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The Future of Housing Finance

The Future of Housing Finance: Restructuring the U.S. Residential Mortgage Market

Copyright Date: 2011
Pages: 212
  • Book Info
    The Future of Housing Finance
    Book Description:

    Fannie Mae and Freddie Mac, government-sponsored enterprises that played a prominent role in the financial crisis of 2008, and the federal government have come to a crossroads. The government must make key decisions about their structure, and indeed, their very existence.

    The government has played an important role in the American housing market since the early 1930s, when the Great Depression ushered in housing programs to promote a stable society. The government's role expanded further during the recent housing and financial crisis -Fannie Mae and Freddie Mac now dominate the American housing market, backing more than 62 percent of new mortgages and holding more than $5 trillion in accumulated mortgage risk.

    InThe Future of Housing FinanceMartin Baily and his associates discuss the issues and options that policymakers face as they reassess the government's role in the U.S. residential mortgage market. While presenting diverse analytical perspectives, including a contribution from former chairman of the Federal Reserve Alan Greenspan, all contributors agree that the government's support for mortgage financing in the recent past was too broad and deep but some role is necessary to maintain the stability of the housing finance market. The Obama administration has recommended reducing the role of Fannie and Freddie while replacing them with a private market approach, but continuing federal support for worthy borrowers. But what will Congress agree to? And how fast will it move on any initiative?

    Specific topics include:

    • Introduction of a new system to reduce incentives that encourage excessive risk taking.

    • Gradual withdrawal of Fannie and Freddie from the housing finance system.

    • New approaches to regulating mortgage securitization, with financial stability as a primary goal.

    • Use of government-backed guarantees through institutional structures designed to limit moral hazard.

    eISBN: 978-0-8157-2209-0
    Subjects: Business, Political Science

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-x)
  4. 1 The Federal Role in Housing Finance: Principal Issues and Policy Proposals
    (pp. 1-20)

    Fannie Mae and Freddie Mac dominate the American housing market, backing more than 62 percent of recent new mortgages and holding more than $5 trillion in accumulated mortgage risk. Unfortunately, their traditional structure as government-sponsored enterprises (GSEs for short) is clearly broken. The GSEs are a kind of public-private partnership in which private capital, motivated by the pursuit of profits, is channeled toward the accomplishment of government objectives for housing. For a while, the GSEs generated very high earnings while meeting increasingly challenging public goals with no cost registering on the federal budget. However, the structures came crashing down in...

  5. 2 The Cycle in Home Building
    (pp. 21-25)

    While the rest of this volume is devoted to the structure of mortgage finance, it might be useful to discuss what mortgage finance is ultimately all about: home building.

    The last twenty years have exhibited the longest uninterrupted rise in singlefamily housing starts, and by far the sharpest collapse, in the postwar years. Starts in recent months have languished at an annual rate of a little more than 400,000, less than a fourth of where they stood at the top of the boom in early 2006. Nothing resembling this collapse had occurred in the six decades following the war. To...

  6. 3 Toward a Three-Tier Market for U.S. Home Mortgages
    (pp. 26-65)

    Home mortgages constituted the single largest type of credit in the United States at $10.6 trillion as of September 2010. Almost half of this amount took the form of mortgage-backed securities (MBS) that were formally or informally guaranteed by the U.S. government—$2.55 trillion by Fannie Mae, $1.7 trillion by Freddie Mac, and $1 trillion by Ginnie Mae. As of September 2010, the other half of outstanding home mortgage credit was composed of $1.557 trillion in MBS not backed by the U.S. government and $3.837 trillion in whole mortgage loans (Bank of America– Merrill Lynch 2010, p. 3).

    Since the...

  7. 4 The Government’s Role in the Housing Finance System: Where Do We Go from Here?
    (pp. 66-91)

    It is time to commit to a future housing finance system for the United States, as the current uncertainty surrounding this issue is likely deterring the recovery of the housing market and the broader economy. Returning to the system in place before the financial crisis is not a suitable option, as the governmentsponsored enterprises (GSEs) Fannie Mae and Freddie Mac created significant problems that contributed to the crisis. Their precrisis activities also left the taxpayers with an enormous burden: as of early 2011, more than $100 billion had been put toward rescuing the GSEs, and the total cost may be...

  8. 5 Eliminating the GSEs as Part of Comprehensive Housing Finance Reform
    (pp. 92-110)

    In the wake of the financial crisis of 2008, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have become insolvent corporations operating under the control of the federal government, yet still mainstays of the U.S. housing finance system. There is general agreement in Congress, ranging from Jeb Hensarling on the right to Barney Frank on the left,¹ that Fannie and Freddie should be eliminated. There is much less agreement on what should replace them or indeed whether they should be replaced at all. This chapter argues that Fannie and Freddie should be eliminated and not replaced because the U.S....

  9. 6 Catastrophic Mortgage Insurance and the Reform of Fannie Mae and Freddie Mac
    (pp. 111-145)

    Mortgage securitization has been tried several times in the United States, and each time it has failed amid a credit bust.¹ In what is now a familiar recurring history, during the credit boom, underwriting standards are violated and guarantees are inadequately funded; subsequently, defaults increase and investors in mortgage-backed securities attempt to dump their investments.² Ex post, the securitizers are taken to task for the methods they used to originate and sell bonds and for not looking out for the interests of bondholders.³ In the most severe cases, a federal emergency response to a mortgage crisis is mounted.4 In effect,...

  10. 7 The Economics of Housing Finance Reform
    (pp. 146-198)

    There is widespread agreement across the political spectrum that Fannie Mae and Freddie Mac should be wound down. With the two governmentsponsored enterprises (GSEs) now guaranteeing or owning about half of all residential mortgages in the United States, this will require nothing less than a complete redesign of the U.S. housing finance system. Unfortunately, there is little agreement about what the new system of housing finance should be.

    There are two leading types of housing finance reform proposals. The first type of proposal—offered by numerous industry groups, think tanks, Federal Reserve economists, and other analysts—seeks to replicate key...

  11. Contributors
    (pp. 199-200)
  12. Index
    (pp. 201-212)
  13. Back Matter
    (pp. 213-214)