US home policy has 'failed', FDIC boss tells Wharton

At Penn's Wharton School real estate program, where scholars helped develop the property finance techniques that inflated the home market up to its 2008 crash, bank-bailout boss Sheila Bair of the bank-funded Federal Deposit Insurance Corp. said it's time to fix Fannie and Freddie fast - and to reconsider the whole federal policy of promoting home ownership via cheap credit. Her talk here. Highlights:

While home-loan financiers expected "long-term payoffs,... many other parties – from the mortgage brokers, to the lenders, to the securities underwriters, to the ratings agencies – got paid upfront. This divergence of financial interests... explains... why trillions of dollars in faulty mortgage paper was issued before the home price bubble finally collapsed...

"In 2009, the [Federal Housing Administration, Fannie Mae, and Freddie Mac] accounted for 95 percent of total U.S. mortgage originations... Federal subsidies for the GSEs in 2009 and 2010 are estimated at over $300 billion... We cannot... perpetuate their quasi-governmental status, which privatizes gains and socializes losses.

"After the financial reform package becomes law, GSE reform should rise to the top of the agenda. The goal must be to clarify once and for all which functions should be governmental, and which are strictly subject to the discipline of the marketplace...

"Homeownership is certainly a worthy national goal. But does it make sense for the federal government to subsidize homeownership in an amount three times greater than the subsidy to rental housing?... These subsidies have helped to promote homeownership, but have failed to deliver long-term prosperity."