NEW YORK – The private sector should provide housing finance, with no government incentives and no taxpayer-backing, Federal Reserve Bank of St. Louis President and CEO James Bullard said Wednesday.
“To the extent possible, we need to let the private sector provide the bulk of U.S. housing finance going forward, without the incentive©\distorting set of government programs and taxpayer guarantees that caused our current system to collapse,” he said at a conference sponsored by the bank, according to prepared text. “Those programs meant well, but ended up costing everyone dearly.”
He continued, “It makes little sense to try to design programs that subsidize everyone. If everyone is subsidized, then no one is subsidized.”
Suggesting that now is the opportune time to reform housing finance, Bullard said, “The future of Fannie Mae and Freddie Mac will depend on the nature and structure of the new mortgage finance system.”
Lower-income and first-time buyers should get government subsidies that are not part of financing. Additionally, he said, “Subsidies should be regularly reviewed and subject to Congressional approval and appropriation of funds.”
Also, he said, equity is a defense against default, and homeowners should put up 20% of the cost of a home, and in case of default, the mortgage debt should not be discharged.
Bullard also suggested pooling mortgage-backed securities should “be constrained to pool loans with similar characteristics (i.e., $150,000 to $200,000 with a loan©\to©\value ratio of 80 percent). In order to avoid one©\sided bets, financial intermediaries could be required to purchase insurance or otherwise appropriately hedge their MBS portfolios.”
