The Psychology Behind the Recovery

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Th e M Rep o RT | 61 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest firmly entrenched in housing, and, along with the mortgage-interest federal tax deduction, has been described as having evolved into an entitlement. Both ends of our political spectrum agree GSE reform is required to minimize risk in U.S. housing markets. Methodology, how- ever, varies depending upon the perspective of the GSEs, which promoted homeowner- ship by loosening standards at the urging of politicians, or private investment companies, which securitized and sold riskier loans. suggested actions s ens. Bob Corker (R-Tennessee) and Mark Warner (D-Virginia) introduced a bill this past June that would replace the GSEs with federal reinsurance for mortgage-backed securities, similar to FDIC-insured bank deposits. This could encourage private investors to take first losses on mortgages, knowing there is a backstop in economic downturns. President Obama endorsed this approach in theory. A government insurance program could assuage the concerns of consumer and trade groups, who prefer the status quo about availability of mortgages, and the ability and promotion of prospective owners to buy homes, the mission of Fannie and Freddie. Most mortgage professionals advocate a thoughtful approach to reform, which would include some type of government guarantee or insurance. The U.S. hous- ing market includes and affects untold numbers of homeowners and home oc- cupants, who are served by a vast industry of professionals—many of whom value the intrinsic permanency of homeownership and solidarity found in our country based on our private real estate market. While larger lenders may not like the competition of the GSEs' rates, they benefit, as smaller lenders do, from the liquidity and pseudo-government guarantee the GSEs offer. Smaller lenders do not want the GSEs to wind down because they cannot compete with the liquidity of large banks. On the other end of the spectrum are advocates of a free market system, with the government almost completely out of housing finance, except for FHA/HUD first-time low- to middle-income buyer mortgages. They propose winding down the GSEs while legislating the definition of a prime loan that would be the standard for a private finance market. Free market advocates note that the stated purpose of the GSEs, to encourage and expand homeownership, has not been substantially accomplished. Since 1998, when the GSEs increased efforts, ownership only increased from 66 percent to 70 percent, and it is now back down to 1998 levels. When the economic and human expense is added to this paltry result, the GSEs are not sustainable, though Fannie vows to remain viable. Free market advocates point to the Western European housing markets, which operate efficiently with very little govern- ment involvement but with respectable percentages of homeownership. Almost everyone agrees that some- thing needs to be done with the GSEs, and almost everyone recognizes that the "something" will be a complex undertak- ing in our housing and financial markets which are enmeshed with the GSEs, but we must be up to this task. We must be thoughtful about reform, avoid unintended consequences, and strike a middle ground between growing a private mortgage mar- ket and providing a government backstop. On the Horizon W hile Congress held hearing son housing during the Congressional fall session, the topic is not on the House agenda and therefore is not as much of a priority as the debt ceiling and the Af- fordable Care Act. Hill insiders predict substantive GSE reform will take many years. Financial ser- vices company analysts point out the cur- rent profitability of the GSEs, and as noted previously, community and large banks like the advantages they receive, in different ways, from the GSEs' liquidity. In fact, some hedge funds have heavily invested in the GSEs' preferred stock, and two of them, Perry Capital and Fairholme Funds, have sued the United States for de- valuation of the stock based upon Treasury changes in agreements with the GSEs. The same holding pattern exists for the Protecting American Taxpayers and Homeowners (PATH) Act, introduced in the House of Representatives bill rolled out in July, which seeks to return the FHA's market share to first-time, lower-income buyers. The best approach now or in future Congressional sessions is to recognize the interplay between GSE and FHA reform and the market shift between them due to reform. Housing market reform is complex, topi- cal, and looming on the horizon, if lessons from our recent history are heeded. Stay tuned for an always evolving and important dialogue on our nation's housing market. Michelle Garcia Gilbert is president and CEO of the Gilbert Garcia Group, a Florida firm specializ- ing in default services, creditors law, and REO. Vice Capital Markets Chris Bennett, CEO Troy Baars, President 248.869.8100 Pick the firm whose performance has resulted in the lowest client turnover rate in the industry. No upfront set-up fees, and no contracts locking you in for years. Instead, receive: • SUPERIOR REPORTING & ANALYTICS—powerful enough to maximize performance yet easy to quickly read and understand • INDUSTRY LEADING FALLOUT ANALYSES, with custom-built daily pull-through modeling for each client • A RESPONSIVE TEAM with unmatched experience through every possible degree of market movement LOOKING FOR A TRUE PARTNER IN HEDGING?

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