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How to solve the housing finance market in 2 easy steps.

A recent report authored by The American Enterprise Institute for Public Policy Research revealed  that the US government should not be in the business of guaranteeing loans.

It supports the elimination of Fannie Mae and Freddie Mac as GSE (Government-Sponsored Enterprises) and suggested that over time, they be privatized. To the extent that government is involved in the financial market, they also concluded that their focus be on ensuring mortgage credit quality, not guaranteeing the quality of mortgages or MBS to potential investors.

Those against the removal of government intervention and guarantees argued that by doing so, investor confidence in the financial securities market would be further eroded, and that the housing recovery would be near impossible.

It reminded me of a funny discussion I overheard recently that went like this:

Broker: “Who has some good news they’d like to share?”
Agent: “I do. I just wrote an offer for some clients on a home I showed them.”
Broker: “That’s great news!”
Agent: “What’s even better is that they qualified for a loan, and neither of them have a job!”

Wait a minute! Isn’t this what got us into the problem in the first place? What happened to all of the mortgage reform policies that lenders were going to put in place? Seems like Deja Vu all over again.
You can download the report here.

What are your thoughts? Should the government continue to guarantee bad loans?

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