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Unfinished business

Hank Hayes • Nov 7, 2016 at 8:30 AM

NASHVILLE — Edward DeMarco insists there’s some unfinished business from the Great Recession that began in 2008.

DeMarco, now a senior fellow in residence at the Milken Institute Center for Financial Markets, was there on the front lines when that financial crisis happened.

As the person who led the conservatorships of Fannie Mae and Freddie Mac during the post-crisis recovery, DeMarco was regularly in the headlines and in the Congressional spotlight during his tenure as acting director of the Federal Housing Finance Agency (FHFA) from 2009 to 2014.

He shared his unparalleled insights into the fundamental challenges that remain during the recent Governor’s Housing Conference held at the Music City Center.

“What’s kind of remarkable is that it’s been eight years now since the financial crisis,” DeMarco said during the event’s opening luncheon. “At the center of it was housing finance. We have not taken steps to fix our housing finance system.”

U.S. taxpayers, he noted, remain on the hook for catastrophic costs in the event of another foreclosure crisis.

DeMarco suggested the secondary mortgage market needs to be redefined while home ownership policies for the 21st century need to be developed.

“I think it is high time to re-examine long standing policies and programs at the federal level, that we’ve had in place to promote home ownership ... if the goal of home ownership is to assist people in wealth building, then let’s build some wealth not debt,” DeMarco said. “ ... We want to keep a liquid active mortgage backed securities market ... we want to change emergency bailouts.”

DeMarco said the government-sponsored enterprises Fannie Mae and Freddie Mac were rescued by a nearly $200 billion taxpayer injection eight years ago because of their central role in the American housing market. Congress, taking political risk to save the system, gave the U.S. Treasury Secretary the authority to inject unlimited taxpayer resources into these massive enterprises.

“It is time — long past time — for us to move beyond this situation,” DeMarco said in a report written for the Milken Institute. “It is time for the mortgage market to grow up, to learn from the mistakes of the past, and to begin serving the needs of the 21st century American economy, like every other industry in this country. It is time for the end of the conservatorships — and taxpayer risk that it brings — of Fannie and Freddie.”

Federal lawmakers, DeMarco pointed out, fear the disruption that comprehensive reform, if done imprudently, could cause. Legislative attempts at reform have failed, he said.

“To us, this means keeping the market for interest rate investors and the market for credit investors clearly separate, but both operating on their own,” DeMarco wrote.

DeMarco pointed to using the Government National Mortgage Association, better known as Ginnie Mae, as the mechanism for having the government backstop the financial system but also as the bridge to a more vibrant private market for mortgage credit risk standing in front of any taxpayer protection. Ginnie Mae is a wholly-owned government corporation within the U.S. Department of Housing and Urban Development.

The charters of Ginnie Mae, Fannie Mae, Freddie Mac and the FHFA would need to be amended, he concluded.

“We know where we need to go,” DeMarco said. “It’s often felt more that the journey has frightened policy-makers than the destination. But that need not be the dynamic any longer. By leveraging infrastructure that we know works, we can end the old duopoly of the past that forced the hand of Congress to put the money of taxpayers they represent at risk. We can bring in a new era of mortgage credit that asks everyone to have a stake in the long-term performance of the mortgages they originate, instead of allowing a game of financial hot potato that eventually ends in tears. We can modernize our mortgage market. Finally, after eight years, it’s time.”

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