GSEs (Fannie/Freddie),FHA&HUD

Restructuring the U.S. Residential Mortgage Market

Posted on Wednesday, February 16, 2011

There is wide bipartisan agreement that government housing policies, past and present, need to be re-evaluated given their role in the financial crisis. While the reform of Fannie Mae and Freddie Mac was not included in financial reform legislation last year, the Obama administration and congressional leaders are vowing action on these government-sponsored enterprises (GSEs) this year. Will the new majority in the House of Representatives wind down the housing giants and if so, how fast? Can the already weak housing market survive without some kind of an explicit government back-stop? Can consensus be reached?

On February 11, the Initiative on Business and Public Policy at Brookings hosted a day-long forum to discuss the issues and the options ahead as policymakers discuss the government's role in the U.S. residential mortgage market. Secretary Timothy Geithner remarked on the administration's strategy for reforming the nation's housing finance markets. Former Federal Reserve Chairman Alan Greenspan delivered the keynote address. Four papers written by experts in the housing market and finance field were released and discussed, and two panels tackled the broader issues the papers raise.

Selected papers and presentations are available below, all in PDF format.

• "Catastrophic Mortgage Insurance and the Reform of Fannie Mae and Freddie Mac," by Diana Hancock and Wayne Passmore
• "The Government’s Role in the Housing Finance System: Where Do We Go from Here?" by Karen Dynan and Ted Gayer
• "The Economics of Housing Finance Reform: Privatizing, Regulating and Backstopping Mortgage Markets," by David Scharfstein and Adi Sunderam
• "Toward a Three Tiered Market for U.S. Home Mortgages," by Robert C. Pozen
• "Eliminating the GSEs as Part of Comprehensive Housing Finance Reform," by Peter J. Wallison

• GSE's: What are the Options and Issues? by Douglas Elliott
• GSEs: Options and Issues by Edward Pinto
• Catastrophic Mortgage Insurance and the Reform of Fannie Mae and Freddie Mac by Diana Hancock and Wayne Passmore
• Discussion of Hancock and Passmore by Chris Mayer
• Comments on Hancock and Passmore by John Quigley
• The Government's Role in the Housing Finance System: Where Do We Go From Here? by Karen Dynan and Ted Gayer
• Comments on Dynan and Gayer by Dwight Jaffee
• The Economics of Housing Finance Reform:Privatizing, Regulating and Backstopping Mortgage Markets by David Scharfstein and Adi Sunderam
• Discussion on Scharfstein and Sunderam by Viral V. Acharya
• Three Tiers of Home Mortgages by Robert C. Pozen
• Restructuring the U.S. Residential Mortgage Market by Michael Fratantoni
• Comments on Pozen by Lawrence J. White
• Restructuring the U.S. Residential Mortgage Market by Sarah Rosen Wartell
SECRETARY GEITHNER: So we, obviously, got a lot of things wrong in the housing market in the United States. And it is a complex system. And reform requires a careful strategy that includes a number of different elements. And let me just lay out the basic pillars, the basic foundations, of what we think is a credible reform plan.

The first, of course, is that we need to wind down Fannie and Freddie, and substantially reduce the government’s footprint in the housing market. And that’s a process that has to happen gradually, because they are now the dominant source of housing finance. And we want to be careful that that process happen in a way that doesn’t interfere with or impede the process of repairing the housing market that still has a long way to go.

For the private market to take on a greater share of the burden of providing housing finance we have to have in place -- outlined and understood -- a new set of rules of the game for all the pieces of the mortgage market. And that means clarity on the capital banks have to hold against mortgage risks.

It means stronger underwriting standards so that homeowners have to hold more equity in their homes. It means better protection for consumers, comprehensive oversight of servicers and all others involved in the basic chain of housing finance. It means better incentives for securitization, clarification on risk retention. That comprehensive set of reforms that are laid out in Dodd-Frank have to be put out to the market to give investors and banks time to adjust, to understand, what will be the new economics of making mortgages in this country.

The third piece is to define a substantial but more targeted role for the government in supporting affordability -- both for people who want to own a home, and people who people who want to rent. And the paper lays out a series of basic elements of a reformed role for the government -- concentrating on the FHA -- in helping support those basic objectives.

And finally, of course, is the end game. And taking advantage of a lot of work that many of you have done, we provide a brief overview of the full spectrum of options out there for future reform. And we try to narrow the field to a more credible set of ultimate reform options. And the three we lay out in the paper -- just to summarize them briefly -- are an approach that is limited to the role the FHA provides, a proposal that would complement the FHA’s role with an emergency back-stop mechanism that would only be deployed in crisis. And a third option is an FHA, alongside a redesigned and much more limited but standing guarantee or insurance mechanism that would be available for a broader class of homeowners.

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