The pressure behind this balancing act is a battle of competing identities. As consumers, most homeowners value the easy access to affordable long-term mortgages and flexible refinance options. As taxpayers, they may resent the fact that twice in 20 years taxpayers have been forced to cover lending disasters covered by government guarantees, the last time being the 1988 Savings and Loan Crisis.
No man's land
Corker-Warner thus tries to navigate a delicate balance, merging the ying of taxpayer risk with the yang of political demands for easy access to home ownership.
It’s a balancing act that will never please everyone, says Philip Swagel, chief economist at the White House Council of Economic Advisers and now a scholar at the Milken Institute. On one side is political pressure for easier loans, spurred in part by advocates for low-income and minority families, who see any shift toward private housing markets as a threat to accessible home ownership.
“It will make it virtually impossible for many in the middle class, and particularly people of color, to purchase homes in the future,” the NAACP's Hilary Shelton told Mortgage Servicing News.
On the other side are market-oriented economists, like Pinto, who argue that government entanglement in the mortgage market, encouraging and guaranteeing "unnatural" loans, will lead to more of the same.
Kevin Villani, chief economist at Freddie Mac from 1982 to 1985 and now a scholar at the Burnham-Moores Center for Real Estate at the University of San Diego, sees the blending of "insurance" and "guarantees" as a contradiction.
Villani argues in American Banker that "federal government guarantees are the opposite of insurance," arguing that insurance is an actual business model that leverages the risk of default against the security of large numbers.
Guarantees, Vilanni argues, "were the centerpiece of the public-risk-for-private-profit model that caused the last systemic failure of the mortgage system, and deposit insurance caused the prior failure of Savings and Loans."
The sweet spot?
"Any time you have a government guarantee," Swagel said, "you have moral hazard," or the temptation to take risks when other people will bear the losses. But Swagel argues that the political reality is that consumers and voters will demand access to mortgages that the market will not provide without government guarantees, and the key is to control and channel the dangers.
But the Warner-Coker proposal would leave the federal government as the ultimate insurer in case of catastrophe. Without that guarantee, supporters argue, affordable mortgages would not be available to many middle- or lower-income families. With that guarantee, opponents respond, the market will be skewed again and taxpayers will end up paying the tab.
This has happened twice in just 20 years, Pinto said, pointing to the Savings and Loan Crisis in the late 1980s. "When you combine very low levels of down payment on the borrower side and very low levels of capital on the investor side, it's a toxic mix. At some point the leverage party stops."
Swagel fears that free market opponents of the bill are "letting the perfect be the enemy of the good."
"The Corker-Warner bill makes the system more private and protects taxpayers," Swagel said. ""It doesn't go all the way to a fully private system, because that is not feasible."
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