Flaws in Obama's mortgage reform plan
Softening the blow
The report recognizes the need to go slow and cautiously, but offers no concrete ideas on how to soften the blow. Here are two.
1. The administration ought to set up a task force to determine whether the existing regulatory structure, including the bank examination process, is unduly constraining the strictly private market. If government wants lenders to expand into the space vacated by Fannie, Freddie and FHA, government ought to make sure that it has not itself constructed roadblocks to such expansion.
2. FHA should extend its tentative steps toward risk-based pricing to a comprehensive system in which the insurance premium on every loan reflects the risk of loss to FHA of that loan. This will help keep FHA financially sound, reduce concerns if FHA is pressed to expand into some of the space vacated by Fannie and Freddie, and neutralize political pressures to liberalize terms unduly.
Thanks to Guy Cecala of Inside Mortgage Finance.
Next week: The ramp-up proposal.
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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