can get home loans, even after the housing market collapsed.

The two companies, the Federal Housing Administration and the Veterans Administration together backed about 90 percent of loans made in the first half of the year, according to trade publication Inside Mortgage Finance.

Geithner did not offer a specific exit strategy for Fannie and Freddie, but said "it is our responsibility to make sure that we create a system that is not vulnerable to these same failures happening again."

The administration is expected to offer a plan next year. One option that dominated the discussion Tuesday is for the government to collect money from the mortgage industry and set up an insurance fund that could be used to cover losses during a severe downturn. That would prevent taxpayers from having to foot the bill for the industry.

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