"The policy question is to what extent the private market can provide that form of insurance or guarantee on its own, or whether this is fundamentally a role for government. ... I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns. The challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure."
That's Secretary of the Treasury Tim Geithner introducing a day-long discussion between policy-makers and stakeholders on how to fix our broken housing finance system. You can watch the conference, which includes two panel discussions, one moderated by Geithner and one moderated by HUD Secretary Shaun Donovan, here.
Geithner is being admirably forthright in a political atmosphere where talking about government support of financial institutions is a toxic idea -- for years, there was a bipartisan consensus that allowing Fannie and Freddie to support the mortgage market with implicit government backing was a good idea. In the wake of the crisis, that position became untenable and the government took full control of the two institutions, and some critics argue that we don't need Fannie and Freddie anymore.
However, maintaining a semblance of the housing finance system that Americans have celebrated will require some kind of guarantee from the government to financial institutions -- that's the only way we know how to create a financial environment that makes long-term, low-interest home loans available. There are different ways to do it, but it seems clear that affordable housing, and especially affordable homeownership, requires the government to play a critical role in the market -- and it always has, since the New Deal created the precursors of these institutions amid the Great Depression.
Also:
"Why GSE Reform Will Be A Challenge."
"If You Loved FinReg, You're Going To Freak Out About GSE Reform."
-- Tim Fernholz
