The U.S. Treasury Department will be hosting a summit tomorrow on how to repair the mortgage-finance system, an industry that accounts for 15 percent of the country’s economy.

Housing advocates and industry participants have warned that the size and complexity of the U.S. mortgage-finance system means that a move on the wrong direction could be overall more detrimental than beneficial, by further restricting credit, driving down home prices, increasing foreclosures and slowing the economy.

At the same time, some lawmakers say it’s time to close government-controlled loan guarantors and halt limitless bailouts.

“It’s like building an airplane while you’re still flying it,” said David Ledford, from the National Association of Home Builders in Washington. Housing investments and related services account for 15 percent of gross domestic product, according to the group, ranking the industry second to health care.

Central to the effort are Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, that has always enjoyed the explicit backing of the state (unlike Fannie and Freddie) and guarantees loans insured by the Federal Housing Administration, the government has guaranteed 96.5% of all newly originated mortgages.

Since 2005, when the three companies accounted for about 45 percent of a $2.2 trillion market, government involvement has more than doubled. Since Fannie Mae and Freddie Mac were seized by the government in 2008 after losses on mortgage investments pushed them to the brink of collapse, almost $150 billion of taxpayers money have been injected just to keep them solvent.

In the U.S. 60% of mortgages are securitised rather than kept on banks’ balance-sheets. That partly reflects Americans’ preference for 30-year fixed-rate mortgages that can be pre-paid without penalty—a difficult sort of asset for banks to hedge. The securitisation rate is more than twice as much as that in Canada, Spain and Britain, the next-highest countries.

Defenders of a federal backstop say this securitisation rate leaves the American system uniquely vulnerable during a crisis, when investors will refuse to buy any MBS that lacks a government guarantee, as they will assume that the government will always intervene, so it makes sense to charge for that guarantee explicitly.

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Tags: finance, U.S., U.S. Treasury