NCPA - National Center for Policy Analysis

Taking the Government Out of Housing Finance

January 25, 2011

Implicit in most of the proposals for reforming the housing finance system is the idea that institutional investors will not buy mortgage backed securities backed by U.S. mortgages unless they are issued by a government sponsored enterprise (GSE), a U.S. government agency, or are otherwise guaranteed by the U.S. government.  There is, however, a robust alternative to government support of the housing finance system, say Peter J. Wallison, Alex J. Pollock and Edward Pinto.

  • An alternative approach is to ensure that only prime quality mortgages, which comprise the vast majority of U.S. mortgages, are allowed into the securitization system.
  • The very low delinquency and default rates on prime mortgages will be attractive investments for institutional investors and enable the housing finance system to function effectively with no government support.
  • This will eliminate the potential for additional taxpayer losses in the future, and allow the eventual elimination of Fannie Mae and Freddie Mac.

The current interest in replacing Fannie Mae and Freddie Mac provides another opportunity to adopt reforms that will prevent a recurrence of another financial crisis in the future.  The four central principles to make this work are:

  • The housing finance market -- like other U.S. industries and housing finance systems in most other developed countries -- can and should principally function without any direct government financial support.
  • To the extent that regulation is necessary, it should be focused on ensuring mortgage credit quality.
  • All programs for assisting low-income families to become homeowners should be on-budget and should limit risks to both homeowners and taxpayers.
  • Fannie and Freddie should be eliminated as GSEs and privatized -- but gradually, so the private sector can take on more of the secondary market as the GSEs depart.

Source: Peter J. Wallison, Alex J. Pollock and Edward Pinto, "Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market," American Enterprise Institute, January 20, 2011.

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