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Banks Want U.S. to Back Mortgages

The financial services industry says the government has an essential role in mortgages.



) -- The financial industry doesn't want the government to exit the mortgage market, and with good reason: The government provides the liquidity, cost-efficiency and safety that the private market simply can't.

"The balance sheets of commercial banks cannot accommodate the amount of capital that is needed to maintain the mortgage finance system," Greg Baer, one of

Bank of America's

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top lawyers told the Treasury Department in an official comment letter regarding housing-finance reform.

At a Treasury event on

Tuesday to examine what ought to be done about Fannie Mae, Freddie Mac and other government-sponsored enterprises, that sentiment was echoed far and wide, by regulators and policy wonks as well.

All along the mortgage pipeline -- from bankers to securitization experts to buyers of mortgage-backed securities to Lewis Ranieri, the so-called "father" of those MBS -- all agreed that the government must stand behind the country's mortgage industry, if there is to be an industry at all in the near-term.

"An explicit guarantee will be required to ensure a reliable flow of mortgage credit," said Mike Heid, co-president of Wells Fargo Home Mortgage. Barbara Desoer, who holds a similar position at Bank of America said that while she doesn't foresee a need for GSEs to hold mortgage-backed securities in the long-term, guarantees will be a necessity.

Free-market conservatives have advocated an

approach much different than the one supported by industry groups, which the Obama administration seems to be leaning toward. They would prefer to see the government completely exit the mortgage market, after winding down GSEs' existing obligations over a period of time.

But SIFMA, a coalition of securitization industry players, said in its comment letter that "abandoning" the mortgage market "would have serious and long term consequences for the global flow of capital to the United States."

The group -- whose membership boasts an assortment of financial players like AIG

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-- also says that privatizing the GSEs would lead to "greater volatility" and increase the cost of mortgage borrowing for consumers.

Others who attended the conference backed that view.

Alan Boyce, who runs an overseas MBS venture called Absalon with hedge-fund manager

George Soros , indicated that the whole mortgage-securitization market might collapse without a government backstop.

"It's very unlikely in the near future to be able to sell MBS in the United States without a government guarantee," said Boyce, a former senior executive at Countrywide Financial, the country's biggest mortgage originator at the height of the subprime bubble.

Bill Gross , arguably the public face of the mortgage-bond buy side, reiterated an earlier statement that he would stop purchasing MBS for the giant fund he manages at Allianz's Pimco. He went a step further on Tuesday, warning that "mortgage rates would be hundreds -- hundreds -- of basis points higher" if the government didn't stand behind the country's mortgage debt.

"To suggest that there's a future for private, secondary housing finance just isn't realistic," he said.

Yet despite the widespread cry for continued taxpayer support, there was much less consensus about how to fix the core problem of Fannie and Freddie: conflicting interests.

The two firms were created by the federal government to expand homeownership yet allowed to operate in a "hybrid" structure as

publicly traded entities . At the same time, they weren't regulated like utilities; they were prodded into riskier business by shareholders and regulators alike.

As the two biggest players in the mortgage-finance market, they also crowded out private competition by having lower capital requirements and offering safer debt at a lower cost due to government support. (Both Heid and Desoer said that establishing a "level playing field" should be a top priority for reform.)

As a result of the myriad of interested parties, Fannie and Freddie have been pulled in different directions: Shareholders and bond holders are reliant on Fannie and Freddie for profits; lawmakers and regulators are reliant on Fannie and Freddie to promote affordable-housing goals; borrowers are reliant on Fannie and Freddie for cheap, easy credit; mortgage originators are reliant on Fannie and Freddie to sell their debt; and MBS buyers are reliant upon Fannie and Freddie to woo investors and boost bottom lines using their "implied" guarantee.

Now taxpayers are holding the bag of bad debt.

"In the end, Fannie and Freddie created what they were created to prevent," said Ranieri, who was deeply involved in the inception of today's MBS market at Salomon Brothers in the 1980s and now heads

Ranieri & Co


Ranieri was speaking at the Obama administration's event on Tuesday as well. The bio handed out by the Treasury Department calls him "the 'father' of the securitized mortgage market," though his name entered the public lexicon in a far less flattering way, with Michael Lewis' book

Liar's Poker

. He was characterized as an uneducated, hard-driving salesman with questionable tactics who didn't always serve clients well or abide by the law, and oversaw a force of profane, gluttonous slobs.

Nonetheless, Ranieri is still a legend. He offered a dose of common sense as someone who was there through it all -- from creating MBS and the GSEs, through the market's ups and downs over nearly three decades, to the subprime bubble's bursting, and now into the post-crisis reality of Fannie-Freddie conservatorship.

In Ranieri's view, things went awry because of lax regulation and a failure of ratings agencies' supposed checks and balances. As a result of those deficiencies, and the economic reality of mortgage lending, he agrees that the housing market will have much more difficulty recovering without significant, explicit support from the federal government.

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U.S. Mortgage Crisis

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Before mortgage securitization was commonplace, borrowers were required to put about 30% down on their mortgages -- the level that Gross says he would require to buy any non-government-backed MBS in a GSE-free world today.

The banking industry has shored up its underwriting standards from the carefree days of 2005 to 2008 as well. Yet the Federal Housing Administration is about to adopt guidelines that will push the down payment for low-income borrowers up to a whopping 6.5% from the current requirement of 3.5%.

"There are some things that are socially desirable," says Ranieri, "but not necessarily economically viable to do."

-- Written by Lauren Tara LaCapra in Washington, D.C.


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