Tag Archives: freddie

Wrapping up America’s Housing Future

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This is my last post (see here and here for the first two) on the Bipartisan Policy Center’s Housing America’s Future report.  I have one last thought to share — a radical one at that.

The report takes for granted that the federal government should provide a guarantee that wraps mortgage-backed securities and completely covers investors for credit losses. (51-52) Is it too Un-American to contemplate a world where investors bear some (I’m not even saying all!) of the credit risk?  Why is that not on the table at all?  Investors obviously bear credit risk in all sorts of credit markets.

But housing, we are told, is special.  The 30 year fixed rate mortgage would disappear without it.  That is patently not true because the private-label market has issued 30 fixed rate jumbos in the past.  It may be true that the number of 30 year fixed rate mortgages would shrink to an unacceptable level if there was no government wrap, but that leads to a modest proposal.

What if the government offered a range of wraps at different price points?  a 100% wrap.  But also a 75% wrap and a 50% wrap and a 25% wrap.  What if those limited wraps covered either first loss or last loss on different MBS?  What if this menu of options allowed us to better determine a socially optimal level of government guarantee instead of assuming that it has to be total to keep the housing market from melting, melting away?

Reiss on Fannie and Freddie Multifamily Contraction

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GlobeSt.com interviewed me (and others) about Federal Housing Finance Agency Acting Director Edward J. DeMarco plans to reduce Fannie and Freddie’s multifamily finance volume by 10% from last year’s levels:

Also consider this, says David Reiss, a professor of Law at Brooklyn Law School who has published papers on the GSEs: “We are living through a very abnormal time when the federal government dominates the market for single family and multifamily mortgages.”

This is neither necessary nor optimal, he tells GlobeSt.com. “It is not necessary because there have been long stretches in the past when the government had a much smaller role in those markets. And other credit markets operate well with no or a much smaller government footprint.”

This is not to say that there is no role for the federal government in the multifamily mortgage market, Reiss continues — just that it is far too large at this point in time. “If the reduction in the GSE footprint is telegraphed over a reasonable time horizon to the other market participants, this change should be taken in stride by the multifamily market,” he predicts.

 

New Direction for Federal Housing Policy? Finally!

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The Bipartisan Policy Center has released Housing America’s Future: New Directions for National Policy.  The Wall Street Journal reported (behind a paywall) that the report represents a “behind-the-scenes effort to jumpt-start the debate over Fannie’s and Freddie’s future . . ..”  My preliminary thoughts on it:

  • The report’s first key policy objective is exactly right:  “The private sector must play a far greater role in bearing
    credit risk.” (8) I have taken this position for years.  There is no reason that a large share of the credit risk should not be underwritten and borne by the private sector.  That is, after all, what they are supposed to do in free market.  This is not to say that the federal government has no role.  But the current state of affairs — with the government supporting more than 90 percent of home loans — is a recipe for the next housing disaster.
  • The government’s role should be limited to supporting the mortgage market for low- and moderate-income households and to playing the role of lender/insurer of last resort when the mortgage market dries up.
  • The report is again exactly right when it says that Fannie and Freddie should be wound down and replaced with a wholly-owned government entity that will not suffer from the dual mandate of fulfilling a public mission and maximizing profits for its shareholders.
  • The report favors a policy of assisting all very low-income households with their housing expenses.  This is a great and radical step.  But any such policy should take into account the Glaeser and Gyourko’s research that indicates that local land use policy can be at odds with federal housing policy in order to make sure that federal monies are used effectively.

I do not agree with the report in all respects.  Some examples:

  • The report characterizes the FHA as having only one “traditional mission of primarily serving first-time homebuyers.” (8) This characterization repeats the conventional wisdom but the conventional wisdom reads the history of the FHA incorrectly.  I will be posting an article on the history of the FHA later this year that will hopefully set the record straight.  The FHA certainly needs reform, but we should start with all of the relevant facts before jumping in.
  • The report asserts that housing counseling is effective (9) but the empirical evidence is not so clear.  Any policy that devotes significant resources to counseling should be built on a solid basis of empirical support.

Notwithstanding these criticisms, the report is a great first step toward developing a federal housing policy for the 21st Century.  More on the report anon.

Federal Reserve Report on the 30 Year Fixed Rate Mortgage

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Fuster and Vickery have posted Securitization and the Fixed-Rate Mortgage, a FRB of NY Staff Report.  This paper brings some empirical research to the debate over the proper fate of the 30 year mortgage.  Commentators are sharply divided over whether the government must be intimately involved in the operations of the residential mortgage markets in order to keep the 30 year FRM available in the United States.   (Whether that is a worthy goal is another question entirely.)

