Posted on Wednesday, March 16, 2011
It is time to commit to a future housing finance system for the United States as the current state of uncertainty is likely deterring the recovery of the housing market and the broader economy. The pre-crisis model, which was centered around the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, had significant problems that contributed to the recent financial crisis. It also left the taxpayers with an enormous burden: More than $100 billion has already been put toward rescuing the GSEs and estimates suggest the total cost may be up to several times that when all is said and done.
In this paper, we lay out the broad outlines of a new housing finance model that attempts to address the weaknesses of the old system. The new system includes a limited government role of providing credit guarantees for qualifying mortgage securities. It also attempts to reduce the incentives for excessive risk-taking embedded in the old system. This feature is essential to creating a stable and robust mortgage finance system, which, over the long run, can help foster economic growth.
The Brookings Institution, Karen Dynan, Vice President and Co-Director, Economic Studies; Ted Gayer, Co-Director, Economic Studies