The commercial banks have largely paid it off, GM has paid it off, and even AIG says it will soon pay off the government’s emergency investment to save the Western world as we know it. As to the GSEs: not so much. We’ve got about $150 billion invested in these entities and no end in sight. In fact, as far as I can tell, there’s yet no plan in sight to ultimately come to an end in sight. Clearly, there are hard political questions about these enterprises which the political class have seen fit to dodge or kick down the road. Should they be private businesses? Conduits for subsidized housing? Both? We now know that both is the wrong answer, or at least not a very good answer. Someone said the GSEs are critical because the private markets have abandoned housing. But how can private markets compete with enterprises that have no need to make a profit, and whose debt is backstopped by the full faith and credit of the United States of America. Who’s going to compete in that market place? Moreover, you’d hope Washington is aware that many other advanced Western economies seem to do quite well without such quasi-public vehicles (not to mention without tax deductibility of mortgage payments, but that’s another story).
The reality is, the private markets would provide enough credit to support the housing market if they could. When and if the GSEs are scaled down, they will. Will that result in 65% of the adult population owning a house? Maybe not. But who says that’s the measure of success? Historically, it’s an anomaly.
I served on the MBA’s Committee to Enhance Liquidity, which developed a thoughtful white paper on the future of the GSEs. We will now weigh in to actually try to help our legislators and regulatory constituencies to craft a solution. On Tuesday, the Treasury, together with the Department of Housing, invited a cross section of experts and industry representatives, including the MBA, to talk about the future of the GSEs. Secretary Geithner kicked off the meeting with a speech that seems to support the notion that private capital should fundamentally fund the housing market, but that the federal government has an important ongoing role. That sort of sums up the tension at the heart of the debate. There are a lot of good ideas out there, both in the MBA and elsewhere, on what to do about these two wayward economic wards of the state, but some fundamental policy decisions need to be made before the hard work of developing an executable plan can follow.
Here’s a modest solution. Let’s do a test case and spin off the GSEs multifamily business into something new and see if it works. The multifamily businesses are small businesses in comparison to Fannie and Freddie’s single family business, but nonetheless significant. Create cooperatives for these businesses. There is a long history of cooperatives in this country and, in fact, the Federal Home Loan banks are cooperatives (OK, maybe that’s not a good example since they are mired in problems as well). But the multifamily businesses could be easily and simply spun into a cooperative in which the members are the existing GSE mortgage banking outlets as well as major depository institutions. In the cooperative structure, the members would provide capital support to the enterprise in proportion to their use of the enterprises. The co-op’s service would be as a conduit for securitization of these loans, and perhaps as a vehicle to provide warehouse financing to the members to accumulate loans on a modest scale in advance of a securitization. The co-op would not become a bloated hedge fund chock full of mortgages and thereby avoid the failed policies of the past. A government guarantee may still be necessary (though I personally wonder whether it really is), it could be bought at a fair price, and a guarantee fee would be paid to the Treasury. This would allow the business to size the value of that guarantee, engage in price discovery, and perhaps over time it could be weaned from that federal teat. There was a lot of talk on Tuesday at the Treasury / Department of Housing meeting about re-sizing the federal guaranty as some sort of backstop guaranty, with a layer of private insurance in between. The thinking being that government ultimately owns the tail risk of another complete and utter market meltdown. This may be a good idea too, and could easily be annealed to my cooperative idea, but let’s not let the perfect drive out the good. Let’s experiment with the multifamily business and see if we can begin to find a way towards a healthier and sustainable private enterprise based market place.
By Rick Jones.