Barry, My Liege :
Your recent proposal to end Federal participation in the United States residential housing markets by ending the guaranteeing of home loans by the Federal government will kill the US housing market.
I agree that it is not right to allow banks to profit from good loans while being reimbursed for bad loans, but removing Federal participation entirely will leave the United States economy to the mercy of banks.
We have seen what happens when banks control the economy, and we do NOT like it.
“Removing them [Fannie and Freddy] entirely would be devastating,” Kelly Powers, vice president for advocacy at the Arizona Mortgage Lenders Association, told FoxNews.com.
Powers argues that there isn’t enough private capital to step in and take over, and the results on lending could be damaging.
Here's a better proposal :
Change the rules so that banks have 'skin' in each transaction; that is, the bank which originates the loan stands to lose some of its equity if the loan fails.
For example, for each home loan that fails for which the bank has evidence of due diligence in the origination process, the Federal reimbursement is limited to 50% of the loss.
If there is no acceptable evidence of due diligence, the bank is not reimbursed. In order to encourage 30 year loans, the reimbursement could be raised to 75% on 30 year loans.
We pray, my Liege, that you consider very carefully any proposal to change the housing markets.
Your faithful servant,