Is reform worth inevitable rate hikes?

by Ryan Smith21 Apr 2014
One of the main roadblocks to reforming the mortgage system has been the fear that moving more risk to the private sector would increase costs for borrowers. But now a former assistant secretary of the Treasury is calling that fear “misguided.”

Legislation put forward by Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) would wind down Fannie Mae and Freddie Mac, replacing them with a new federal mortgage system that would put more risk on the shoulders of private investors. The bill would require investors to put up their own capital in an amount equal to 10% of the mortgages receiving a government guarantee.

Many industry groups and housing advocates have lobbied for the government to retain Fannie and Freddie, saying that winding them down would inevitably increase consumer costs. But Phillip Swagel, a professor at the University of Maryland’s School of Public Policy and a former assistant Treasury secretary, says the additional cost would be small and called the concerns “a misguided obsession.”

“The 10 percent capital requirement is large enough to protect taxpayers,” Swagel wrote in an op-ed for the New York Times. “Fannie Mae and Freddie Mac together in the crisis suffered losses of about 4 percent of the value of their assets, meaning it would take an economic upheaval considerably worse than that of the last seven years to burn through the private capital protecting taxpayers. In exchange for the increased role of the private sector, the existence of the secondary government backstop would ensure that mortgages remained available to Americans across financial market ups and downs.”

Swagel admitted that adopting the Johnson-Crapo system would almost certainly mean a hike in mortgage interest rates. But the protection it would provide to taxpayers would be worth the increased costs, he wrote.

“Before the financial crisis, advocates for reforms were sometimes attacked as ‘antihousing,’ on the grounds that the higher interest rates from reduced government support would make it more difficult for Americans to become homeowners,” he wrote. “This complaint is misguided, since the impact on interest rates from the Crapo-Johnson is the consequence of fixing the flaw in the old system that left taxpayers at risk: the higher cost for borrowers corresponds to the protection for taxpayers that was missing.”

What do you think? Is mortgage reform worth the attendant hike in interest rates? Would the Johnson-Crapo system do more harm than good? Tell us your thoughts in the comments below.


  • by Stacey Johnson | 4/21/2014 4:58:34 PM

    Here's the facts... banks are no longer writing no document stated mortgages which is what caused the crisis to begin with. Well that a d the loss of jobs in America, the sub prime mortgages that went to ridiculous rates after a certain time. But our goverment were pushing these mortgages. It was great for our economy. House were selling faster than the could be built. Then...Our economy started to crash. Jobs were going away hone values were going down and some hone owners interest rates were going up to a point they couldn't afford the payment. So now we don't write these lians anymore... no sub prime mortgages no stated income no inflated income or home values. We now document income assets give a barring a on customers credit history etc. We do all we can to be sure a customer can make the payments and give credit history a bearing on mortgage approval. Everything we can to only put eligible borrowers into home mortgage. You have fined the banks billions for.doing what you agreed to. Let's step back here and use common sense. Because right now we are far from it. Get to g a home mortgage now has become so difficult a.s complicated for everyone. No one can tolerate this anymore. I know I have to find a new job... to the point I can't support my family for 2 reasons. Not that I don't have customers wanting to buy a home or refinance mortgage it's because my income has been cut in more than half and I can't get qualified borrowers approved

    Stacey Johnson.


Should CFPB have more supervision over credit agencies?