The president has three plans on the table. Which one is going to fix the mess we're in?
The Obama administration had scarcely released its plan to fix Fannie Mae and Freddie Mac before howls of protests arose from members of Congress, consumer advocates, and community bankers, all screaming that this is an about-face from a long-standing policy to promote home ownership in America. But enough already.
With its white paper, which offers three alternatives for tackling the mortgage finance crisis over the next five to seven years, the administration is simply laying out the starting point for a conversation on how to get the mortgage market back under control. The complainers are disregarding a few basic, inescapable facts about the system today: It's broken. The government is the only player in the game. And taxpayers are on the line for a massive bill from this mess of at least $135 billion and growing.<!-- more -->
Long an advocate of affordable housing for Americans, the government has increased its role in recent years. Just five years ago government-sponsored entities like Fannie Mae, Freddie Mac, and the Federal Housing Authority made up about 36% of the nation's mortgage originations. Now that number sits above 90%. That in itself should be enough reason to hear out the administration's plans.
Those who understand what a mess the mortgage finance market is right now applaud the administration for putting out such a thorough, comprehensive document. "It's such an easy thing to sit on the sidelines and throw potshots," says Wes Edens, founder and president of Fortress Investment Group. Fortress owns a mortgage-servicing company, Nationstar Mortgage, with a portfolio of some $70 billion. Edens believes serious thought went into this white paper, with provisions to address some of the many complex problems in today's market, like dealing with loan servicers whose interests aren't aligned with those of investors, or shoring up consumer protections, or dealing with secondary loans on homes, which in most cases were never altered, even in situations where the primary loan was. "A lot of the spirit behind this is really reasonable," he says.
And with the taxpayers having so much on the line, that's exactly the type of spirit that should go into the discussions of an eventual plan to deal with Fannie and Freddie. Market players almost universally agree that it's neither healthy nor good policy to have the government acting as the only player in mortgages. "If all the flows are going to the government, that means the government is giving away a subsidy, and that means they are underpricing the risk," says Neel Kashkari, who's now head of new investment initiatives at Pimco but who skyrocketed to fame as the man who ran TARP for Treasury.
He's concerned that the government is currently increasing the likelihood that taxpayers will have to pay for bad loans being written right now, perhaps at an astonishing rate. What about that estimate of $135 billion that we owe for Fannie and Freddie's mistakes? "That's just the bill that's coming due for all the underpricing they did the last 20 years or so," he says. It doesn't include what's happening right now.
Kashkari's take ought to count for something. After all, he ran the much-maligned program that critics charged would cost the taxpayers $700 billion -- but didn't. The government now estimates that TARP will cost the taxpayers about $25 billion, and some believe it could produce a small profit.
So which of the three white paper plans, which range from light to heavy government involvement, does Kashkari like? He favors the middle proposal, which would require Fannie and Freddie to charge a higher guarantee fee, making it more likely that the private sector would get back into the game. "The government still acts like a backstop, though," he says, pointing out that this plan is designed like the Federal Reserve programs that were developed to bail out the commercial-paper markets during the financial collapse. "The programs automatically wind down when the private sector heals itself," he adds. I don't know about you, but I'll take the advice of the guy who already saved hundreds of billions of taxpayer dollars.
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