A GSE-Free Future?

So, we’re just a week away from the original deadline for the Treasury Department to offer up its bold plan for the future of Fannie Mae and Freddie Mac. While a delay is expected, little will likely happen this year to the same government sponsored enterprises that turned the U.S. housing industry from a local partnership between bankers, builders and homebuyers into a global industry that ultimately cost U.S. taxpayers hundreds of billions of dollars. Reading the opinions of the various pundits and observers in the trades and around the blogosphere, I can’t shake the feeling that I’m trapped on the set of one of a cable network’s sex in sandals shows. I can almost hear the coliseum crowd from here: death, Death, DEATH! You can hardly blame the industry. For decades now, mortgage loan originators have been held hostage to companies that told them what they could sell, for what price and with what built-in fees after using what underwriting technology. And then, just to add insult to injury, these same originators were told which loans they had to buy back. Not the kind of partner you wish a long and happy life. And don’t even get me started on their relationships with the nation’s mortgage loan servicers. I’ve said it before in this space, and at the risk of becoming boring, I feel compelled to point out that something happens to people when they become convinced that they have been trusted to make all the rules for the benefit of those of us who are for whatever reason incapable. It happens in every government agency and soon we’ll see it again with the new Consumer Financial Protection Bureau. But let’s stay on topic. GSEs: live or die? Discuss! Okay, then, what kind of death? It’s not like the industry is ready to attract non-government investors. Until we make it clear that an investor can recover from a borrower who decides to stop making payments, we stand little chance of getting anyone other than the government (i.e. an investor that’s used to spending $10 for every $1 of benefit). This means we’ll still need some vehicle for getting taxpayer money into the hands of good borrowers. We need someone that has a long history of loaning to borrowers, preferably someone who has worked with borrowers who are a bit risky. Someone like, I don’t know, the Federal Housing Administration. Okay, I know. This agency has been stretched all out of proportion when it became the de facto subprime lender for the industry. But it didn’t explode, or implode. Delinquencies rose, check engine lights came on, but the agency is still making loans. Maybe we should throw a few billion into turning FHA into the way the government supports American homeowners. Beats throwing hundreds of millions into legal defense for former, former-GSE executives who are trying to explain in court how their conflict of interest between showing returns and fulfilling a charter sucked billions of dollars down a black hole. In any event, we may well end up living in a GSE-free world, but our industry will still have a major government-backed investor in the game for a long, long time. I’d love to see your ideas hit my Twitter stream. If I get enough I’ll send them to Treasury for consideration (and throw a few quarters into the town’s wishing well while I’m at it). Rick Grant is veteran journalist covering mortgage technology and the financial industry. Follow him on Twitter: @NYRickGrant