The Treasury Department held a press-and-policy-maker event on Tuesday to start the discussion about housing-finance system reform. High-profile experts representing the government, borrowers and various parts of the industry were featured speakers in panel discussions.
The crib notes are thus: The Fannie-Freddie model of housing-finance is kaput; the new system will almost certainly include (explicit) guarantees on certain types of residential mortgage-backed securities to help middle-class borrowers; and low-income borrowers will be incentivized to rent until they can afford to buy.
Wow.These are the kinds of things that have been vaguely suggested by the power set in Washington and the bankers on Wall Street for the past couple years of uncertainty. But now they've nearly been said explicitly, and with the molasses-like speed of Capitol Hill progress, that's saying a lot. "This is a test for Washington," said Treasury Secretary Tim Geithner, after his keynote speech. "The stakes are high." Most of the official news on policy came from reading between the lines of Geithner's speech. The Treasury Secretary indicated that Fannie and Freddie will die -- albeit with an "elegant funeral" -- and their legacy portfolios will be wound down. While he didn't outline any explicit policy objectives, he said "I believe there is a strong case to be made for a carefully designed guarantee." With widespread industry support for such a move, it's nearly certain that Fannie and Freddie will be replaced by a system that's similar but with important distinctions: No "hybrid" structure where shareholder gains are subsidized by taxpayer support; an explicit guarantee on debt, rather than an assumed one; pricing on guarantees that's more favorable to taxpayers; and capital requirements that give private players a chance to compete in the mortgage-buying space. Beyond that, in group sessions after the main panel discussion, conversation was dominated by the various interests who have a stake in housing reform. Representatives from Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), PNC (PNC), Citigroup (C), U.S. Bancorp (USB), Morgan Stanley (MS), Blackrock (BLK), State Street (STT) and a variety of other firms were there to offer the "industry"'s side of the story. Then there were the buyers of mortgage bonds outside the banking industry, like Bill Gross, chief investment officer of Allianz's (AZ) PIMCO, who manages its most prominent bond fund; and Bill Irving, who manages a big fixed-income fund for Fidelity. The Chamber of Commerce was there to represent the non-bank industry side, which will see economic effects of major housing-industry changes as well. "Main Street" was represented by a variety of officials from the Treasury, HUD, Federal Reserve, FDIC, legislative offices and consumer groups as well. Civil-rights advocate Marc Morial, who heads the National Urban League, took umbrage at the suggestion that low-income borrowers had played a key role in the housing downturn. He characterized them as victims who have been taken advantage of and suffered greatly, rather than as naïve or irresponsible borrowers.
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