The public may be calling for the “ritual slaughter of Fannie Mae and Freddie Mac,” but bringing private capital back into the mortgage finance market without some sort of government backstop is “fanciful at best,” according to Jim Millstein, chairman and CEO of Millstein & Co.
Millstein made that assertion while speaking at HousingWire’s 2012 REthink Symposium in Palm Beach Gardens, Fla.
Prior to forming Millstein & Co., an investment management and financial advisory firm, Millstein served as chief restructuring officer at the Treasury, where he oversaw the restructuring of American International Group (AIG).
Instead of pushing for an abrupt end to the government’s role in the mortgage finance system, Millstein called for an orderly transition and proposed the creation of a new entity, similar to the Federal Deposit Insurance Corp., that would essentially function as a reinsurer protecting taxpayers from the risk. The agency also would take on a regulatory function over the government-sponsored enterprises.
Another step would be to segregate “the mortgage guarantee business from the portfolio business” at the enterprises, Millstein said. His plan would raise guarantee fees to 65 basis points, of which 10 would go to the new reinsurance public agency.
“The balance would then go to Fannie and Freddie to help them accelerate their buildup in capital,” Millstein explained. “When they are adequately capitalized, then you move to privatize the GSEs.”
Millstein told HousingWire in an interview that the approach is practical, but it’s competing against political philosophies and public anger over the financial crisis, resulting in calls for an end to government involvement.
“These things take time,” he told the audience. “We’re talking about a massive restructuring of all the private guarantees and all the moral hazards that evolved from that.”
