–Calls For End To Gov Programs,Taxpyr Guarantees That Caused Mkt Crash

By Brai Odion-Esene

WASHINGTON (MNI) – It is time for the federal government and
lawmakers to reduce their level of involvement in the U.S. housing
finance market and allow the private sector to take on more of the
responsibility, a Federal Reserve official said Wednesday morning.

“The extent of Congressional meddling in this market has been
astonishing to the point where one can barely identify what the private
sector outcomes would be in the absence of intervention,” noted James
Bullard, president of the Federal Reserve Bank of St. Louis.

In remarks to open his bank’s conference on “Past, Present and
Future of Government-Sponsored Enterprises,” Bullard argued that, to the
extent possible, “we need to let the private sector provide the bulk of
U.S. housing finance going forward, without the incentive-distorting set
of government programs and taxpayer guarantees that caused our current
system to collapse.”

Bullard said it makes little sense to try to design programs that
subsidize everyone. “If everyone is subsidized, then no one is
subsidized.”

He went on to offer a few principles that could be used to guide
the coming reform process of the U.S. housing finance market.

To address concerns over the transparency and risks associated with
the mortgage securitization process, Bullard said the pooling of
mortgages into mortgage-backed securities could be constrained to pool
loans with similar characteristics. For example, $150,000 to $200,000
with a loan-to-value ratio of 80%.

And in order to guard against one-sided bets, he said financial
intermediaries could be required to purchase insurance or otherwise
“appropriately hedge” their MBS portfolios.

The main goal of the government in getting involved in the housing
market has been to make homes affordable for as many Americans as
possible. Bullard, however, said government assistance to lower-income
and first-time home buyers, again to the extent possible, “should be
disentangled from housing finance more broadly defined.”

Any government subsidies, he added, should be regularly reviewed
and require approval by Congress as well as appropriation of funds.

On the matter of mortgage loan origination, Bullard said it is
important to examine whether the private market will allocate credit
more efficiently than the government-sponsored enterprises.

Noting that mortgage finance is provided by the private sector in
most other nations, “Ideally, in a well-functioning private system,
taxpayers can be sheltered so they are not exposed to insolvency risk,”
he said.

Bullard also sees home equity as being the best insurance against
default, and said loan-to-value ratios of 80% or below should be
adequate to insure against most house price movements.

Those that choose higher ratios, he continued, could be required to
buy default insurance or increase the amortization component of their
mortgage payments.

Another way to reduce the high rates of default in the U.S.,
Bullard said, is to make it so that in the event of default, a borrower
cannot discharge his or her mortgage debt.

He noted that in Spain for example, mortgage debt cannot be
discharged in the event of default, and as a result, the default rate is
much lower than in the United States.

“A possible reform of recourse regulation along European lines may
improve the pattern of default in the U.S., which is currently regulated
at the state level,” Bullard said.

** Market News International Washington Bureau: 202-371-2121 **

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