Bipartisan Group Embraces FDIC-Like System for Mortgages

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WASHINGTON — A bipartisan group of former lawmakers has offered an outline for a plan to reform the government-sponsored enterprises, embracing a contentious option initially offered by the Treasury Department.

The Bipartisan Policy Center released a blueprint on Monday that would replace Fannie Mae and Freddie Mac with a catastrophic government guarantee in an attempt to significantly increase private market participation in the mortgage market.

"Our new model clearly delineates the respective roles of the government and the private sector, and establishes a clear expectation that private firms suffer the consequences of poor business decisions by losing their capital, with no bailout for private shareholders or bondholders," says the report, unveiled by the think tank's housing commission. "The business model of these government-sponsored enterprises — publicly traded companies with implied government guarantees and other advantages — has failed and should not be repeated."

The recommendation is similar to an option outlined by the Treasury Department two years ago, which also suggested a catastrophic reinsurance plan.

While Republicans were open to other options at the time, the GOP did not favor the reinsurance plan because it retained a role for the government in the mortgage market.

The report from the Bipartisan Policy Center, which includes members such as former Sens. Mel Martinez, R-Fla., and Kit Bond, R-Missouri, may suggest the idea has grown more attractive to at least some conservatives since then. (The center also includes former Sen. George Mitchell, D-Maine as well as industry representatives such as Frank Keating, head of the American Bankers Association.)

In a press release issued after the report, Sen. Bob Corker, R-Tenn., said the housing paper "appears to be headed in the right direction by putting substantial private capital in front of the government and resolving the legal limbo of the GSEs."

According to the paper, the government guarantee would "cover losses from an account pre-funded by payments of a separate catastrophic guarantee fee, but only after private credit enhancers have exhausted their own capital and reserves.

"The Public Guarantor must play a strong role as regulator of the new system, including establishing sound prudential standards for private-sector entities and structures that are permitted to participate in this system as originators, servicers, or credit risk bearers," the paper says.

The idea is functionally similar to that of the Federal Deposit Insurance Corp., which guarantees deposits but requires banks to pay into a fund to absorb any losses after an institution's failure.

The report also recommends reducing the Federal Housing Administration's loan limits over time to help move the industry toward a new housing finance system.

"Through the gradual reduction in loan limits to precrisis levels, the commission also supports a more targeted FHA that returns to its traditional mission of primarily serving first-time homebuyers," it says.

In the near term, the policy center is urging regulators to avoid tightening credit too much, pointing to a spate of recent mortgage rules released by the Consumer Financial Protection Bureau and others.

The "pendulum has swung too far from the excesses of the pre-bust era, and today's credit box is tighter and more restrictive than underwriting practice and experience justify," the report says. "The commission cautions against well-meaning regulations that may go too far and end up reducing credit to consumers. Going forward, a combination of proper regulation, adequate liquidity, and the right incentives in the private market can help ensure that homeownership remains a vital housing and wealth-building option."

Efforts to reform the housing system have stalled in recent years, with Congress at an impasse and the White House providing little direction on how to proceed. Housing issues are expected to be a top priority for lawmakers this year, but few observers expect tangible progress toward long-term reform.

"We do not believe Congress is prepared to enact a plan that would eliminate Fannie and Freddie and move the securitization business to the big banks," said Jaret Seiberg, an analyst for Guggenheim Securities, in a note to clients. "For us, the real upside to this report is that it might clear the way for the Obama administration to outline its GSE reform approach. We believe that would be a material development as it would signify whether a deal over the next three years is possible or not."

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Comments (1)
A misadministered, underfunded and underpriced safety net got us here. Why not extend its coverage before taxpayers can figure this out?
Posted by kaneeb | Monday, February 25 2013 at 3:52PM ET
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