"How to Fix the Current Mortgage Market Problems"

I know the White House doesn’t want to admit that there are any credit problems or mortgage issues which lend themselves to intervention, yet Fed actions would suggest it doesn’t agree. The central bank has seen some ominous developments requiring it to jump in and take necessary steps to fend off more problems later. Just last Friday, the Fed revealed that it granted flexibility to Citigroup and Bank of America to help respective subs mired in mortgage liquidity problems. The previous week, the Fed pumped billions into the market to ease bank and consumer concerns.

Based on their words and actions, many in Congress seem to think the mortgage and credit markets need help, too.

I’m of that mind. I believe that Congress and the Administration should take ameliorative steps now.

Here is a barebones, three part, legislative proposal to bring relief--both near and long term--to the residential mortgage markets, regenerate consumer and investor confidence, and deal with real problems in both the subprime and jumbo segments It would insure that the broadest segment of the mortgage market, which has been well served by Fannie Mae and Freddie Mac, remains stable and in good hands, while also addressing subprime and jumbo mortgage liquidity issues.

Title I would remove the OFHEO-imposed portfolio investment caps from Fannie Mae and Freddie Mac. This is a result sought by many, most prominently Senate Banking Committee Chairman Chris Dodd (D-Ct.) and Senate Housing Subcommittee Chairman Chuck Schumer (D-NY), House Financial Services Chairman Barney Frank (D-Mass.), former Clinton Treasury Secretary Larry Summers, and the major housing industry trade groups.

Title II would create a temporary GSE single family mortgage purchase limit of $750,000, which would sunset three to six months after this bill become law. This short term emergency increase will allow the GSEs immediately to provide liquidity to the jumbo or non-conforming mortgage market, re-establishing a functioning secondary market there, until traditional jumbo investors return.

Title III would be identical to language already passed by the House, cosponsored by Barney Frank and George Miller (D-Cal.), creating a high cost adjustment formula for GSE purchases in states where middle-income housing costs are so far beyond other communities, like California, New York and Boston. Titles II and II are complementary. The Frank/Miller provision—which only would apply in selected communities--would take effect, when the temporary $750,000 single family limit sunsets.

The House Financial Services Committee and the Senate Banking Committee should eschew all efforts to amend the bill with non-germane items or amplification of what the committees believe is essential to achieve mortgage market equilibrium. You don’t want to keep stressing the all important housing sector of the economy, which accounts for 25% of the nation’s goods and services.

For their part, the GSEs would agree to take on a greater share of financing subprime victims out of their old ARM mortgages into conventional fixed rate loans, when the borrowers are capable of doing so. The latter effort would be in addition to the $20 billion, which each company announced --some weeks ago--they would invest in subprime mortgages.

Many of those 2-28 and 3-27 teaser ARMS just never should have been made and the brokers/lenders who made them—and the Wall Street firms which securitized them-- must bear those losses, while everything should be done to help the families hornswaggled into taking on those debt obligations.

Since any legislative activity will occur just about the time--traditionally late September--when OFHEO tells the GSEs what their new 2008 mortgage ceilings will be (based on the OFHEO controlled survey of lenders), any “new” GSE single family mortgage ceiling should be choreographed with the removal of the emergency ceiling.

If the nation truly is going through a residential real estate trauma, these easy-to-understand and implement legislative steps—immediately--should generate market calm and confidence, until other non-GSE investors return to their traditional roles and the breadth of possible subprime problems become easier to grasp.

The key for the Congress is to promptly pass this package—with no amendments—and send it to the President.

It this approach is too “activist” for this Administration, let President Bush say so loud and clear.

Then, those GOP office seekers, campaigning in 2008 on the Bush mortgage market “non-intervention,” will be able to chant (quietly to themselves), “*#%@+% Bush, Paulson, Hennessey, and Lockhart, they didn’t do their mortgage part, they didn’t do their mortgage part”--as their Democratic opponents’ vote totals scream past 50%!

(Possible alternative chant for losing candidates: “ #^&%#$@ Paulson, Hennessey, Lockhart and Steele, why did you balk at the emergency deal, why did you balk at the emergency deal?”)

Maloni 8-28-2007