Government may be forced to stay in mortgage business

June 20, 2011 12:41PM

A dicey start to the spring housing season has raised the prospect that the government will remain dominant in the mortgage market for longer than intended, the Wall Street Journal reported. The fragility of the market, falling prices and reduced consumer confidence are making it difficult for Washington to pull back its support.

Government-sponsored organizations Fannie Mae and Freddie Mac must try to return to sound lending standards without cutting off access to mortgages completely, according to the Journal. Taxpayers are on the hook for $138 billion since Washington took over control of the organizations in 2008, a loss that it cannot walk away from.

“We’re not going to get a recovery in housing until the average borrower can get a mortgage,” said Kenneth Rosen, a California-based economist.

Some experts are championing the return of private investment as a means to curb the government’s role. Obama administration officials are pushing to increase fees to lenders and reduce the maximum loan size eligible for government backing. Those limits are set for a minor decline in September.

There are flaws to this rationale, however. “I’m sort of a champion of private capital, but I’m also not naïve,” said Lewis Ranieri, a pioneer of the home mortgage bond market. “At this point, it really doesn’t work because we don’t have fundamental issues resolved.” [WSJ]