I am on a Halloween kick right now – it’s the elections. I hear Zombies are popular this year.  Zombies indeed.  Do you ever think this could be a deeply sophisticated and sly commentary on our GSEs?  How droll.  They are scary.  How about that for a segue.

The private securitization market for residential mortgages is still dead (like Generalissimo Franco) and the GSEs, attached to a fire hose of taxpayer money, continue to fuel 90% of the United States housing market.  But they are insolvent. What apparently worked so brilliantly for twenty-five years is breathtakingly broken.  Call me silly, but I don’t think we’ve got a sustainable model here.  The good news is that no one else seems to think we have a sustainable model either.  There was a symposium at the Federal Reserve last week on the future of housing finance.  I don’t think a lot of progress was made.  I was passingly concerned to see that almost all of the talking heads were academics.  That demographic may be really good at some things; my guess is not so much at rebirthing a functional housing finance market. It struck me as more can kicking.  When in doubt, talk.  Wonk-filled symposiums give birth to papers, not markets.

We need to get on with it.  There are already lots of good ideas in circulation.  We’re not going to get any smarter.  We do not need more symposia. Official leadership just needs to get out of the “I’ll think about this some day” box and into the “do today” box.  When your pants are on fire, stop worrying about the tailoring!

A few things seem obvious to me.  First, there will be a private securitization market again.  That market, when not crushed by a giant securitizer with zero cost of funds and no need to make a profit, will re-flate.  Simply and syllogistically, the need for credit will be met by supply.

Second, the government is going to continue to fill the role of guarantor of last resort.  Okay, some countries, many with much larger governmental sectors than ours, seem to have done pretty well without a government role in housing, but that train has left the station.  There’s a notion that government needs to remain a final bastion of defense against the next housing apocalypse.  That is received wisdom and will be part of Housing Finance 2.0.

Third, we have two great organizations full of bright and hard-working people who can and should be part of the solution.

So let’s stop kicking this can down the road.  The outlines of the solution are apparent.  Freddie and Fannie need to be re-launched using some variant of a good bank/bad bank structure.  A private tranche of guaranty capital must be developed with some ultimate governmental backstop bought and paid for.  Paying a premium for a federal backstop, at least on some type of mortgages, will even-out the playing field and open the tap for private money and conventional securitization.  We need that.  Otherwise, housing will continue to be starved for capital and, simultaneously, suffering as a political football.  I personally think some sort of co-op structure, such as can be found today in the federal home loan bank system, seems appealing.

The problem is, of course, politics.  The GSEs have been a third rail. Fixing them will take courage. Within a week, the election will be over and perhaps we’ll get down to business.  The Treasury, the GSEs and the business community should be able to sit down and sort this out.  Fundamentally, it’s not that hard. And it’s hugely important.

By Rick Jones.