by Ethan Handelman, National Housing Conference
Restructuring expert and former Treasury official Jim Millstein has come out with a plan for mortgage finance reform. The plan models a government guarantee of the secondary mortgage market on the FDIC, creating a reinsurance model that would allow a smooth transition from the current system by gradually rebuilding the reserves to stand between taxpayers and potential claims. The plan is worth looking at (see Panel #4 on this video of a recent presentation and the accompanying slides), but even more important is Millstein’s clear explanation of why we need government backing in secondary mortgage markets.
Millstein’s key early observation is that we need to be realistic about the availability of private capital. Government backed sources currently support the market almost entirely right now, and private capital sources are nowhere near ready to step in. To hammer this home, Millstein compares the average daily trading volume in 2011 of corporate debt, municipal bonds, and non-agency mortgage-backed securities (MBS), which together totaled $30 billion. Average daily trading of government-backed agency MBS was $256 billion, plus another $53 billion of agency debt. That mismatch—more than a factor of ten—helps us see that only government backing can bring in the volume of capital we’ll need for the foreseeable future.
One point where Millstein could spend more time is making the new mortgage finance system has a way to deal with down cycles, those times, like right now, when private capital heads for the hills. For all their flaws, Fannie Mae, Freddie Mac, and FHA are filling the void left by fleeing private capital so that the mortgage markets continue to function. Whatever replaces them needs to do that, too, because the one thing we know for sure is that there will be another down cycle. We just don’t know when, so we need to have the infrastructure in place to ride it out.
A second point is affordability, which Millstein acknowledges in the Q&A portion. Whatever system we create to replace Fannie Mae and Freddie Mac must make credit broadly available through proven, stable products like the 30-year fixed-rate mortgage. Mortgage securitization is amazingly efficient, and our society should provide the benefits of that efficient infrastructure broadly to low- and moderate-income families who can responsibly achieve homeownership and build wealth over time.