Editor: David Reiss
Brooklyn Law School

March 8, 2013

Wrapping up America’s Housing Future

By David Reiss

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?

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