LIVE: Mortgage Markets Face 'Fundamental Change,' Geithner Says

The big takeaway from today's "Future of Housing Finance" conference at the U.S. Department of Treasury was that everybody agreed to agree – more or less. It was a given that Fannie Mae and Freddie Mac will be put into retirement, eventually.

As Treasury Secretary Timothy Geithner said in his introductory remarks, "This administration will side with those who want fundamental change."
And all dozen panelists clearly bought into Geithner and HUD Secretary Shaun Donovan's not-so-secret agenda: making mortgage credit widely available and supporting affordable housing, including rentals. Of course, this was no coincidence.

The dozen panelists were handpicked by Treasury and HUD, and the ultimate purpose of this summit was to get a broad spectrum of opinion-makers on record in support of the Obama administration's reform plans. Geithner and Donovan will need a big crowd of united supporters behind them when they take this show to Congress in the next session, and what until now has been a mostly technical policy discussion turns into full-blown circus.

But still, it isn't every day that you have agreement on anything from a group that includes executives from Wells Fargo and Bank of America; the head of the National Urban League; bond guru Bill Gross of PIMCO; economist Mark Zandi; mortgage-backed securities pioneer Lewis Ranieri; and a stellar cast of housing experts from academia, think tanks and foundations. What they all said in their own very distinctive ways was that there is no way that low-interest, long-term mortgages are going to be available to a large number of Americans without the federal government making sure, in some way, that it happens.

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Much of the discussion centered on the exact nature and deployment of credit guarantees, and I'll spare you the nerdy details. But a few panelists dropped bombshells worthy of broader attention:

Mortgage rates could jump by 3 to 4 percent in a solely private market

Bill Gross of PIMCO, one of the country's biggest bond investors, says his firm is staying far away from private mortgage-backed securities because of enduring uncertainty about their performance, and will only consider investing in mortgages where borrowers make 30 percent down payments. He estimated that if privately backed mortgages were the only game in town, mortgages would cost three to four points more than they do now. Gross advocated for a complete government takeover of the mortgage markets by a single agency. Said Gross: "To suggest that there's a large place for private financing in the future of American housing finance is unrealistic."

Renters must be reckoned with

Lots of panelists spoke of the need to better support renters and affordable rentals – though not about the big question, which is how to shift resources from owners to renters without undercutting the support that homeowners have come to expect. Still, it was good to hear economist Mark Zandi, who ususally clocks in about the latest foreclosure numbers, saying things like "we have to provide access to affordable housing, particularly for lower-income households... they will not have access to housing, which is not a luxury but a necessity, without government help." Ellen Seidman from ShoreBank, who early in her career worked on policy at Fannie Mae, shared some alarming statistics reminding us how poorly renters are now served by the billions government now puts into the housing market: One in four renters spends more than half of income on shelter, yet only a fraction of those eligible for housing aid currently receives it.

Second mortgages remain a time bomb

When Secretary Donovan asked Lewis Ranieri if it was OK to call him "the father of the mortgage-backed security," Ranieri cracked back: "Do I have a choice?" Ranieri zeroed in on one of the big issues left untouched by the recent Dodd-Frank financial reform legislation: second mortgages, including home equity loans. Second mortgages can take a safe and sound mortgage and, by piling more debt on a home and household, turn it into a ticking time bomb. "If we don't resolve the second-mortgage problem, we don't deal with the risk issue," Ranieri warned. "This whole [mortgage market system] is based on home as shelter, not home as a credit account."

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