WL Ross Vice Chair Talks Shop on GSEs and Housing Lessons

While the industry and government are at odds on the next steps for Fannie Mae and Freddie Mac, one important voice in the industry said that wait and see approach on the GSEs may yield to better results to a packed room on Monday.

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James B. Lockhart III, vice chairman of ""WL Ross & Co."":http://www.institutional.invesco.com/portal/site/invescoinst/menuitem.41f20d94768ecd0bf8800610e14bfba0/ and former director of the Federal Housing Finance Agency, spoke to a large crowd at the inaugural Investment Symposium at the ""10th Annual Five Star Conference and Expo"":http://thefivestar.com/fsc/.

The session was one of many dedicated to the investor experience in today's marketplace.

Louis Amaya, CEO of National Asset Direct, introduced Lockhart to the crowd.

The GSEs were the focal point of Lockhart's address because they are giving investors pause as they examine the marketplace.

""One reason we're in a slow recovery is that there's a lot of uncertainty,"" he said. ""[These] new rules are adding to this uncertainty and the sequester and debt ceiling deal are a part of what make investors uncomfortable.""

Fannie Mae and Freddie Mac have a giant a market share, Lockhart says, lending to a lot of the turmoil surrounding them in Washington, D.C. During the recovery the GSEs forged their own path, but not without trial and error.

""When they wanted to tell they were safe they put their foot in the government side and when they wanted to assure their shareholders they put their foot in the private sector space,"" he said.

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Lockhart also spoke to the lessons learned from the crisis.

""The most obvious lesson from the crisis is that markets are cyclical, bubbles do burst,"" he said, which is why he calls for a clear demarcation between the private and public sector.

He also spoke to Federal Reserve chair Ben Bernanke's leadership during the crisis. ""He had studied the Great Depression and really knew what to do.""

By lowering interest rates, Bernanke's move to stimulate the economy has worked by most accounts. However, the stimulus will end one day, and the taper will still come as a shock to the market, Lockhart says.

""They're going to have to be very careful about tapering, the other thing is that they're going to have to be pretty balanced ... the Fed has to act as the lead regulator for our banking system.""

Still, Lockhart is fairly optimistic about the turn the market is making. Defaults are now no longer the norm for the industry. Instead of REO-to-rental, Lockhart thinks the trend is more short sale-to-rental, which points to a fact of life within the market: There will be bubbles and crashes. To remedy both, Lockhart suggests examining the current cyclical nature of the market.

""Interest rate risks on mortgages are a difficult animal,"" he said. ""We need to build a strong market├â┬ó├óÔÇÜ┬¼├óÔé¼┼ôbuilt on strong insurance principals and market discipline. We need to build in a whole counter-cyclical structure here.""

Introducing a new backstop--such as the current idea for a government-owned Federal Mortgage Insurance Corporation--would not be a bad move, according to Lockhart, and neither would be keeping the GSEs as revenue generators.

""Fannie and Freddie are working. They're returning money to the government,"" he said. ""They're reducing the deficit. The momentum to move is not as high because they're creating cash.""

While the crisis changed a great deal in the housing market, in terms of investing, if it is not broken--especially with the GSEs--then don't fix it.