WASHINGTON (MarketWatch) -- Participants at a housing finance conference Tuesday largely agreed that subsidies for housing need to be reduced but not eliminated even as they disagreed on how far government assistance to the mortgage market should be curtailed.
The gathering Tuesday comes in the wake of the near-nationalization of Fannie Mae and Freddie Mac at the peak of the credit crisis in 2008. So far, the mortgage giants have cost taxpayers roughly $145 billion in funds, used to cover their losses, with more losses expected on the horizon.
Nonetheless, most new mortgage loans are guaranteed by Fannie Mae /quotes/comstock/11k!fnma (FNMA 0.36, -0.01, -1.88%) and Freddie Mac /quotes/comstock/11k!fmcc (FMCC 0.40, -0.01, -1.25%) and the Federal Housing Administration.
U.S. Treasury Secretary Tim Geithner, fourth left, participates in the Obama administration's Conference on the Future of Housing Finance in the Cash Room of the Treasury Building in Washington, August 17. With Geither are (L-R) PIMCO's William Gross, Bank of America's Barbara Desoer, National Urban League's Marc Morial, New York University's Ingrid Gould Ellen, American Enterprise Institute's Alex Pollock and the University of Pennsylvania's Susan Wachter.
U.S. Treasury Secretary Timothy Geithner and the vast majority of the participants at a gathering on the fate of Fannie and Freddie decided that no matter what structure will emerge - and dozens of different approaches are being considered - the government would offer some type of federal guarantee of mortgage securities to buyers in the market for a fee. Read Geithner's remarks.
Some participants called for a significant continuation of the guarantee program, while others called for a transition to a system where the guarantee should only kick in to cover catastrophic losses.
Ingrid Gould Ellen, professor of Urban Planning and Public Policy at New York University's Wagner Graduate School of Public Policy, said that the government should set up such a "catastrophic loss" guarantee where private investors take the first set of losses before the guarantee kicks in. In one scenario, investors would take the first 5% of losses when a high quality pool of mortgage securities fails, while the government guarantees the other 95% of the package. She argued that over time the catastrophic guarantee would cover a smaller share of the market, as the private sector increases its share.
"Private-market insurers, securitizers would cover the first losses and all of their capital would be at risk, and you might even require, for instance, that there be -- that private mortgage-backed securities stand in front of the -- of the guaranteed bonds to provide a further cushion on losses," Ellen said. "We certainly want to begin to ratchet down the public involvement, and we want to begin to ratchet down, over time, the limits on the government programs so over time that this sort of catastrophic guarantee would cover a smaller share of the market."
However, Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said he favored the creation of one national agency that would impose a broad government guarantee. Gross said that without government guarantees, mortgages would be hundreds of basis points higher, resulting in a moribund housing market for years. He added that PIMCO would not buy a privately insured mortgage pool unless it was made up of mortgages that each had at least a 30% down-payment, an amount that is unachievable for most first-time borrowers.
"The concept of guarantees is crucial to the liquidity and to the cost of home financing; it lowers it. It is the ultimate liquidity provider and the lowest cost provider," he said. "PIMCO advocates a hundred-percent public finance, with government guarantees that are protected by adequate down payments, obviously, and sufficient insurance premiums."
However, Alex Pollock, fellow at the American Enterprise Institute, argued that the bulk of mortgages should be private and the government should phase out much of its guarantees.
"The way we get there is by ratcheting down the limits for all the government guarantees; that is, for Fannie, for Freddie and the Federal Housing Administration," Pollock said.
Marc Morial, president of the National Urban League, indicated that he was concerned about what impact a reduced reliance on government guarantees would have on the flow of credit to homeownership in the U.S.
"One thing I don't want is a system where homeownership is available to a few, where underwriting rules require 35 % down-payments, where only some Americans can afford a home -- and then we create a class of renters," he said "What impact does the design of the guarantee have on the objective of improving and increasing the flow of credit in homeownership in this country."
Ronald D. Orol is a MarketWatch reporter, based in Washington.
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