Obama Mortgage InsuranceBarack Obama Mortgage Insurance
Measures to restructure the mortgage and home financing sectors must not come too soon. In spite of a broad policy and government agreement that the SGEs, which are currently the state' s failing stations, have become far too big and influential - a mood that has been strengthened by a $135 billion tax payer rescue to date - the GEEs are taking an ever larger stake in the private mortgage community.
Over 90% of all new US household mortgages are bought, secured or covered by the German state, with the DCEs alone acquiring at least 70% of the home origins. The turn of the fully loaded GSE vessel in the middle of the course is one of the most difficult challenges currently faced by the administration, but is seen by many as an important springboard for re-establishing a sound rental environment after the economic downturn.
This proposal first establishes a three-part blueprint for the reorganization of the U.S. residential financing system, which provides for actions that can be taken under existing laws or relatively simple laws that do not resolve the emerging philosophy of how the German authorities should ensure investor exposure to mortgage loss to U.S. home-owners.
Firstly, the reduction of state aid for financing residential construction in general, involving the progressive but conscious dismantling of Fannie Mae and Freddie Mac over a number of years, is the first item in the overall package. GSE will achieve this through a number of measures, among which the increase in GSE's warranty fee charges billed to vendors of credits that have been divested to GSE; the possibility that GSE's "credit limits" under applicable laws may decrease from a limit of $729,750 in most countries to $625,000 and beyond; the progressive increase in the requirements for advance advances to borrowers to at least 10%; the encouragement of GSE's to provide extra cover for losses on lending to commercial underwriters and other investors; and the reduction in GSE's portfolio of investments.
Secondly, the action plans aims to address "fundamental deficiencies" in the mortgage financing markets that have been highlighted by the administration as important factors in the credit crunch by reforms to lending and securitisation practice, as already provided for in the Dodd-Frank Act, and by reforms to mortgage service and sealing procedures, as discussed in detail in recent week but not yet translated into a regulation or legislative draft.
A third part of the Blueprint is to better align governments' assistance to affordability by the reform and reinforcement of the Federal Housing Administration (the "FHA"), rebalance domestic residential policies to deliver extra assistance to rented property, and ensure that residential assets reach non-mainstream community sectors, to include countryside, disadvantaged and low-income areas.
This proposal then defines three "options for the long-term financing pattern of housing". "At the heart of these three choices is the unsolved basic US philosophy and policy discussion about the appropriate part of the government's support for residential construction, which ranges from an ultra-restricted warranty and insurance programme that focuses only on the most vulnerable members of the community to the delivery of a sovereign bond that would eventually support the whole US securitised mortgage industry.
Under ''Option 1'', the government's involvement in the insurance or guarantee of mortgage credit would be severely restricted to vulnerable target groups currently serviced by the FTA, the Ministry of Agriculture and the Ministry of Veterans. On the other end of the scale, in "Option 3", the authorities would offer the mortgage-backed security ("MBS") holder with certain skills a disastrous re-insurance that would strengthen an initial degree of coverage for mortgage -backed insurance, in fact, by covering the whole mortgage-backed security (MBS) retail insurance business and thus probably restoring an element of the GSEs' roll that is strongly criticised for promoting "moral hazard".
" Intermediary "Option 2" would include a restricted insurance or guarantee from the authorities that would normally be operated at a minimum but would be increased to assist house financing in times of financial distress. Focus on privately managed business models. Whilst the suggestion circumvents an opinion on the basic issue of the appropriate levels of state aid that should eventually be granted to the residential mortgage financing markets, the suggestion advocates privacy driven retail remedies that many of them have found unexpected, stemming from a supposedly democratic administration.
The proposal aims to "pave the way for a strong retail mortgage market" and to bring about the re-entry of retail finance into the mortgage markets. The Obama administration has set the boundaries of the Republican residential democracy by supporting a privately owned settlement and reluctance to use residential and mortgage policies as a means to promote socio-political outcomes.
Obama's administration's start line may estrange the more deregulated Democratic Party from the more deregulated faction that may choose to use house policies to attain redistribution and other deregulated societal outcomes. The majority of analysts believe, however, that the line taken by the government will remain, so that the business community can assume that it will take over the lion's share of mortgage and residential construction financing in the future.
The most " open " of the three long-term state guarantees - the disastrous mortgage re-insurance - even posits a first line of defence consisting of a huge net of mortgage insurance companies. These positions should give companies and institutional buyers who are considering participation in the next round of US residential property boom the confidence that they can take a stand in the new real estate arena without worrying about being marginalised by massive public or quasi-public institutions such as Fannie Mae and Freddie Mac.
A further conspicuous characteristic of the proposal is the extent to which it withdraws expressly from the US dream of home ownership as a political objective. This proposal clearly displaces this long-standing cornerstone of US property policies with the aim of providing all Americans with affordability and habitable protection. Therefore, the proposal emphasises the need for other types of accommodation, to include apartment buildings.
Accessibility, which in the past was often used as a substitute for the capacity of an U.S. home to buy, has been re-defined by the government to include the capacity of an U.S. home to provide a home, whether bought or leased. This proposal expressly recognises that securitisation is a necessary means to bring money to the US real estate market and thus constitutes an important move to remove the demonisation of securitisation that followed the start of the global economic downturn.
The proposal requires substantive reform of the securitisation processes, encompassing enforcement and service reform, to be on the safe side, but the government recognises that securitisation must eventually have a significant impact on the US residential market rebound. While the proposal is a significant advance in the country's system of financing residential construction, the conclusion of the reorganisation is still many years away.
The liquidation of Fannie Mae and Freddie Mac and the distribution of their huge portfolio without significant disruption to the real estate and mortgage market is likely to take five to ten years once a schedule is in place. Moreover, as shown by the fact that the goverment has not taken a stance on the basic philosophy and policy issue of the extent to which the goverment should back the mortgage and financial market, it is likely to be several years before a policy enumeration on a final restructuring scheme for the residential financing system itself is conducted.
While Senate and House Committees have already started to consider the proposal seriously, many experienced policy analysts question that a consensus can be achieved before Congress addresses contentious issues next week in the run-up to the 2012 U.S. general elections, and believe that it is not realistic to anticipate that the definitive house financing bill will enter into force before 2013.
Recognising that the complete transformation of the US home financing system is a thousand mile voyage, the government has at last taken the decisive first steps.