According to Reuters, Federal Reserve Board Chairman Ben Bernanke’s comment on the housing market was that the only time the U.S. Government should back home loans is as a last resort in a time of severe economic stress. By the end of the week, President Obama’s ‘white paper’ is due. This plan will detail the options for improving and reforming the way homes are financed in the U.S. In response to the questions of the House Budget Committee, Bernanke noted that the if the “government is involved in providing credit guarantees, the should do so only as a deep backstop.” Bernanke went on to say that the first damages sustained in a recession should be “born by the originators of the mortgages or by the securitizers.”
The same Reuters article cited that in the current U.S. housing market, the government backs more than 85 percent of new home lending primarily through government-seized Fannie Mae, Freddie Mac, and the government runs Federal Housing Administration. These lending companies have since 2008 have received $150 billion in taxpayer funds.
Predictions of political analysts indicate that the government will approve a temporary increase in the size of loans in order to function as a metric for whether the free market will make up the difference. Additionally, the Obama administration is anticipated to approve an increase on premiums connected to loans supported by the Federal Housing Administration. The Wall Street Journal states that the administration is also expected to propose eliminating Fannie Mae and Freddie Mac, incrementally reducing the government’s role in the market place. However, housing and banking industries have proposals citing long-term, fixed-rate loans to remain part of the U.S. Housing financial system.
This could have several outcomes in the market. On one hand, investors may make the assumption that government will step in, and therefore it would be better to make assurances and request payment from the outset. According to the same article in the Wall Street Journal, many academic and industry professionals have called for a new regulatory entity for government guarantees and the market in general. On the other hand, some economists anticipate that additional government backstops would put taxpayers at risk and reinforce the perspective that the major banks are ‘too-big-to-fail.’
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