Filed under: Mortgages, Banking, Securities, Home Buying, Home Loans
What if the two government-owned housing agencies that backstop so many of the nation’s mortgages ceased to exist? A new report from an influential think tank says that’s what should happen.
But while the plan isn’t quite as radical as it first sounds, if implemented it would mean a significant change if another housing bubble builds and bursts — a change that would have more of the risk falling onto individual homeowners instead of the federal government.
“Housing America’s Future: New Directions for National Policy” was authored by the Bipartisan Policy Center, a Washington, D.C.-based group founded by former Senate luminaries Howard Baker, Tom Daschle, Bob Dole, and George Mitchell.
Among other things, the report recommends slowly winding down Fannie Mae and Freddie Mac — the government-owned housing agencies that had to be bailed out at great taxpayer expense after the most recent real-estate bust — and replacing them with what the report’s authors call the “Public Guarantor.”
Taking the heat off taxpayers and putting it on homeowners
As the name suggests, the Public Guarantor would serve a similar function as Fannie and Freddie, but with a twist that would take the heat off the taxpayer in the event of another catastrophic housing-market event, like the one we saw in 2007.
Right now, Fannie and Freddie buy mortgages originated by the nation’s banks, package them up into mortgage-backed securities, and sell them to investors. In return, Fannie and Freddie pay interest on the securities back to the investors.
But unlike Fannie and Freddie, the Public Guarantor wouldn’t buy mortgages or issue mortgage-backed securities. The private sector would now handle that. And in the event of another burst housing bubble, the Public Guarantor would only guarantee investors their interest payments and the return of their initial investments.
This guarantee would only be triggered after the private capital in line ahead of it had been exhausted. Specifically, the government would be fourth in line to take a loss, which means, of course, the taxpayer is also fourth in line.
Mission accomplished, right? Yes, but it’s a double-edged sword.
Goliath Wins This Match, for David’s Own Good
While it’s great that the taxpayer is less on the hook for mortgage-market trouble, that default risk has to land somewhere.
With this new plan, part of that somewhere is back onto the borrower, who would be first in line to take the hit if the Public Guarantor guarantee is ever triggered. Next in line after borrowers are private-credit enhancers and finally the corporate resources of mortgage issuers and servicers.
So in the end, under this proposed plan the government would only be giving an ironclad guarantee to investors in privately issued mortgage-backed securities.
Why favor the big investor over the little homeowner? …read more
Source: FULL ARTICLE at DailyFinance
