The Obama administration may propose that any federal backing of mortgages be paid for through fees on the lending industry, according to people familiar with the internal discussions.
While the administration hasn't settled on a plan to revamp failed mortgage giants Fannie Mae and Freddie Mac, which are now under federal supervision, a consensus appears to be emerging that some type of government guarantee will be needed to keep the ailing mortgage market functioning.
Some conservatives don't believe the government should offer any type of guarantee, while others advocate limited, but explicit, backing. About nine in 10 new loans are currently backed by Fannie, Freddie or government agencies.
Policy makers face challenges determining what types of loans or mortgage-backed securities should be guaranteed and how the industry should be charged for government backing. Government officials want the cost of any explicit guarantee fully offset by the mortgage industry to avoid adding to the federal budget deficit.
But Washington must walk a fine line between pricing a guarantee high enough so it accurately reflects risk, while not charging so much that borrowing costs soar.
At a housing-finance conference last week, Treasury Secretary Timothy Geithner cited a "strong case" for a continued federal guarantee but said "the challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure."
Officials want to avoid a repeat of what happened to Fannie and Freddie, which had to be bailed out and taken over by the government in 2008 after losses destabilized the firms. Mr. Geithner and others have said the firms wrongly guaranteed increasingly risky mortgages without charging enough to cover the risk.
Others warn the government has a poor track record when deciding how to price guarantees. While guarantees provided by the Federal Housing Administration, which insures mortgages, have traditionally turned a profit for the U.S., in recent months that agency has depleted its reserves and risks running out of money.
"It's very hard to know what the right fee is," said Alex Pollock, resident fellow at the conservative American Enterprise Institute think-tank, who supports moving to a fully private mortgage market. "The argument will always be from homebuilders, realtors, affordable housing groups, consumer groups and members of Congress that you're charging too much and making it too expensive for borrowers."
The National Association of Realtors, for example, is asking the Treasury to reduce interest payments Fannie and Freddie must currently make to the government, arguing that easing the firms' expenses could produce more flexible lending standards. In a letter to Mr. Geithner this month, the organization said the Treasury should retroactively lower the 10% dividend the firms must pay on the $148 billion in taxpayer aid they have used.
The industry appears prepared to pay some type of premium to get the government's backing. Under proposals floated by two trade groups, the Financial Services Roundtable and the Mortgage Bankers Association, new private-sector entities created to securitize and insure mortgages would pay a fee into a government-insurance fund.
Researchers at the New York Federal Reserve Bank, writing on their own behalf, have proposed creating lender-owned cooperatives that would replace Fannie and Freddie. Private lenders would pay into a "mutualized loss pool" to provide guarantees for mortgage-backed securities, and members would also pay a reinsurance fee to the government for a separate fund to backstop additional losses.
Some investors and academics say a government backstop is needed if the U.S. wants to facilitate securitization markets, where investors buy bonds backed by pools of mortgages. While mortgages were once funded primarily through the banking system, securitization fueled the growth of the nation's $10 trillion mortgage market over the past 30 years, dwarfing the capacity of the nation's banking system to fund loans.
"To suggest the private market can come back in and take the place [of the government] is simply impractical. It won't work," said Pacific Investment Management's Bill Gross at last week's summit.
source: WSJ
