To reform the GSEs, Mark Zandi says the government should create
A hybrid system that is part private and part public. To replace Fannie and Freddie, Mr. Zandi recommends creating between five and 10 privately owned, but government-chartered "mortgage bond insurance companies" that buy eligible loans from banks and issue mortgage-backed securities explicitly guaranteed by the U.S. government.
But isn’t the whole notion of a “government-chartered” financial institution what caused all the problems with the first GSE model? Investors will always assume such institutions have implicit government backing, which in turn means (as we saw in 2008) they will have government backing once the crunch comes.
I don’t see how Zandi’s plan would save taxpayers any money when the chips are down—and the only time the taxpayers are at risk in a situation like this anyway is when the chips are down. . . .
Free market purists will want a system in which the government is out of the business of owning or guaranteeing residential mortgages altogether. That’s very sensible in theory. But in the recent crunch, in the absence of government mortgage guarantees provided by the post-nationalized GSEs, the credit and housing crunch would have been unimaginably worse. I’d rather not hang on to ideological purity and endure that kind of pain. . . .
I still like the idea Edward Glaeser put forth last October. Set up a government-run mortgage insurer of last resort, but operate it to maximize earnings rather than share. So when the private market is working the way it should, let the agency go years without writing a single piece of business; then, when a seize-up happens, insist the agency (which by then would likely be the only player in the market) charge sizable premiums.
Result: mortgage lending stays active at a critical moment, but the government isn’t constantly, inextricably involved in the business, as it is now. The agency would also earn a pretty decent return. Warren Buffett has run his reinsurance units using a similar pricing strategy for years, and seems to have made a go of it. . . .