Washington is alive with debate today as one private investor lays his case for a smaller government role in the flailing U.S. housing market. Simultaneously, housing-industry lobby groups pushed Congress to move ploddingly in their retraction of mortgage giants Fannie and Freddy. The fear is that pulling back Fannie and Freddie too quickly will result in limiting mortgage availability, but with $151 billion in tax dollars already spent on the losses of the programs, it looks like a Catch 22.
Martin Hughes, who is the president and Chief Executive of Redwood Trust Inc. believes the weight of losses to be counter intuitive to recovery. The market has been nearly frozen since the financial crisis and by his estimation perpetuating Fanny and Freddy only drains government dollars rather than keep the mortgage and housing market intact. The private market could be left to its own devices and successfully invest in safe, well-structured, prime securitizations backed by solid mortgage loans.
Terri Ludwig, the president and chief executive at Enterprise Community Partners doesn’t have as much confidence in the private market.
“Any shift away from the current structure must be done carefully and must ensure that viable affordable housing options — both home ownership and rental — exist in all communities.”
Hughes countered that mortgage rates would not be negatively affected amid a global “competition for returns,” encouraging a incremental 5-year increase of Fanny and Freddie returns to market levels to encourage the fostering of a “safe attractive robust” private label market.
This has been in line with the agenda of Republicans for some time. A bill introduced by Senator John McCain in March with similar objectives has been the focus of the National Association of Realtor groups who imagine it would be potentially deleterious to the already struggling housing market. Less mortgage capital than is already availability would shake the housing market beyond what it could withstand, according to these lobbyists.
Government officials appear to be split on Hughes position, though many believe that the absence of the federal support system would destroy a market that has already taken more battering than it could withstand by minimizing housing credit.
Among the largest issues of debate today was the multifamily loans offered by Freddie and Fanny. While single housing has had little success and been largely a drain on the system, the financial crisis has led to more demand and success from multifamily loans, which actually thrived through the housing crash.
The housing sector reform that is currently underwar would impact a number of real-estate investment trusts, including Prologis (PLD), Apartment Investment and Management Co. (AIV) , Vornado Realty Trust (VNO) and AvalonBay Communities Inc. (AVB). Housing bulls, and there are few these days, may want to keep an eye on these stocks but consider holding out on investing until the direction of the situation becomes more clear.
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