Housing policy reform is beginning to take shape. At this point, it looks like both the financial sector and Washington agree that the government must maintain a big role in the mortgage market. The favored strategy to do so thus far appears to be government mortgage guarantees that require a fee from banks that wish to obtain them. It would be kind of like depository insurance, except for mortgages. What could go wrong? Fannie and Freddie (F&F) provide a sufficient explanation.
The Federal Housing Authority, which oversees these two entities, released a report (.pdf) this week on their status. There are a couple important lessons contained in the assessment, some of which we already knew — like F&F allowed their underwriting standards to suffer so that they could better compete with banks for mortgages during the housing bubble. But there was an interesting nugget that hasn’t been widely discussed. The activity that caused most of their losses was mortgage guarantees.
WATCH: U.S. HOME SALES DIP TO 15 YEAR LOW