March, 2011

Five Proposals for a New Housing Finance System in the United States

The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac dominated the U.S. mortgage market for almost 40 years. When the U.S. mortgage and housing markets crashed in 2008, however, these two GSEs survived only due to government bailout and conservatorship, and U.S. taxpayers could end up paying as much as $400 billion for rescuing just these two GSEs.

Although the financial crash devastated the GSEs, they and other government entities continued to expand their roles in the U.S. market. During 2009 and 2010, GSEs guaranteed as much as 70 percent of mortgage market activity. Other government programs guaranteed an additional 25 percent.

In light of this dominance, some commentators suggest that a private market for U.S. mortgages is no longer possible. Others argue that heavily subsidized government programs have crowded out private providers, making actual competition impossible. The five papers presented here look beyond the crisis to present various proposals for the long-term reform of the U.S. mortgage market.

  • Government-sponsored enterprises (GSEs, Fannie Mae and Freddie Mac) are unsustainable—the expected costs they create for U.S. taxpayers far exceed their expected benefits. The question is then how to reorganize the U.S. mortgage market in the absence of GSEs. This paper focuses on a specific mortgage market reform proposal to abolish the GSEs and substitute privative market incentives for mortgage originators, securitizers, and investors, while retaining the FHA and HUD programs in support of lower-income and first-time homebuyers. The paper assembles data showing that stable housing and mortgage activity can be sustained with minimal governmental intervention, including data that demonstrate the success of European housing and mortgage markets that operate with little government intervention.

    March 1, 2011
  • The insolvencies and conservatorships of Fannie Mae and Freddie Mac in September 2008 have clearly established the inappropriateness of the “government-sponsored enterprise” (GSE) model for residential mortgage finance in the U.S. Two-and-a-half years later, however, the “$5 trillion question”—how to replace their presence in the secondary mortgage market—remains an open question.

    March 1, 2011
  • Implicit in most of the proposals for reforming the U.S. housing finance system is the idea that mortgage-backed securities (MBS) backed by U.S. mortgages cannot be sold unless they are issued by a government-sponsored enterprise (GSE), a U.S. government agency, or are otherwise guaranteed by the U.S. government. This paper argues that continuing U.S. government involvement in the housing finance system will inevitably involve serious losses for the taxpayers, and that a U.S. housing finance system would function well without GSEs or any other form of government financial support simply by ensuring that the mortgages allowed entry into the securitization system are of good quality.

    Peter Wallison
    March 1, 2011
  • This paper offers two alternatives to reforming Freddie Mac and Fannie Mae, the government-sponsored
    enterprises (GSEs). One approach, the “devil you know” strategy, would restore the status quo ante,
    meaning that Freddie Mac and Fannie Mae would be returned to the investing public as private
    corporations with government backing, able to purchase loans for securities and able to hold securities
    in portfolio, subject to limits on loan amounts and subject to safety-and-soundness regulation. The other
    approach, the “Jimmy Stewart banker” strategy, would get the government out of the mortgage-guarantee
    business and let the mortgage market evolve in a decentralized way. In this system, mortgage lending
    would return to local banks, which would retain the loans that they originate.

    Arnold Kling
    March 1, 2011
  • Can the private sector offer a less costly alternative to Fannie and Freddie that requires far less government involvement in the housing and mortgage market? This paper argues that it can.

    Michael Lea
    March 1, 2011