It was Rahm Emanuel who said we shouldn't let a crisis go to waste, and now James Bullard would like to apply that dictum to the housing-finance industry.
Bullard, the president of the St. Louis Federal Reserve Bank, hosted a research conference today on the future of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage companies. In his opening remarks, Bullard said the current situation -- with Fannie and Freddie both in conservatorship, and together with the Federal Housing Administration accounting for some 90 percent of mortgage originations today -- is untenable:
The extent of Congressional meddling in this market has been astonishing to the point where one can barely identify what the private sector outcomes would be in the absence of intervention.
To the extent possible, we need to let the private sector provide the bulk of U.S. housing finance going forward, without the incentive‐distorting set of government programs and taxpayer guarantees that caused our current system to collapse. Those programs meant well, but ended up costing everyone dearly.
It makes little sense to try to design programs that subsidize everyone. If everyone is subsidized, then no one is subsidized.
Bullard called for reform "according to best principles and sound lending practices."
Some of the participants at the conference sketched out what a private-sector-led mortgage system might look like:
- Dwight Jaffee of the University of California, Berkeley, described European systems where the government has very little involvement but mortgages have features that aren't common here, such as prepayment penalties, to make them safer for private lenders.
- Lawrence White of New York University proposed a "pragmatic middle ground" in which the private sector sets underwriting standards and insures a fraction of a mortgage's value, such as 25 percent, while the government acts as a "silent partner" in insuring the rest of the risk.
- And Alex Pollock of the American Enterprise Institute said Fannie's and Freddie's portfolios should be put into a liquidating trust, with their ongoing operations sold to private companies that would receive no government backing.