Transparency emphasized as government mulls Fannie Mae reform

Introduction

More transparency about the overall U.S. mortgage securitization market must be part of the Obama administration’s eventual plan to reform finance giants Fannie Mae and Freddie Mac, a real estate expert urged Treasury Secretary Timothy Geithner today.

Susan Wachter, a professor at the University of Pennsylvania’s Wharton business school, said that level of transparency may include real-time databases for regulators to monitor. She was among a dozen bankers, real estate experts, and economists who spoke at the the Treasury Department’s first public conference, held by Geithner, to collect advice as he prepares a housing finance reform plan to deliver to Congress in January.

“For me the key factor is information, and the lack of information,” Wachter said, when asked by Geithner how the finance market should be reformed. “Markets took on risk that was not understood, markets failed to price risk, to control risk or recognize risk. Correcting the information market failure will require disclosure, transparency and standardization.”

Wachter, a former assistant secretary for policy at the Housing and Urban Development Department in 1998-2001, said real-time information must be available for the mortgage markets to work smoothly and for private capital to bear more of the risk instead of the federal government. “We will need to have transparent information and databases that investors and regulators can track in real time,” she said.

The federal government took over Fannie Mae and Freddie Mac in late 2008 amid their rising financial losses and has pumped nearly $150 billion of taxpayer money into them since then. Devising a plan to get Fannie Mae and Freddie Mac off the government’s life-line is a formidable challenge because the two government sponsored enterprises plus the Federal Housing Administration now guarantee more than 90 percent of all U.S. mortgage loans.

A Center for Public Integrity investigation earlier this month reported a whistleblower’s claim that Fannie Mae executives bungled their stewardship of the government’s massive foreclosure-prevention program because they were preoccupied with earning short-term incentive payments from the Treasury Department. A 2009 investigation by the Center analyzed government data on nearly 7.2 million subprime loans made in 2005-2007 and profiled the top two dozen lenders who made them.