The US government should dramatically reduce its role in supporting and subsidising the country’s mortgage markets, but cannot withdraw completely or face a collapse of the system.
Despite some calls for the two government-run mortgage buyers, Fannie Mae and Freddie Mac, to be returned wholesale to the private sector, a majority of speakers at a special housing conference agreed that federal support was necessary in some shape or form.
Wharton School real estate professor Susan Wachter
“We need to have the role of the federal government explicitly there … in terms of catastrophic risk,” warned Wharton School real estate professor Susan Wachter. “The government will step in during a recession. The government will step in because otherwise that recession will become a depression. The government will step in to ensure borrowers can borrow at a reasonable rate.” 
We need to have the role of the federal government explicitly there … in terms of catastrophic risk.
Today’s conference was organised by the White House, led by US Treasury Secretary Tim Geithner and included speakers such as mortgage investor Lewis Ranieri and PIMCO co-founder Bill Gross. The debate was not intended to set out government policy but is expected to feed into planned legislation for the reform of Fannie and Freddie, which were taken over by the government and placed in conservatorship in 2008, next year.
Geithner opened the debate saying the current system was “untenable” adding: “We will not support a return to the system where private gains are subsidised by taxpayer losses.”
US Treasury Secretary Tim Geithner
However, he accepted some form of government guarantee of mortgages was necessary. “Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale. We will not support a return to the system where private gains are subsidised by taxpayer losses.
“This crisis – where we saw a full retreat by private financial institutions from many forms of mortgage and consumer lending – provides a compelling illustration of why private markets, left to their own devices, find it hard to resolve financial crises.”
During the debate today, Alex Pollock, resident fellow at the American Enterprise Institute, argued there should be no government-sponsored entities, with much of Fannie and Freddie’s operations turned over to the private sector. But he accepted some government role was needed in ensuring subsidies to low income families, and he said a “bad bank” would be needed to deal with the existing toxic debt currently enjoying a government guarantee.
A majority of speakers agreed the government’s explicit guarantee of mortgages should remain in a limited form, to cover “catastrophic” losses by the sector in times of recession.
“We have been dealt a significant blow and the only way to bring housing back and create liquid financial mortgage market going forward will be to provide a government guarantee,” said Gross.
Tougher underwriting standards were therefore called for, along with bigger down payments, greater disclosure and standardisation. Ranieri also called for transitional guarantee limits for the GSEs, to be based on median house prices for individual areas, with Fannie and Freddie – or other government body – backing only the bottom half of the income market.
The future of Fannie and Freddie has moved increasingly into the spotlight with the two organisations swallowing a massive $148.2 billion of bailout cash since September 2008. However, for multifamily investors reform of the GSEs could have a significant impact on the sector with Fannie and Freddie accounting for between 80 percent and 90 percent of all multifamily debt issued at the height of the financial crisis.
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