The financial regulation bill passed this summer left out one key component: housing finance policy. While there is broad agreement that government-sponsored mortgage companies Fannie Mae and Freddie Mac were a disaster, there isn't a clear answer to how to reshape the mortgage market to function better going forward. Since Democrats in didn't feel like approaching this very messy debate when drafting the summer's financial regulation bill, they just punted to the next Congress. At this time, little has changed, as the government continues to back most new mortgages in the U.S. Early talks implied that the government would ultimately continue to stand behind most mortgages, but suddenly housing policy's fate isn't looking as inevitable.
Back in August, the Treasury opened up the housing finance policy discussion with a big conference consisting of investors, economists, bankers, and other industry experts. At that time, it looked like there was a fairly broad consensus advocating for explicit government mortgage guarantees, where lenders would pay a fee for that service. But a Wall Street Journal article by Nick Timiraos and Deborah Solomon from this weekend casts some doubt on that seemingly unavoidable outcome:
Top administration officials, including Treasury Secretary Timothy Geithner, have publicly discussed the merits of a limited but explicit government guarantee of securities backed by certain types of mortgages. Investors, academics and the housing industry say such a guarantee is needed to maintain a healthy market, particularly for long-term, fixed-rate loans that remain a keystone of U.S. housing.
But the administration is divided over whether a backstop for new loans would be needed when markets return to normal, a process that could take several years. Some worry any guarantees expose the government to too much risk, as the $134 billion in losses incurred by Fannie and Freddie indicate.
This is a surprise, because as the excerpt above says, pretty much all sides agreed at the August conference that some form of government guarantee was necessary. Investors love the idea because it eliminates their risk. Banks love the idea, because they can originate all the mortgages they want to sell to investors. Affordable housing advocates love the idea because government guarantees would keep mortgages cheap. The government loves the idea because it believes it can price the risk properly and points to its depository insurance as proof.