"We as a nation need to ask and answer some hard questions about what we want out of our housing finance system," Edward J. DeMarco, acting boss of the agency that regulates Fannie Mae, Freddie Mac and the Federal Home Loan Banks, told the Senate Banking Committee today. His testimony here.
What, if anything, should the government do to influence the price of home loans?
Bad things happened when "markets relied upon an implicit government guarantee," as Fannie and Freddie financed riskier loans from the early 1990s until the market collapsed in the mid-2000s.
But if the government pulls out and leaves the private sector in charge, there'll be times when investors and banks stop lending, he warned. "Do we need to ensure there is a balance sheet of last resort?"
"What level of government credit support is needed to have a mortgage market that operates efficiently?" Should the government offer "limited catastrophic credit insurance?" Or should it leave that to the private sector - but with strict "regulatory oversight" and increased "transparency," so investors know more about the loans they're buying?
DeMarco suggested that, if the government really wants to help first-time homebuyers, "subsidies" for "first-time homebuyers could be more efficiently targeted through down payment assistance" than by the"general subsidy provided to all types of mortgage credit" that fed he curtent crisis.
And it's still a crisis. Fannie and Freddie have burned up all their capital, plus $96 billion in Treasury stock investments; they "remain troubled and likely will require" more taxpayer money. And that's despite more than $1 trillion in Federal Reserve and Treasury purchases of Fannie and Freddie mortgage-backed bonds in the past year.
Meanwhile, the $1 trillion-asset Federal Home Loan Bank system faces big losses, too, which have been masked by changes in accounting rules.
For all these lenders, which now make most U.S. home and apartment loans, delinquencies are still going up. And we're only in what DeMarco calls "the early stages of an important national discussion" about what to do.