WASHINGTON ( TheStreet) -- 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 ( BAC) 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 ( AIG), JPMorgan Chase ( JPM), Citigroup ( C), BlackRock ( BLK), Goldman Sachs ( GS) and Morgan Stanley ( MS) -- 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.
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.
A Special Series by TheStreet >>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..
U.S. Mortgage Crisis
A Special Series by TheStreet >>