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Could private sector risk sharing save the housing market?

Potential change of plans

The Obama Administration has struggled with how to address the mortgage crisis and this month, we reported that leading House Democrats are suggesting that the FHFA (which regulates Fannie Mae and Freddie Mac) Edward DeMarco step down because they are “infuriated” that during his recent briefing of 17 House Democrats, he revealed that the FHFA doesn’t have a plan yet for fixing the housing crisis or helping struggling homeowners.

The tune has changed on The Hill in short order and the Administration now says they are experimenting with ways of getting private investors interested in taking on more risk by having Fannie Mae and Freddie Mac sell some bonds without a federal guarantee, sources familiar with the plan tell Reuters.

The idea is that if private firms are more involved in the housing finance system, given that 90 percent of all new mortgages are funded through the FHFA, the companies could stay afloat and ultimately save taxpayers money.

Various options to lure investors

Currently, Fannie and Freddie buy mortgages from lenders, repackage the loans and sale to investors as securities, charging fees to guarantee the debt, but under the new proposal, some bonds would lack a federal guarantee and investors would receive a higher return for their higher risk. Reuters notes that this is just one idea, that the White House may consider other ways to get investors to assume more credit risk in the mortgage market including using derivatives or pushing for greater mortgage insurance coverage for loans underlying the bonds.

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The plan will require FHFA approval and the administration indicates it will begin testing ideas to spur private sector investment as early as 2012.

Written By

Marti Trewe reports on business and technology news, chasing his passion for helping entrepreneurs and small businesses to stay well informed in the fast paced 140-character world. Marti rarely sleeps and thrives on reader news tips, especially about startups and big moves in leadership.


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