The Obama administration wants to make mortgages more expensive and harder to get. In exchange, taxpayers would be less likely to bail out mortgage companies or delinquent homeowners. That's the essence of the Treasury Department's memo to Congress titled "Reforming America's Housing Finance Market."
I'll deconstruct the key paragraph from the introduction, sentence by sentence.
Under our plan, private markets -- subject to strong oversight and standards for consumer and investor protection -- will be the primary source of mortgage credit and bear the burden for losses.
I'm trying hard not to be cynical, and this sentence doesn't help. During the housing boom, private markets were the primary source of mortgage credit. Wall Street established mortgage companies -- dubbed conduits -- that served as pipelines of cash and credit between consumers and investors. They should have born the burden for their losses, but taxpayers bailed out these private companies. Strong oversight is nice. But making private markets "the primary source of mortgage credit" doesn't magically transform the mortgage industry into a rational marketplace where everyone makes sound decisions.
Banks and other financial institutions will be required to hold more capital to withstand future recessions or significant declines in home prices, and adhere to more conservative underwriting standards that require homeowners to hold more equity in their homes.
This passage has two consequences, whether they are intended or not. First, buyers will have to make bigger down payments, and refinancers will have to hold more equity. Second, the new housing policy will favor the biggest financial institutions. The three biggest lenders -- Wells Fargo, Bank of America and Chase -- underwrite half of the mortgages. These too-big-to-fail banks will gobble more market share.
Securitization, alongside credit from the banking system, should continue to play a major role in housing finance subject to greater risk retention, disclosure, and other key reforms.
Loans will continue to be securitized, but lenders will have to retain some of the risk. Rates will be higher, but taxpayers (one hopes) won't be on the hook for losses.
Our plan is also designed to eliminate unfair capital, oversight, and accounting advantages and promote a level playing field for all participants in the housing market.
When Fannie Mae and Freddie Mac wither away, so will government backing of mortgages. Mortgage rates will rise. The line about a "level playing field" provokes my cynicism again: Huge banks almost surely will benefit, at the expense of smaller banks, nonbank mortgage companies and mortgage brokers.