Fannie/Freddie Overhaul

EDIT: The Fannie/Freddie overhaul got rolling yesterday, and hopefully they’ll get the answer right – leave loan guarantees in the hands of the private mortgage insurance industry. The new FHA model, where they are ranking the risk based on the borrower’s credit score and amount of down payment (the more security, the lower the mortgage insurance premium) is what PMI companies do – just let them insure the loans, and pass along the risk premium to the borrowers, not the taxpayers.

From Bloomberg – they didn’t allow embedding of their video, here is link to Berman’s interview, who says the overhaul is gaining “traction”:

The Obama administration, looking to overhaul the U.S. mortgage-finance system, gathered support from lenders and the real estate industry for reducing, without ending, the government’s role in insuring loans. A limited government backstop “has a lot of traction,” said Michael Berman, chairman-elect of the Mortgage Bankers Association, in a Bloomberg Television interview after a Treasury Department conference in Washington to discuss proposals.

The Obama administration is seeking advice on how to rebuild a system at the center of the 2008 credit crisis. Some Republicans have sought to abolish Fannie Mae and Freddie Mac, the main sources of U.S. mortgage financing. Yesterday, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the system.

“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said at the meeting. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Fannie Mae, based in Washington, and Freddie Mac of McLean, Virginia, have drawn almost $150 billion in Treasury aid since September 2008, when they were seized by the government amid soaring losses on mortgage investments. The U.S. has promised unlimited support for the two companies. Including Ginnie Mae, the government insured almost 97 percent of U.S. mortgages in 2009, according to Inside Mortgage Finance.

“There is a strong case to be made for a carefully designed guarantee in a reformed system,” aimed at providing access to mortgages, even during economic slumps, Treasury Secretary Timothy Geithner said. “The challenge is to make sure that any government guarantee is priced to cover the risk of losses and structured to minimize taxpayer exposure.”