America’s bastion of capitalism can’t get enough of government support. What Wall Street really cares about when it comes to the Obama administration’s housing-finance proposals, expected Friday, is that Uncle Sam continues to guarantee the bulk of the country’s new mortgages.
The rest is just details. Important ones, to be sure, especially as they relate to the shape and size of Fannie Mae and Freddie Mac, as well as the cost of mortgages. But the central question revolves around whether government should explicitly back mortgages.
Sadly, the administration’s proposals aren’t likely to tackle that issue head on, even if they are painted as long-term moves to wind down Fannie and Freddie. The ostensible reason is that any transition away from government support, unless taken super slow, would further depress housing and choke off the economic recovery. Currently, Fannie, Freddie and agencies like the Federal Housing Administration guarantee more than 90% of all new mortgages.
But there is a deeper reluctance to upset the postcrisis status quo. Markets favor a world in which government takes on most, if not all, mortgage credit risk while investors deal only with things like interest-rate risk. While there is much ire directed at Fannie and Freddie, “many groups benefited from the existing system and want to see a version of it remain,” Jaret Seiberg, an analyst at MF Global, noted in a report this week.
For taxpayers, however, this makes little sense. They get stuck with a potentially huge bill while supporting investors who should be in the business of assessing credit risk. If changing that means mortgages grow more expensive over time, it would at least remove the temptation for politicians to use mortgages as an instrument of policy and ensure that house prices remain more in line with fundamentals. The trouble is, without a hard deadline for change, even if years out, markets will likely defeat any attempt to remove guarantees.
So what will the administration propose? The Treasury Department is expected to put forward three proposals, one in which the government would exit from the housing-finance market, another in which there is more limited involvement and a third that more closely mirrors the current backing afforded through Fannie and Freddie. But this isn’t likely to result in any drastic change to the overarching structure of mortgage markets for some time, notes FTN analyst Jim Vogel.
Granted, there may be incremental changes. Analysts at Goldman Sachs say these could include efforts to reduce the size of loans that can be backed by Fannie and Freddie, reduce the size of the mortgage giants’ balance sheets and increase the fees they charge to guarantee mortgages.
Those are all good steps. But without a long-term commitment to stop subsidizing and distorting housing markets, they will fall short.