The U.S. Treasury Department held its conference on the future of housing finance this morning. Among the speakers at the gathering were U.S. Treasury Secretary Timothy Geithner and PIMCO founder Bill Gross.

In his remarks, Gross called for merging all government mortgage programs into Ginnie Mae and providing a 100% guarantee on government loans.

These government loans would be "protected by adequate downpayments and sufficient mortgage insurance premiums," Gross said.

The bond market maven said it is "unrealistic" to expect a robust return of private label securities anytime soon that will provide affordable financing.

The Fannie Mae and Freddie Mac model also is expensive and leads to higher mortgage rates,  Gross believes.

The financial crisis has shown that private mortgage insurance is "untrustworthy" and it will be a "very expensive cost going forward," he said.

Gross also called for a massive refinancing of Fannie and Freddie mortgages to stimulate the economy and prevent a double dip recession.

Meanwhile, at the start of the conference, Geithner said that the current financial crisis illustrates the need for the government to provide some form of support or guarantee for the mortgage market.

This crisis saw a "full retreat" of private market institutions from the mortgage market, he said.
"The challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure," the secretary said.

The Treasury noted there is no consensus yet on how to design a new system.

However, the Obama administration will not support returning Fannie Mae and Freddie Mac to their former hybrid status of private/public entities.

"This administration will side with those who want fundamental change," Geithner said.

Meanwhile, Treasury wants to begin "weaning" the markets away from government mortgage programs to get the private sector back into the business of providing mortgages.

"As we get though this transition, it is important that consumers maintain access to credit at attractive rates," Geithner said.

The secretary stressed that government will continue to stand behind the GSEs' commitments during this transition and the "planned wind down" of the GSEs' portfolio.

Aside from Gross and Geithner, Lewis Ranieri  and  Barbara Desoer, president of  the nation's second largest residential funder Bank of America Home Loans, were among the group of 12 speakers who testified today at the Treasury forum.

Ranieri, who pioneered the MBS market in the early 1980s when he was at Salomon Brothers, is chairman of Ranieri & Co.

At the conference, Ranieri said the Dodd-Frank Wall Street Reform bill goes a long way toward addressing the issues that led to the meltdown of the private-label securities market.

He said the bill addresses risk retention and requiring securitizers to have "skin in game" if they bundle risky mortgages. "There are new rules for the credit rating agencies," he said, along with capital requirements and real enforcement of regulations.

Howver, Ranieri pointed out that the bill doesn't address the issue of second mortgages. "The bill is totally silent on second mortgages," Ranieri said. "If we don't resolve the second mortgage issue, we haven't resolved the excess leverage issue."

In a separate securitization session, industry executives discussed ways of preventing consumers from taking out second mortgages without getting the first mortgage holder's approval. One official noted such an approval requirement could be written into the mortgage as a covenant.

Tom Deutsch, executive director of the American Securitization Forum, released comments this morning regarding the conference.

“One of the most important tasks facing policymakers as they tackle the enormous challenge of appropriate reformation of the U.S. housing finance system is establishing a clear role of the private sector to work in conjunction with the public sector to provide efficient funding sources to mortgage originators to make loans to home buyers," Deutsch said. 

He added that a fully functioning private sector taking from large capital pools, including global entities as pension and mutual funds, is critical to establishing a sound U.S. housing finance system.

Mike Heid, co-president of Wells Fargo Home Mortgage, and S.A. Ibrahim, CEO of Radian, also made presentations.

Geithner and Housing secretary Shaun Donovan moderated the discussion, which was held between 9 AM and 1:30 PM.

The Treasury Department is also working on a draft proposal to reorganize Fannie and Freddie and hopes to release its blueprint early next year. Currently, the two GSEs account for 70% of all residential loans funded in the U.S. The Federal Housing Administration accounts for most of the balance.

In April 2010, the Treasury and the U.S. Department of Housing and Urban Development issued a set of questions for public comment on the future of the housing finance system, which received more than 300 responses from a broad cross-section of consumer and industry groups as well as market participants that included those from the securitzation market.

Members of the public, think tanks, and other stakeholders also submitted comments to the Treasury on the issue.

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