WASHINGTON — If only the administration's task in fixing housing finance was as easy as choosing plan A or plan B.
Instead, part of the Treasury Department's challenge is just sifting through all the ideas. The public has seen a broad array of ideas from stakeholders, all with different visions of the world after the Fannie Mae and Freddie Mac conservatorships. Maybe as a result, the administration — already taking heat for delaying a plan — is expected to offer a report merely weighing pros and cons of many ideas, rather than propose a single approach. That has only amplified criticism.
"I don't know if that really gets the ball going," Rep. Randy Neugebauer, R-Texas, said at a recent University of Maryland conference on the government-sponsored enterprises.
At the moment all that's clear is that White House officials favor some type of government guarantee, while rejecting the status quo. "We will not support returning Fannie and Freddie to the role they played before the conservatorship," Treasury Secretary Tim Geithner said last year.
While the administration has been silent, others have been vocal about which plan they support. Here are options attracting the most attention:
One plan with traction is to create a new catastrophic insurance fund to cover losses from mortgage-backed securities. Rather than have the GSEs buy and securitize loans, privately run firms would do the buying. Yet investors would have federal insurance, similar to how the Federal Deposit Insurance Corp. protects deposits.
The Mortgage Bankers Association, Wells Fargo & Co. and the Center for American Progress have all endorsed variations of the plan. It received a good deal of attention last summer when two Federal Reserve Board economists, Wayne Passmore and Diana Hancock, advocated going one step further, suggesting a backstop for all asset-backed securities.
But such a plan has sparked questions over how the government would establish risk-based premiums for the MBS market. At the University of Maryland conference, former GSE regulator James Lockhart said while a backstop would have its benefits, pricing that risk would pose a huge test for the government.
"The idea of trying to create a very strong government guarantee insurance program I think is very, very difficult," said Lockhart, the former director of the Federal Housing Finance Agency and now vice chairman of WL Ross & Co. "There is tremendous moral hazard in government insurance."
Deborah Lucas, the Congressional Budget Office's chief economist, agreed. She said policymakers would have to decide whether to charge firms a systemic-risk fee in addition to normal premiums.
"The guarantee creates a wedge between the value of operating assets and the market value of debt and equity equal to the present value of the future stream of income generated by the guarantee," Lucas said at the conference.
Also on the table is a plan where the private sector would assist the government in creating the insurance backstop. The idea is the private market is better equipped than the government to price risk, but the influence of Uncle Sam would still bolster liquidity in the market. Supporters of such a hybrid approach include the National Association of Home Builders.
Observers have said a public-private structure could reduce moral hazard and mitigate the government's burden.
A benefit of the plan "is while the private sector controls quality of the risk creation, it also bears the risk, so there is a good alignment of incentives," Viral Acharya, a finance professor at New York University, said at the University of Maryland conference.
Others have pushed for a more substantial role for the government, making the implicit guarantees the GSEs have received for so long more transparent.
Under this approach, Fannie and Freddie would essentially become permanent wards of the government.
Bill Gross, co-founder and co-chief investment officer of Pacific Investment Management Co., has been more specific, proposing that the government create a super-GSE of sorts by merging Fannie and Freddie into Ginnie Mae.
Bert Ely, an independent analyst based in Alexandria, Va., said that such explicit government backing for MBS "means effectively that it is government debt, and in effect we will have fully nationalized, or largely nationalized, the American housing finance marketplace."
Under this plan, Fannie and Freddie would be eliminated and replaced by private-sector guarantors regulated like public utilities. The most prominent advocate for this model so far has been former Treasury Secretary Henry Paulson, who in January 2009 said creating utility-like entities to guarantee home loans "could be the best way to resolve the inherent conflict between public purpose and private gain."
Meanwhile, some have taken the approach that there should be no government support in housing. Yet they do not offer any alternatives.
In a recent paper, the American Enterprise Institute's Peter Wallison, Edward Pinto and Alex Pollock argued that many of the proposals for reforming GSEs still preserve a government role.
"It is a very serious problem if we are going to try to develop a system that looks anything like the system we had before," Wallison said at an AEI conference last week.
Republicans in Congress who support privatization are pushing legislation to wind down Fannie and Freddie within five years. "We need to let the market determine the risk premium and not the government," Neugebauer said.
Many counter that fully privatizing the market — and removing any explicit guarantees — may, ironically, perpetuate the risks that have plagued the system thus far. "There is concern that a policy of 'no guarantees' could be interpreted as a return to implicit guarantees," said Lucas at the Congressional Budget Office.
Another plan would be to foster a more robust covered-bond market. Unlike securitization, in which an originator no longer holds an original loan, a covered bond issued by a bank provides liquidity and is backed by loans that stay on the balance sheet.
The bank can replace the collateral with new loans if the original assets stop performing.
Bank of America Corp. is among the advocates of a plan to establish a nationalized covered-bond market.
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