By Jon Prior
A Mitt Romney administration plan for a future housing finance system likely shuns any form of a government guarantee based on the Paul Ryan, R-Wis., pick as candidate for vice president.
Ryan, as head of the House Budget Committee, released a plan that was passed by the House last year to slash spending across nearly every sector of the government, excluding the military. After Romney selected Ryan as his vice president, the plan received renewed attention from Democrats looking to target long absent specifics from the Romney campaign and Republicans hoping to recharge its base.
The selection also gives markets much needed insight into how Romney may proceed with the long-awaited reform of the government-sponsored enterprises. The long-term outlook of the Ryan plan involves a complete wind-down of Fannie Mae and Freddie Mac and an end to the $188 billion in bailouts so far.
The Ryan budget would “privatize the business of government-owned housing giants, Fannie Mae and Freddie Mac, so they no longer expose taxpayers to trillions of dollars’ worth of risk.”
The Obama administration released three options last year Congress could pursue, which include various degrees of government support to the future mortgage market, including a completely private option. But that was where the process stopped outside of roughly 15 bills passed by the House, each largely duplicative of the conservatorship agreements.
“Taxpayers’ exposure to Fannie and Freddie, once an implicit guarantee, has now become an explicit obligation to cover its debts,” Ryan wrote in his plan. “The housing-finance system of the future will allow private-market secondary lenders to fairly, freely and transparently compete, with the knowledge that they will ultimately bear appropriate risk for the loans they guarantee. Their viability and profitability will be determined, not by political favoritism, but by the soundness of their practices and the value of their services.”
Many in the industry feel a completely private system – one that hasn’t existed since Fannie was chartered in 1938 – would be unlikely to ever arrive.
Tom Cronin, managing director for financial adviser The Collingwood Group, said until reforms such as the qualified mortgage, risk retention and the new servicing standards are in place, and more importantly, understood, private capital would remain slow to return.
“I don’t think anything is in place for that to be a likely outcome anytime soon,” Cronin said in an interview. “Just because he [might be] vice president and just because his budget is being revisited, we’re still nowhere near an era of private capital to support housing finance. Absent some secular activity, there are no broad based initiatives getting any spotlight.”
The housing market is improving, he said. Fannie, Freddie and the Federal Housing Administration are strengthening their balance sheets while funding much needed financing to clear the excess inventory leftover from the bubble. But even down the road, large investors stateside and abroad will be unlikely to return without some sort of government guarantee, he said.
“Prospectively, we need it and would like to see it. I’m not sure Paul Ryan being on the ticket and his focus on the budget is consequential at all. He’s a voice on the right, and it would be ideal if we had private capital. It’s a worthy goal, but I don’t think we get there without some explicit government backstop,” Cronin said.
The only like-minded bill to move beyond a Congressional subcommittee was the Private Mortgage Market Investment Act from Rep. Scott Garrett, R-N.J., which supported a completely private system similar to what Ryan proposed. A subcommittee Garrett chairs approved the bill in December. It has yet to be brought up before a full committee.
Even if Romney wins the election, Republicans would have to take a majority in the House and Senate to pass such a plan, which met opposition from not only Democrats, but powerful industry interest groups, as well.
Proposals from the Mortgage Bankers Association, the National Association of Realtors and borrower groups such as the National Community Reinvestment Coalition each back plans putting private capital in a first loss position but still involving some sort of guarantee from
“It is important to note that the absence of a guarantee does not mean the government will not be forced to step in during a crisis,” MBA CEO David Stevens told a House panel last year. “The most recent crisis has shown the government’s willingness to support even institutions that lacked even an implicit guarantee. The taxpayer is better protected, and the market will operate more efficiently, if the rules of the road are clearly stated upfront, and government guarantees are clearly delineated and paid for before the crisis occurs.”
On “60 Minutes” on August 12, Romney began distancing from the Ryan plan, giving him room to maneuver away from its controversial specifics.
“I have my budget plan,” Romney said. “And that’s the budget plan we’re going to run on.”
The Romney campaign did not respond to questions about what the candidate may plan for Fannie
The Obama administration has not released its own plan either, but warned about pursuing a completely private market. The Treasury told Congress when the three options were unveiled that such a plan could shut out many borrowers, because without the guarantee, home loans could become more expensive.
“While mortgage rates are likely to rise somewhat under any responsible reform proposal, including the three outlined here, the effect could be larger under this option,” according to the Treasury white paper.
“In particular, it may be more difficult for many Americans to afford the traditional pre-payable, 30-year fixed-rate mortgage.”
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