Do's and don'ts of mortgage privatization

Flaws in Obama's mortgage reform plan

Last week’s article described the Obama administration’s plan for scaling down the federal government’s involvement in housing finance. The plan calls for a phasing out of Fannie Mae and Freddie Mac, and for a smaller FHA.

Liberals are dismayed by the administration’s scale-down plan because it will result in higher interest rates and tighter qualification requirements, with a disproportionate impact on disadvantaged groups. Conservatives are pleased with the prospect of reprivatizing most of the market. Independents (which is how I like to characterize myself) accept the desirability of privatization, but believe it should be accompanied by structural changes that will make the private market work better. This is what the administration’s ramp-up proposals should do but don’t.

The administration’s proposal is to authorize "private mortgage guarantor companies" that would guarantee mortgage-backed securities with a last-resort backstop by government. Providing last-resort protection against another financial crisis is a good objective but we already have mortgage insurers who can and have guaranteed mortgage securities. Adding a government backstop to their operations might be a good way to go but would not address other major structural deficiencies. There are three.