Fear of falling house prices is one reason a Republican congressman has advanced a GSE reform bill that provides government guarantees on privately issued MBS.

Rep. John Campbell, R-Calif., is wary of other Republican proposals that would simply wind down Fannie Mae and Freddie Mac and expect the private sector to fill the void.

At a House Budget Committee hearing last week, the California lawmaker raised concerns that phasing out government guarantees would lead to a further drop in house prices.

He also expressed concerns that the cost of a 30-year fixed mortgage would become too expensive for most homebuyers.

Campbell told a conservative think tank scholar that the private jumbo market currently expects a 50% downpayment on a 30-year fixed mortgage.

"If that is where a completely private market and your proposal would lead us, that is going to make the last housing drop look small," he warned.

Alex Pollock, a resident fellow at the American Enterprise Institute, stressed that the GSEs have "crowded out" the development of a private-label securities market that would provide financing for middle-class homebuyers.

After a five-year transition, "I have no doubt there will be a robust" 30-year mortgage market," Pollock said.

But Campbell is skeptical. The congressman has co-sponsored a bill with Rep. Gary Peters, D-Mich., that creates new privately capitalized entities that would issue government-guaranteed MBS.

These private entities would pay the federal government a fee for that guarantee.

Sarah Rosen Wartell, executive vice president of the Center for American Progress, noted that Fannie and Freddie never priced its loan guarantees properly.

The secondary market entities proposed in the Campbell-Peters bill would make the MBS guarantees explicit, and it would be reflected in the government's balance sheet. That is a big difference compared to the Fannie and Freddie model, she said.

But Rep. Mick Mulvaney, R-S.C., does see the difference.

"The Campbell-Peters bill is just another attempt to recreate Fannie and Freddie," the South Carolina congressman said.

But there is still the problem of pricing risk, the budget committee member said. The government doesn't do a good job of pricing risk. "We price risk on a political basis."

Rep. Scott Garrett, R-N.J., also panned the Campbell-Peters bill.

"They want to go back to a system where—at least at some level—the government will explicitly guarantee MBS," Garrett said.

The New Jersey congressman chairs the House Financial Services Subcommittee on Capital Markets and GSEs. Campbell also sits on the GSE subcommittee.

The Center for American Progress executive noted the U.S. housing market has enjoyed a consistent source of mortgage credit since the 1930s when the Federal Housing Administration and Fannie Mae were created.

"If we simply wind down Fannie and Freddie with no replacement, we face the real risk of returning to the period of wild swings in housing prices," Wartell testified.

This consistency also is reassuring to homebuyers because they know mortgage credit will be available when they go to sell their home.

"If we go back to a world without that consistent availability, it will make people much more reluctant to invest in homes," the former FHA official said.

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