A Housing Reform Test Drive

By / 9.10.2013

U.S. housing officials are preparing to reduce the government’s abnormally large footprint in mortgage markets, one of the most visible remaining legacies of the subprime lending crisis. It’s the right move at the right time.

The Wall Street Journal reported Monday that the Federal Housing Finance Authority will order Fannie Mae and Freddie Mac to cut the size of mortgage loans they will guarantee. The idea is that with the government backing nine out every 10 loans, taxpayers are bearing too much risk, and it’s time for private capital to step in and take on a greater share.

That’s the right call, but it will meet resistance from the housing industry and consumer advocates who worry, quite reasonably, that it might mean even tighter credit for middle-income homebuyers in certain high-priced markets (typically found along the coasts), such as San Francisco, New York and Washington, D.C. Such advocates of maintaining the status quo say the recovery is still too shaky and investors are still leery about buying and making loans to any but the most affluent, low-risk borrowers.

But private mortgage investors, on the other hand, are likely to applaud the FHFA’s move. Investors and securitization firms like Redwood Trust and Two Harbors have been eager for the opportunity to show what they can do when they don’t have to compete with the federal government. They say there is plenty of appetite for private lending, so long as they aren’t undercut by the ultra-low rates the government can offer.

At some point, we must move from the “recovery” phase of the housing crisis to the “reform” phase. Creating a sustainable mortgage finance model will entail some difficult choices, like when and how much to lower the guaranteed loan limits.

Read the entire piece at U.S. News & World Report.