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NEW YORK (
TheStreet) -- Housing finance experts are increasingly taking the view that the future of mortgage finance cannot exist without a government backstop.
A new paper authored by Mark Zandi, chief economist of Moody's Analytics, and former government officials from both sides of the political aisle calls for an end to government-sponsored enterprises
Fannie Mae(FNMA) and
Freddie Mac(FMCC), the bailed-out housing giants who now originate more than 80% of today's mortgages.
"Fannie Mae and Freddie Mac would not be part of the future housing finance system. Their investment portfolios would be wound down, their securitization activities spun out into the new platform, and their guarantee functions sold to privately funded MBS insurers. Any remaining assets would be sold. Taxpayers would be repaid (to the extent possible) for their past support of Fannie and Freddie," the authors wrote.
This largely reflects the thinking in Washington, where there is little political appetite to return the agencies back to private hands, even though both are now making record profits.
But the new system will not be completely devoid of the government's involvement. The paper instead calls for a system where private capital takes the first-loss position, while the government will step in in the event of a catastrophic failure of the mortgage market.
"In good times, when private capital is ample, private markets would provide a broad range of mortgage products with a limited government backstop. During times of severe economic stress, when private investors are unwilling to bear much risk, the government's market share would naturally expand," they wrote.
This is in fact what happened in the financial crisis. The difference is, the government's role in the future would be "explicit and transparent" so that taxpayers are compensated for their risk.
The authors consider a government backstop essential for a stable financial system that ensures borrowers get access to credit under all economic conditions. "...Though the previous housing system had serious flaws, government involvement meant that mortgage financing remained available during the financial crisis even while other parts of credit markets experienced considerable strains," the authors said. "Although costly and poorly conceived in the previous system, the government backstop eased the severity of the Great Recession that followed the subprime market collapse."