What Comes After the Future of Housing?

What is the explicit guarantee described at the Future of Housing Finance Conference?In my previous article I outlined some of the now historical flaws in the housing finance system as discussed by certain panelists at the recent Future of Housing Finance Conference in Washington, specifically the misalignment of objectives within Fannie Mae and Freddie Mac, which led to their systemic failure.

Now I'd like to look forward and imagine some possible scenarios for housing's future, based on some of the proposals put forth during the conference:

Greater transparency and access to information. Don't know what that means specifically, but it sounds great. I hope it has something to do with demanding better information when considering which mortgages to securitize and rate appropriately. I'm no hedge fund manager, but even I know that you need more than a loan amount and a ZIP code to independently and accurately determine the risk of a residential mortgage-backed security.

Counter-cyclical underwriting. This refers guidelines that demand more in terms of down payment during times of economic growth and less during times of contraction. That's a slippery slope. A dynamically shifting anything doesn't seem very plausible for a market looking for real stability and psychological confidence.

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A cry for serious litigation
. Certain panelists wanted everyone, including underwriters and originators, to know that they can be touched by the long arm of the law. Litigation is expensive, even for the government, but I suspect heavy fines in face of litigation will come a common practice.

Fannie Mae and Freddie Mac should be fundamentally restructured rather than abolished altogether.
They may not even bear their current names, so I'll refer to them as those government-sponsored mortgage entities (GSMEs). A majority of their worth was apparently held in the (free) implied government guarantee offered for anything they bought and sold into the secondary market -- more specifically Wall Street. On Wall Street, the word implied is akin to 'Exploit my loophole, please.' Done and done.

An explicit government guarantee.
Such a guarantee was stated and accepted as essential to keeping interest rates, underwriting standards, as well as the cost and accessibility of credit within reach of the relative many, specifically the "under-served borrower." Major private sector investors dodged the responsibility of taking on any additional risk by making it clear that mortgages without such guarantees in some form will cause them to demand larger down payments and substantially higher rates, thereby limiting the size of the consumer pool to those relatively few wealthy, qualified individuals. Not an option for this or any future political administration.

I'd expect any such guarantee to be very limited in scope and open to little conjecture; nobody on Capitol Hill wants to be saying "So, what we had meant was..." a second time around. According to Tim Geithner: "We're not going with a system where private gains are subsidized by taxpayer losses." Read: The GSMEs drop their government/private hybrid model and go straight-up government for total control over the process.

This actually kind of makes sense. The GSMEs, whatever their names end up being, may return to the role they were always meant to serve: to create affordable housing for the masses and mitigate risk on their behalf. They're able to dictate policy across the housing finance market while claiming to better regulate Wall Street's nefarious exploitation of people who live on Your Street -- an obvious prerequisite to any policy the Fed presents Congress. A government guarantee will insure the actual security or mortgage and not the business entities that hold them, eliminating such an entity's incentive to profit from homeowners' losses.

Providing affordable housing -- but not necessarily through homeownership.
Demand for suitable rental properties will continue to increase as foreclosures create more displaced, former homeowners and distressed inventory levels are rising in tandem. Favorable government-sponsored mortgage insurance against certain levels of loss around multifamily-housing finance would make investing in such property more desirable for the well-qualified investor or borrower, fostering the desired private marketplace to service this demand. I'd also suggest that these very qualified investor/borrowers will be allowed to own more property in the aggregate for similar reasons.

All of this is pure speculation at this point, but it's what I got after watching every minute of the Future of Housing Fiance conference, feverishly taking notes and digesting them for what was said rather than what I thought the agenda should have been. In any case, it'll be interesting to see how much of what was discussed at this prefabricated conference makes it to Congress in January.

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