Saying government involvement in the housing market helped cause the recent economic collapse, the head of the Federal Reserve Bank of St. Louis today urged that the U.S. mortgage market be largely turned over to the private sector, with minimal federal involvement.
"The extent of Congressional meddling in this market has been astonishing to the point where one can barely identify what the private sector outcomes would be in the absence of intervention," said James Bullard, president and CEO of the St. Louis Fed. "To the extent possible, we need to let the private sector provide the bulk of U.S. housing finance going forward, without the incentive-distorting set of government programs and taxpayer guarantees that caused our current system to collapse. Those programs meant well, but ended up costing everyone dearly."
Addressing a conference on the role of government-supported enterprises such as Fannie Mae and Freddie Mac in the mortgage market, Bullard said mortgage financing proved to be an exceptionally weak link as the economic crisis unfolded. He said the current circumstances should be seen as an opportunity to reform the housing market "according to best principles and sound lending practices."
"When everyone is subsidized, no one is subsidized," he said, referring to the broad government support currently provided to the housing market.
Bullard suggested that subsidies to lower-income and first-time buyers be separated from housing finance in general and subjected to periodic review and approval by Congress. He also questioned whether Fannie Mae and Freddie Mac should continue to provide credit to mortgage markets, or whether private markets would allocate credit more efficiently.
He noted that in most developed countries, mortgage financing is provided by the private sector. And while European countries had housing booms and busts similar to the United States, their default rates were different. He suggested the U.S. might look to the example of Spain, which has a lower default rate than the United States, which he attributed to the fact that a default does not free mortgage holders of their debt in that country.
To provide transparency in the mortgage-backed securities market, he suggested that mortgages only be pooled with mortgages of similar types, such as those in the $150,000-$200,000 range with 80 percent loan-to-value, and that financial intermediaries be required to insure their mortgage portfolios to guard against risky products.