Purchasing a home is an important milestone and perhaps the greatest embodiment of the American dream. While a fragile housing recovery is under way, the outlook is bright. Many in the real estate finance industry are optimistic about the future as purchase demand grows, home prices stabilize, and mortgage performance improves. However, the recent credit crunch and ensuing recession have left many in private capital reluctant to invest in the now-burgeoning U.S. housing market. As Washington embarks on the road toward recovery, its goal should be a fully functioning market that relies more heavily on private capital, with a limited, appropriate role for federal programs.
Why is private capital so vital to the mortgage finance industry? Reducing the government’s involvement provides an even playing field for lenders of all sizes, giving consumers greater choice and increased access to more competitive loans. It allows for smaller lenders – the engines of our economy – to thrive and will inevitably help open doors for families who have hitherto been unable to secure a mortgage. In the current environment, private capital has effectively been crowded out. And private capital should not be misunderstood to represent unsafe loans to consumers. Appropriate and needed regulatory changes have reformed the mortgage industry and the products offered. This is about expanding capital, not lowering qualification standards.
A first step to this end includes a transparent, substantive debate over the future of government-sponsored enterprises (GSEs). These GSEs – Fannie Mae and Freddie Mac – do not make loans. Instead, they buy mortgages and mortgage-backed securities and fund purchases through the issuance of mortgage-backed securities, general obligation corporate debt, and other sources of capital. Even though Fannie Mae and Freddie Mac don’t sell mortgages directly to consumers, they command enormous control over the private real estate finance market and, inevitably, impact the terms of all mortgages from all lenders.
Recipe For Success
In order to bring private capital back into the mortgage market in a way that benefits both taxpayers and consumers, the Federal Housing Finance Agency (FHFA) should require GSEs to offer risk-sharing (i.e, insurance) options to lenders at the “point of sale” of mortgages, rather than on the back end after loans have been delivered to the GSEs. In doing so, lenders can eliminate the risk from their loans before they are sold, and the mortgage insurance market would be opened to all lenders, instead of solely the GSEs through which lenders must go to secure risk-sharing options. This step would ensure private capital, not taxpayers, is in the first loss position and would give lenders of all sizes the opportunity to compete, driving down costs for borrowers. Likewise, if private lenders were to run into trouble, the burden wouldn’t fall on taxpayers, as it now does for GSEs; instead, they would handle the repercussions as any private company would.
Fannie Mae and Freddie Mac have and should continue to play a pivotal role in the nation’s housing market. However, if we want to create a diverse marketplace, keep loans competitive for borrowers and lenders, and get back on a meaningful path way toward recovery, we must change the current system to encourage and allow for more private capital – and ultimately make qualified borrowers feel safe, confident, and secure in their loans.
Kurt Noyce is president of Embrace Home Loans.
