The American Bankers Association (ABA) said it believes the role of government in housing finance should be dramatically reduced from its current level, according to a letter sent to federal officials today.
In the letter, Frank Keating, president and chief executive officer of ABA, shared recommendations for the future of government sponsored enterprises (GSEs) with Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan.
The letter details a path that can be followed to reduce and transform the housing finance role currently provided by GSEs. Also, rather than develop a "silver bullet" solution to housing finance, the ABA suggests that policy makers create a well-regulated covered bond market, as well as enhance the Federal Home Loan Banks to better help them meet their mission of providing advances to private market portfolio lenders with minimal taxpayer exposure.
"A well-regulated private market should be the desired financing source for the bulk of borrowers whose income and credit rating qualify them for conventional financing," Keating said.
The ABA recommends an increase in guarantee fees, or "G fees," as the primary mechanism for reducing government involvement, as well as for compensating the government for its ongoing support.
"By dialing up the G fees in an orderly and well-detailed manner, eventually the private market will find itself in a position where it is better able to compete with the GSEs for business," Keating said.
The other key mechanism for transition to a private market will be the creation of more reasonable loan limits for GSE purchases, ABA said.
"While some high-cost areas persist and a recovery of the housing market will entail a hoped for stabilization and recovery in home values, the conforming loan limits for most of the nation can be reduced," Keating said.
The ABA said it believes any GSE successor must contribute necessary market stability and liquidity, and have adequate capital. In addition, the new book of G-fee business should provide healthy returns that support government payments and absorb some of the potential bad asset losses. The resulting guarantee business should be managed and regulated to dramatically shrink its market share, and also to establish incentives for growth of purely private mortgage finance alternatives to fill that market share.
"The end goal we envision is a housing finance market in which more than half of mortgage finance occurs without federal secondary market guarantees of any type," Keating said. "That vision may take years to attain. However, it is essential that we start taking incremental steps toward these goals, and trust in our ability to make mid-course corrections as we progress."
