Most of the panel agreed that the government should continue to
support some agency to provide liquidity to the mortgage market. Garry
Cipponeri of JPMorgan didn't believe that privatization would work,
because there would be a lack of consistency if the government wasn't in
charge. But more importantly, he thought the price shock would not sit
well with the market: investors would have to add a risk premium if
Uncle Sam wasn't standing behind half of the mortgage market.
Another panelist Wellington Denahan-Norris,CIO and COO of Annaly
Capital Management, agreed. She was unconvinced that the market would be
able to live with the new risk pricing if mortgage liquidity providers
were completely private. This would curtail lending and make it more
expensive for consumers to get mortgages.
A third panelist, Armando Falcon, CEO of Falcon Capital advisors,
also wanted government ownership of an entity in charge of liquidity. He
even suggested that the Federal Reserve could serve this function if it
made its mortgage security purchase program permanent.
Only one panelist disagreed: James Lockhart III, vice chairman of WL
Ross & Co. and former director of the Federal Housing Finance
Authority. He wasn't prepared to reject the notion of privatization
entirely. When Cipponeri asserted that the absence of a government
liquidity provider would raise funding costs by as much as 150 basis
points, Lockhart thought it might not be that much.
This is kind of amazing. What you have here is a group of investors
and bankers who would prefer to keep the government propping up the
market so that costs remain low. This idea spits in the face of free
market economics. It would dictate that if the market demands a higher
price for mortgage funding, then that's what the price should be.
Indeed, if recent history has taught us anything, then it's precisely
that mortgage funding was entirely too cheap and easy. That's what
created the housing bubble. If costs were higher, then fewer mortgages
would have been originated, and credit quality would have been better as
Also interesting is that all of these panelists essentially agreed
that the two objectives of providing liquidity and making homes more
affordable should be separate. But, in a sense, providing liquidity also
makes homes more affordable. If something is more liquid, it has
cheaper transaction costs. So if the government kept liquidity
artificially high, then prices would be kept artificially low: it
couldn't escape the dual purpose of providing liquidity and also making
home ownership more affordable, since banks' funding costs would be
lower as a result.
This is a great illustration of where businesses only support the
free market until it costs them to do so. As soon as Wall Street
realizes that a privatized mortgage market liquidity provider might
increase funding costs and decrease loan volume, all that great free
market philosophy goes right out the window. After all, that could make
their bonuses a little smaller.
The truth is that there's no reason the U.S. needs
government-sponsored entities to provide mortgage market liquidity.
Other countries leave that function in private hands, and their mortgage
markets function perfectly well. Indeed, given the disaster experienced
by the U.S. mortgage market over the past few years, those other
nations' mortgage markets may perform even better.