- Posted at 12:55, December 05, 2013
- By Russ Bleemer
Former Fannie Mae CFO Tim Howard is in a video posted by Reuters talking the future of mortgages, the institution he led until the mid-00s, and how a future home loan crash should be avoided.
Howard says at the outset that the government will have to decide on the future role for Fannie Mae and Freddie Mac, now under the conservatorship of the Federal Housing Finance Agency, but disagreed with host Anthony Currie's point that the two were always headed down a path of self destruction.
"The primary reason people said these companies were inevitably going to fail," says Howard in the interview, "is because many people believe that a government-sponsored company with special advantages over private companies has inherently bad incentives to take risk."
He says he managing both interest rate- and credit risk for almost 20 year at Fannie Mae. "This notion that Fannie Mae had an implied guarantee that only applied to the debt and mortgage-backed securities . . . It never applied to the shareholders."
Howard continued: "We knew if we made mistakes the shareholders would lose all their money. . . . The record shows we did a very good job, particularly on the credit risk side."
The credit-risk issue, he explained, wasn't raised as a concern when he was there. It was raised later, when losses hit.
As to the future of the mortgage securities issuers, Howard said, the "big irony of the current consensus for what to do in the mortgage market is you wind Fannie and Freddie down and replace them with private companies, . . . [T]hat is exactly what was attempted in the late 90s-early 00s, and it ended in disaster."
The problem, he explained was because private companies underwriting and rating the mortgages "had no skin in the bame."
He said that the banks would package the mortgages and they would be sold and forgotten about, with little regard for downstream commercial mortgage-backed securities investors.
You can find the Reuters video, "Fighting America's Mortgage Wars" on The Exchange, here.