Does the Mortgage Industry Need More Federal Intervention?

With the mortgage industry in such a mess following the subprime mortgage crash and the other problems with the economy, some are wondering if the federal government needs to intervene into the situation even more than it already has.

One of the proponents of the “more government” mindset is Bill Gross, the head of PIMCO. He oversees more than $1 trillion of investments and he was a recent guest speaker at the Treasury Department’s discussion concerning Freddie Mac and Fannie Mae’s future. He thinks that the mortgage industry’s dependence on the federal government isn’t something that we can do “cold turkey” without creating more problems than we already have. It’s a relationship the industry has with the government lately and The Christian Science Monitor likens it to the relationship that a heroin dealer has with his customers.

Gross says that the mortgage industry is in a bind. With the mortgage giants owning about $5 trillion in debt, it is not feasible to assume that the industry can break its reliance on the government without some major problems. In fact, Gross tends to favor more involvement by the federal government. He suggests allowing Fannie and Freddie to fold into one federal housing agency which would guarantee the overwhelming majority of mortgages, both current and future ones. This way, the taxpayers would support the mortgage lending process and the $5 trillion in debt would be passed along to the federal budget.

Others are proposing that the $5 trillion be absorbed by the private market. Of course, this can’t be done all at once. But with a gradual absorption, the mortgage industry can begin to break its addiction to the help that the federal is giving the industry. If the private market sells the mortgages in small increments, it can be done successfully without closing Fannie and Freddie. While the process may take several years, we have to remember that it took a few decades in order for the subprime mortgage industry to have the blistering effect that it has had on the housing market and the economy as a whole.

Is the answer in more government intervention or the mortgage industry slowly separating itself from the government’s help? What are some of the thoughts you have about this?