Mortgage summit brainstorms ways to revamp financing

WASHINGTON — The Obama administration got what it was looking for at its summit on the future of housing finance, big ideas that ranged from government-sponsored refinancing of millions of mortgages to blowing up the structure that's backstopped mortgage lending for decades.

The recent summit, in the Treasury Department's ornate Cash Room, was a starting point for a debate that will unfold in months ahead and carry consequences for all Americans.

How this debate is decided could affect everything from the supply of affordable rental housing to tax deductions for mortgage interest to whether Americans pay significantly more to be homeowners.

The process that began Aug. 17 also is likely to spell the end, at least in their current form, of mortgage-finance titans Fannie Mae and Freddie Mac, which have been in government conservatorship since September 2008.

Treasury Secretary Timothy Geithner put down some wide markers on what he envisions for mortgage finance.

"We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support," he said. "We will not support a return to the system where private gains are subsidized by taxpayer losses."

Fannie Mae was created in 1938 to boost homeownership after the Great Depression. Freddie Mac was created in 1970 to provide more competition.

The two congressionally chartered private entities buy mortgages originated by lenders and pool them into bonds backed by U.S. mortgages. For decades, this has freed banks and other mortgage lenders from having to retain the loans on their books, and allowed them to keep lending to homebuyers.

The administration hasn't said what it will propose to Congress by January. The summit was to gather ideas and reaction from those involved in mortgage finance.

Participants ranged from bankers who underwrite loans to financiers who buy mortgage bonds to consumer advocates who want more affordable rental housing.

"I'm impressed with the fact that they're asking the right people," said Jim MacLeod, the president of Coastal States Bank, a community lender in Beaufort County, S.C.

The summit began with a bang when Bill Gross, the managing director of Pimco, the world's largest bond fund, proposed the Obama administration order Fannie Mae and Freddie Mac to refinance all outstanding mortgages that they back or guarantee into today's historically low interest rates.

Doing so, he reasoned, would free up a significant amount of income for millions of Americans, who could boost the economy by spending that additional disposable income.

Known as a maverick, Gross also declared dead the private sector's secondary market for mortgages, where they're pooled together and sold to investors as bonds. The Obama administration should recognize this, he said, and explicitly guarantee all pools of new mortgages going forward.

Getting the government out of mortgage lending, he and others warned, could mean mortgage rates 3 or 4 percentage points higher than they are today.

The private sector can't return to the pre-crisis market share, he said, because the psychological scars of the recession will change investors' and consumers' behavior for decades and there will be little appetite for Wall Street securities backed by bonds.

"To think (Wall Street) is going back to 30 or 40 percent of the market is simply unrealistic," Gross told McClatchy Newspapers.

He advocated rolling a handful of government-backed lenders into a single entity with the explicit mission of promoting mortgage finance.

Others touched on sacred cows of American consumption, such as the federal income-tax deduction for mortgage interest. This is often viewed as a main incentive for homebuyers.

Mark Zandi, chief economist for forecaster Moody's Analytics, stressed that countries such as Canada and Australia have similar percentages of homeownership but without similar tax breaks.

"The housing market, in my view, is over-subsidized," Zandi said.

Other panelists picked up on Zandi's theme, suggesting the tax deduction provides 10 times as much benefit to wealthy homeowners as it does to lower-income homeowners.

Some experts advocated privatizing virtually all functions of Fannie Mae and Freddie Mac. Alex Pollock, a fellow at the American Enterprise Institute, a conservative research organization, said 70 percent or more of the mortgage market involved prime loans to borrowers with good credit histories.

Hence, the private sector should be pooling those plain-vanilla loans for sale to investors, not some government-chartered company, he said.

A former president of the Federal Home Loan Bank of Chicago, Pollock also called for new rules that would force lenders to raise rates for borrowers and set aside more capital during times when home prices rise well above their historical norm.

His approach is similar to how the Federal Reserve raises its benchmark lending rate to slow down an economy that's overheating.