Editor: David Reiss
Brooklyn Law School

October 22, 2013

Private Capital and the Mortgage Markets

By David Reiss

The American Securitization Forum recently wrote to the Federal Housing Finance Agency to argue for at least a small reduction in the size of the loans that Fannie and Freddie can guaranty. While this makes sense to me, it is pretty controversial.  The ASF argues that “incremental reductions are appropriate for the following reasons:”

(i) as a means to begin scaling back the outsized role the GSEs currently play in the U.S. housing finance system and encourage the return of private capital;

(ii) FHFA has the legal authority in its role as conservator to act according to its dual mandate; and

(iii) the timing of any Congressional action on wide-ranging housing finance reform remains uncertain. (1)

Various groups like the Realtors and some members of Congress argue that any restriction of credit is unwarranted while the housing recovery is so tentative. The ASF notes, however, that the federal government is insuring roughly 90% of new residential mortgages. Virtually no one supports such a level of government support for the mortgage market, so the only question is one of timing. Do we start cutting back now or do we wait for better market conditions?

Others argue that there is not enough private capital to replace the government guaranteed capital in the market. But scaling back the Fannie/Freddie loan limit is a great way to work private capital back into the market gradually. The long term health of the American mortgage market is best assured by having private capital assume as much of the credit risk as it can responsibly handle. This private capital should also be subject to consumer protection regulation to ensure that it is not put to predatory uses. The Consumer Financial Protection Bureau has rules in place to provide that consumer protection. The FHFA should complement that regulatory action with its own. It should reduce the Fannie and Freddie loan limits starting in 2014.

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