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EXPERTS OFFER PROPOSALS FOR HOUSING FINANCE REFORM Three industry analysts gave testimony on housing finance reform before a Senate committee in late March. While all three 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, cochair of the Bipartisan Policy Center's Housing Commission. 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 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 mortgagebacked securities. The public guarantor would be the fifth in line before taking a loss, with borrowers, private credit enhancers, corporate resources of the securities' issuers, and mortgage servicers coming before the guarantor. Martinez also stressed the model of the GSEs should not be reproduced. Peter Wallison, Arthur F. Burns fellow in financial policy studies at the American 38 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 a thing of the past. Ratcliffe also stressed the goal should be more than just ensuring access to safe, affordable mortgage financing, but for a reformed multifamily finance system to meet the demand for affordable rental as well. On the very same day, Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), stood before the House Financial Services Committee and presented his take on the future of "sustainable housing finance." DeMarco began his testimony by reiterating his goals for the GSEs this year. He then went on to describe three possible scenarios for the future of the housing finance system and the government's role in that system. The first, which he termed "StandardSetting," would leave the market with no government guarantee. Instead, the government would establish a "regulatory regime or a market utility" to set standards for the industry. The responsibility of pricing credit risk would lie solely with investors. The second market format DeMarco highlighted, the "Federal Backstop," would call on the government in times of market stress or illiquidity. This "backstop" could come from one or more of several sources, according to DeMarco. He suggested the Federal Housing Administration, Ginnie Mae, Treasury, the Federal Reserve, or the Federal Home Loan Banks could fill this role. DeMarco's third scenario, the "Government Guarantee," is most similar to today's structure. A government guarantee offers "a high degree of liquidity" and favorable pricing but "would not provide the benefit of market pricing for credit risk of the underlying mortgages," according to DeMarco. "This type of structure requires a significant amount of regulatory safety and soundness oversight to protect against the moral hazard associated with providing a government guarantee," DeMarco added. As for the current state of housing finance, DeMarco placed the responsibility on Congress to set the course for the GSEs—either ending or revising their charters—reiterating as he has in the past, that as Congress placed the GSEs under government conservatorship, only it has the authority to remove or revise that status. "While FHFA is doing what it can to encourage private capital back into the marketplace, so long as there are two governmentsupported firms occupying this space, full private sector competition will be difficult, if not impossible, to achieve," DeMarco said. The government currently guarantees 90 percent of mortgages when measured by securities issuance, according to DeMarco's testimony. KNOW THIS Bank lending has increased 11% since the recession ended after bottoming three years ago, according to economists with Wells Fargo Securities.

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