Peter Wallison at the American Enterprise Institute has argued that the existence of 30 year FRMs in the jumbo market demonstrates that the government does not need to play an active role in the mortgage markets to ensure the availability of that mortgage product.  David Min, formerly of the Center for American Progress, has argued that the government must continue to play an active role in order to keep that product in the market.  My own position has been in the middle — the government can reduce its dominant role in the mortgage markets while retaining a role during financial crises.

Fuster and Vickery test whether securitization, by allowing interest rate and prepayment risk “to be pooled and diversified, increases the supply of FRMs relative to ARMs.”  (1)  They find that “lenders are averse to retaining exposure to the risks  associated with FRMs in portfolio. Securitization increases lenders’ willingness to originate FRMs by transferring these risks to a diverse international pool of MBS investors.” (2)  Unsurprisingly, they also find that “when private MBS markets are liquid and well functioning, as in the period before the onset of the financial crisis in mid-2007, private and government-backed securitization perform similarly in terms of supporting FRM supply. However, public credit guarantees may make securitization less susceptible to market disruptions, thereby improving the stability of FRM supply.” (2)  Fuster and Vickery suggest that the current GSE- centered mortgage finance system may not be necessary for FRMs to remain widely available at competitive rates, but only as long as private securitization markets are liquid.”  (30)

Fuster and Vickery do not mean to say that they have produced the last word on this topic, but their findings are intuitive to me.  This debate is central to any plan for the future of the American housing finance system, so more empirical work in this area is most welcome.

S&P Predicts Residential Mortgage Finance To Improve in 2013

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S&P’s report has a couple of interesting predictions:

  • Although the GSEs (government-sponsored entities, such as Fannie Mae and Freddie Mac) have been vital players in the U.S. mortgage finance market, 2012 was a strong year for mortgage banking, largely because of refinancing activity. This trend will likely continue in 2013, but banks may struggle to duplicate strong performance next year.  .  .  .
  • We expect the federal agencies to continue to dominate the residential mortgage-backed securities (RMBS) market in 2013, but the private-label market will see some growth from a low base.

Levitin and Wachter’s New History of American Housing Finance

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Adam Levitin and Susan Wachter have released a very interesting paper on The Public Option in Housing Finance.  The paper provides a history of the development of the housing finance infrastructure in the United States.  It concludes that

[t]he experience of the U.S. housing finance market teaches us that public options can only succeed as a regulatory mode in certain circumstances. A public option that coexists with private parties in the market is only effective at shaping the market if all parties in the market have to compete based on the same rules and standards. Otherwise, the result is merely market segmentation. Moreover, without basic standards applicable to all parties, the result can quickly become a race-to-the-bottom that can damage not only private parties, but also public entities.(60)

Personally, I wish they struggled more with the trillion dollar issue that they highlight in the middle of the paper:  “It is not clear how deep of a housing market can be supported if credit risk is borne by private parties rather than by government.”  (30)  As the Obama Administration seeks to impose a new order on the housing finance market that will likely last for generations, we should seek a consensus (or as close to one as we can) among policymakers as to how much credit risk the private sector can take when it comes to mortgages secured by single and multifamily housing.  Personally, I believe it can handle a lot more than we give it credit for.

CRL Issues Report on State of Lending

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The Center for Responsible Lending has issued a new report, The State of Lending in America and its Impact on U.S. Households.  CRL, Cassandra-like, warned of an epidemic of millions of foreclosures at the height of the Subprime Boom, so they have a lot of street cred.  And while they are consumer advocates, their research is solid.

Their policy recommendations include “the following key principles to ensure a robust and secure secondary market:”

• Government Guarantee: The U.S. government should provide an explicit, actuarially sound guarantee for mortgages in a future secondary market structure. This is an appropriate role to for the government to play in the event of a housing-market crash or market disruption. Discussion about the role of private capital in sharing losses is an important part of the conversation, but a catastrophic government guarantee is essential to the future of mortgage finance.

• Duty to Serve Entire Market: Mortgage finance reform should require secondary market entities that benefit from federal guarantees to serve all qualified homeowners, rather than preferred market segments. Without a duty to serve the entire market, lenders could recreate the dual credit market that characterized lending during the subprime crisis.

• Encourage Broad Market Access by All Lenders: The future mortgage finance system should encourage competition and further broad market access to the secondary capital markets for both small and large lenders. These goals should be met by establishing a cooperative secondary market model of one non-lender entity, owned in equal shares by member-users, that is able to issue guaranteed securities. Such a model of aligned interests will correct the shortcomings of Fannie Mae and Freddie Mac’s past and also prevent a further concentrated lending marketplace in the future. (53)