If we could go back in time, decades ago we would have phased out Fannie Mae and Freddie Mac — the two government controlled housing finance agencies — allowing for a wholly private secondary market for mortgages to develop. But we don't get to go back in time and instead need to deal with the hopelessly imperfect system we have today.
Reforming this system has to reflect two key realities:
- Fannie and Freddie exist, and in a big way — with huge portfolios of mortgages, including about 90% of all new mortgages originated since the financial crisis; and
- The government has shown — and investors rightly believe — that it will step in to support housing finance should another crisis emerge.
However much many of us would like to see a strictly private role for mortgage securitization, Treasury Secretary Geithner's options rightly reflect these two realities.
The Geithner plan has the right goal: private markets – subject to strong oversight and standards for consumer and investor protection – should be the primary source of mortgage credit and bear the burden for losses. The private sector, not the government, should be the dominant provider of mortgage credit.