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Mortgage Reform of Biblical Proportions

Politicians cite chapter and verse when it comes to Fannie and Freddie.



) -- Alex Pollock seems to know that no one agrees with him, but he doesn't seem to care. That's because he seems to think he's right.

If there were any living representation of the cheese who stood alone, it'd be Pollock at the Treasury Department's panel discussions about the future of the housing-finance industry on Tuesday. A former banker and regulator, Pollock is now a fellow at the conservative think-tank the American Enterprise Institute. His ideas for reform don't quite jibe with the industry's -- or a good portion of the political establishment.

Calling his idea a "Julius Caesar strategy," Pollock, who prides himself on cleverness, said he'd first divide the system into three parts ("like Gaul") during a transition period leading up to a system that had no GSE involvement at all. The parts active in the market would be privatized, the regulatory parts would go to the Federal Housing Administration. The existing mortgage portfolios of Fannie Mae and Freddie Mac would be wound down over time.

"There is a verse in the book of Proverbs which addresses guarantees," said Pollock, " ... and it goes like this: 'He who stands a surety for the debts of another shall smart for it.' "

He later cracked, "This may also be known as the FDIC verse," referring to that agency's reputation for being a much stricter regulator than others.

The closest anyone came to agreeing with Pollock during the conference's main discussion panels was


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Chief Economist Mark Zandi. Though he stopped short of saying the government ought to outright abandon the mortgage market, he did call current policy unaffordable and advised that "the government's role in housing needs to be pulled back quite significantly."

Most other panelists -- from mortgage executives at

Bank of America

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Wells Fargo

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, to MBS buyers like

Bill Gross to affordable-housing advocates like Marc Morial to Lewis Ranieri, who essentially created the mortgage-backed securities market at Salomon Brothers in the 1980s -- tended to recognize that the government will have a place in the U.S. housing system out of necessity and politics, if nothing else.

"America has been overhoused and overconsumed, producing too many mortgages people couldn't afford," Gross said in a blunt characterization of the country's avarice. But he also said that a U.S. housing finance system absent federal assistance "isn't realistic."

Pollock's unpopular policy position is similar to a proposal outlined by a few top

Republican lawmakers during the financial-reform debate. In an editorial last month, Pollock became one of the few high-profile policy wonks to make the Fannie-Freddie issue a priority, criticize the government's lack of progress to-date and point out Democrats' prominent role in creating the flawed system in place today. In a veiled reference to Rep. Barney Frank (D., Mass.), Sen. Chris Dodd (D., Conn.) and former President Bill Clinton, among others, Pollock noted that "members of the Democratic Party were Fannie and Freddie's principal promoters and protectors."

In turn, Frank -- the most prominent legislative champion of Fannie and Freddie before the crisis -- defended his lack of action or comment since the two firms entered conservatorship in September 2008. In a New York Times article on Monday, Frank first makes the argument that lawmakers did a lot by putting Fannie and Freddie into conservatorship. He then says there hasn't been anything to do in the intervening time since the private market hasn't been clamoring to take over their role, and since they're losing money on legacy loans, not those that have been made since the fall of 2008.

"I take offense at the idea that we've done nothing," he told the Times, later adding that "there is no urgency" to do anything.

On Tuesday, Eliott and Treasury Secretary Timothy Geithner traded barbs in a humorous fashion, though the tension was palpable.

Geithner made a point of discussing "some persistent misconceptions," referring to the "myth" that taxpayers are exposed to more losses the longer Fannie and Freddie remain under government control. He noted that the GSEs' problems were "the result of mistakes made in the years leading up to this crisis," and that "a Republican president" had put them into conservatorship. Following Geithner's keynote address, Secretary of Housing and Urban Development Shaun Donovan gave a speech that seemed to be more stump than substance, targeted at middle-class voters who will be key to the November election.

"We today stand on that firmer foundation as we consider all that is at stake in housing finance -- not only for Wall Street, but for the families and businesses on Main Street," said Donovan. While he agreed that GSEs will have to play a smaller role than the 90% market share they maintain today, he advocated a system that would support middle-class goals of homeownership, while helping low-income families attain that level of wealth.

Despite Pollock's lonely position on the "get rid of Fannie-Freddie" front on Tuesday, he seemed to enjoy the spirited debates that occurred, using his wit as cover for a largely unsympathetic crowd. Though Pollock took issue with even the Treasury Secretary's recap of his position -- calling it "Tim Geithner's" version of what he had said -- Pollock's injection of humour turned him into a cross between comedian and curmudgeon.

At a lunch panel, Ranieri asked rhetorically whether anyone believed that mortgage portfolios were made up of anything but income. Pollock's retort: "Yes: Loss."

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


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