End Government-Backed Mortgages?

Do away with the U.S. government backing mortgage securities? “Think again” said trade groups and investors before a House subcommittee last week. Proponents of private money, however, believe that the U.S. mortgage market would not lose funding from foreign investors if the government stops backing mortgage bonds.

Government officials of various shapes and sizes are considering a program to draw private investment back into the mortgage market by having Fannie Mae and Freddie Mac sell slices of securities that wouldn’t carry a federal guarantee but would pay a higher interest rate than current mortgage-backed bonds.

The cost of the higher rate, of course, will be borne by the borrower. 5% or 10% of a bond issued by Fannie or Freddie would be sold without a federal guarantee.

Not such a bad idea and investors in this “first loss” position would take on an additional risk of absorbing losses but would receive a higher interest rate. But don’t look for too much exciting from Congress in this area ahead of the election 13 months from now – but FHFA may do a little pilot program on its own.