Wednesday, April 18, 2007

Freddie Mac's Syron on Subprime

by Tanta on 4/18/2007 12:36:00 PM

From Freddie Mac CEO Richard Syron's testimony to the House Committee on Financial Services yesterday:

First and foremost, regulation is needed to ensure that borrowers have the information they need to make informed mortgage choices. To be most effective, consumer disclosures need to be uniformly and consistently applied.

Second, good regulation also would set prudent guidelines on what I call the “socially acceptable” level of defaults. As a nation, we need to set some limit on the level of risk we are willing to take in order to promote higher levels of homeownership. We need to be honest that there's a major tension between putting as many families into homes as possible – and ensuring they can sustain homeownership over the long term.

Third, good regulation should ensure a level playing field. As long as some institutions operate under different, or no, regulatory strictures, potential for these sort of excesses and abuses will exist. There are a lot of investors in this market, and relying on any one set of participants will be ineffective. As a case in point, relying on the GSEs to “regulate” the behavior of other entities will not work because non-GSE investors account for the vast majority of subprime mortgages that have been securitized.

We also should carefully distinguish between those borrowers who can be “rescued” and those who cannot. I realize such a triage will not be easy or popular, but policy prescriptions such as widespread “bailouts” or foreclosure moratoriums should be considered only in certain extreme situations. Broad application of such prescriptions could have lasting, unintended consequences that harm the housing finance system in the long term.