Mortgage rules put recovery at risk

A plan to jump-start housing

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Add Comment Add Comment | Comments: 0 | Posted Sep. 30, 2011

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Conservatorship requires liberalization

Since September 2008, Fannie and Freddie have been in conservatorship.

The Federal Housing Finance Agency (FHFA) as conservator is charged with the responsibility of preserving their assets. FHFA has to sign off on any major policy changes affecting Fannie/Freddie.

In the current economic environment, a liberalization of Fannie/Freddie lending terms is a requirement of responsible conservatorship. According to Laurie Goodman, whose analysis of the current housing crisis is the most complete and insightful one I have seen, if government policy does not change, 1 in 5 mortgage borrowers will lose their homes and a second round of home-price declines becomes highly likely. Agency losses will mount as a result.

The tightening of lending terms by Fannie/Freddie in response to the crisis has been very similar to that of private lenders making loans to retain. The difference is that no private lender can materially affect the market, but Fannie/Freddie can.

Next week we'll take a look at some specific proposals.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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