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Six Key Principles for the Future of the Housing Finance Market

CEO Ed Haldeman Most discussions today about the future of the housing finance system begin with two related ideas: (1) private capital must return to the market; and (2) the role of the federal government should be reduced. These ideas are a sound starting point for the detailed reforms that must follow.

It's not Freddie Mac's role to advocate any particular position in the discussions about our future. Instead, our efforts are focused on helping the nation combat the housing and economic crisis – which is exactly what taxpayers should expect of us. Our role in the policy discussions, based on much specialized expertise, is simply to provide information and perspective.

Based on Freddie Mac's long experience in the markets, we believe the odds of a constructive policy outcome will be improved if the discussion centers on a set of sound housing market principles that can command broad consensus over time. So here are six principles – of widely understood importance – that could play this kind of useful role.

Principle 1: Private capital, rather than government, should represent a far greater portion of the market than it does today.

There's broad agreement on this first principle in Congress, the Administration and the housing industry itself. For example, Treasury Secretary Geithner testified in March before the House Financial Services Committee, "The Administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit."

There's consensus on this starting point: if we want a healthy housing finance system for the future, it's clear we must attract more private capital.

Principle 2: We need a residential mortgage market – including a rental market – that is liquid.

"Liquidity" refers to lenders' ability to convert mortgage loans into cash quickly and with little loss of value – thus allowing them to issue more mortgages. It also refers to investors' ability to similarly convert mortgage loans into mortgage-backed securities. In both these ways, liquidity leads to a larger, more robust market and lower rates.

One key source of liquidity to date for the mortgage market has been a thriving TBA (or "To-Be-Announced") market. Here, investors buy billions of dollars in generic mortgage-backed securities with confidence, even though those securities won't settle until a future date. The TBA market lowers costs for borrowers and enables them to lock in rates for 60 or even 90 days.

Principle 3: We need a residential mortage market that is stable.

How to provide stability? By having a major countercyclical influence in the market – one that runs counter to the economic cycle. This requires a mechanism that can sustain mortgage investment even when overall economic activity is decreasing.

Countercyclical influences have been vital during the housing crisis. More than 80 or 90 percent of liquidity since 2006 has been provided by government or related entities. But as everyone agrees, such continued heavy government involvement is both unsustainable and undesirable.

The lesson is, you need countercyclicality if you want to achieve a stable, healthy mortgage market that doesn't dry up when the country needs it most.

Principle 4: We must maintain the widespread availability of a core set of sound, sustainable mortgage products – currently including long-term fixed rate mortgages – even as markets evolve and products change.

Families need continuous access to such products in good times and bad. Lenders, in turn, need a core set of products to sustain them during the down side of the economic cycle.

It's essential such sustainable products be available in all communities and geographic areas. And for renters, the market also needs broad access to multifamily capital.

Principle 5: Lenders of all types and sizes should have equal access to the secondary market.

This principle recognizes that market power shouldn't be concentrated in a few large institutions. Small players as well as big ones should have access to the liquidity, stability, and low costs available through the secondary market.

It's important for the market to allow for innovation and new entrants. And let's not forget, an abundance and diversity of choices benefits consumers, too.

Principle 6: Once policy decisions have been made, the transition to a new structure must be gradual and carefully monitored.

The shifting, complex interaction of market factors during the transition will inevitably be unsettling. But we must strive to "First, do no harm" to borrowers or investors as we move to the new structure. Ensuring a careful, gradual transition will help attract and retain essential new private capital for the housing finance system.


The debate over the future of housing finance will have far-ranging consequences. We believe that if the discussion centers over time on sound principles like these, the results will serve America's families, mortgage lenders and the housing finance system well.


* Ed Haldeman left his position at Freddie Mac in May 2012.


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