Assuming Barney Frank Is Not Lying....

... about fixing housing finance through a completely redesigned system instead of trying to "fix" Fannie and Freddie (I know, believing a politician is not lying is always dangerous) I offer up the following suggestions.

1. Put Fannie and Freddie into run-off via formal receivership.  Leave them outside of the government and withdraw all support.  Whatever the RMBS return, they do.  Whatever the bondholders get back, they do.  No support.  The face of the prospectus was clear and everyone, including Bernanke, knew it.  Honesty and fair dealing starts with telling the truth.
   
   
2. Leave the mortgage market alone for 90%+ of the transactions.  That is, no government involvement whatsoever.
   
   
3. With that said, there are two places I recognize a reasonable place for the government to get involved.  The one I cannot argue against is the VA mortgage program - I believe this is a perfectly-legitimate benefit of military service and should be maintained.  The other is for very specific and targeted FHA loans for low-priced housing.  Both should be limited to homes in the lowest quartile of price irrespective of location, that is, with no "escalator" for "high priced" areas.  We live in a nation with freedom of movement and association - if you find the place you're living in to be too high cost, then move!

However, if we're going to leave FHA and VA loans in place (and we can do the issuance via Ginnie Mae, which already exists) we need to seriously restore underwriting standards.  Specifically, the following are minimums I believe we must demand:

1. NO automated underwriting and no use of FICO scores at all.  FICO is not useful for longer-term obligations, which a mortgage is.  Instead, all files must be manually underwritten.
   
   
2. 28% front-end ratio and 36% back end (DTI) ratios must be enforced.  No exceptions, no ifs, ands, buts or maybes.  High-ratio loans are still being made and they're the #1 reason why these loans default.  This has to stop.
   
   
3. No VA or FHA refinances permitted for cash-out, without exception.  If someone wants a cash-out loan they need to get it on the private market.
   
   
4. 10% down payments in cash required, seasoned funds.  No kickbacks, no funny games, no seller funding, no "loans from Dad."  Cash means cash.  If you can't come up with it you don't need to own a house.  This isn't being cruel - it's being honest.  Roofs needs repair (I'm putting one on my place this spring), water heaters leak and need to be replaced, things deteriorate over time or simply break.  You have to be able to save up enough money so that you're not dependent on credit cards if and when something like this happens.

Task the DOJ with enforcement of all statements on mortgage loan applications and paperwork.  You lie, you go to prison.  Period.  End of discussion.  No more "fraud for housing" .vs. "fraud for profit" - fraud is fraud, you go meet Bubba and lose your house.  Investors have to be able to fairly evaluate what they're buying and so does the government!

In the private market I would radically revamp the securitization system such that:

1. Any bank that securitizes debt cannot offload liability for breached reps and warranties.  You issue it, what you represent and warrant is in the package is yours, without exception or disclaimer.
   
   
2. Credit derivatives on RMBS are absolutely banned (thereby preventing the formation of synthetic CDOs that are purposeful value destroyers by hedge funds and others.)  Any true hedge + the underlying (if the hedge can perform) will return less than a Treasury of similar characteristics - as such it makes no sense at all to buy such a thing except to perform regulatory arbitrage, which must be prevented to stop future financial market disasters.
   
   
3. All off-balance sheet, "Level 3" or other-than-marked to the market  "holding pens" for such vehicles are banned.  If you want to hold these assets you have to do it where people can see them, without exception.  That is, it's perfectly ok for investors to buy these for investment purposes but the practice of using them as speculative trading vehicles in hinky legal structures has to be stopped.

That would be a good start.

PS: As I write this the pumptastic CNBS crooners claim that Barney Frank has repudiated his statements.  Even though he apparently made them originally in public.

Mr. Frank, did you truly wake up and decide to do the right thing or not?  I think you owe everyone an answer.