At Reuters, my Economics 21 colleague Chris Papagianis has a column on the Ryan budget and an earlier column in praise of a new reform proposal from Edward DeMarco, the acting head of the Federal Housing Finance Agency who has been trying to find ways to make the U.S. housing finance system more sustainable:
[P]ractically all of the U.S. firms that specialize in providing private insurance against mortgage defaults (a.k.a private mortgage insurers or guarantors) are struggling to make good on their existing liabilities from the pre-crisis years. In fact, many analysts think several of the five or so firms that dominate this space in the U.S. are already insolvent. So, it’s unclear if any of these companies have the capacity to step up and partner with the GSEs on some sort of increased-risk-sharing agreement.
But what about attracting new investors by laying out clear rules — a policy foundation, if you will — such that investors start thinking about creating new private mortgage insurance companies?
This is where DeMarco’s loan-level disclosure initiative comes into play. As he has said, it’s important to “enhance loan-level disclosures on Enterprise MBS, both at the time of origination and throughout a security’s life” as it will “contribute to an environment in which private capital has the information needed to efficiently measure and price mortgage credit risk, thereby facilitating the shifting of this risk away from the government and back into the private sector.”
As Chris goes on to explain, this represents a significant break from the status quo:
With our current system — dominated by Fannie, Freddie, and the Federal Housing Administration — private lenders and investors get guarantees from the government. Where is the incentive, then, for these (supposedly) private actors to effectively manage mortgage credit risk? What we need is a system where the private sector is making the lending decisions and taking on the incremental credit or default risk on new loans, rather than continuing to let the government micromanage the process.
One hopes that DeMarco will have an opportunity to implement his reform agenda.