NCPA - National Center for Policy Analysis

Developing a New Housing Finance System in the United States

March 8, 2011

Implicit in most of the proposals for reforming the U.S. housing finance system is the idea that mortgage-backed securities (MBS) backed by U.S. mortgages cannot be sold unless they are issued by a government-sponsored enterprise (GSE), a U.S. government agency, or are otherwise guaranteed by the U.S. government.  But continuing U.S. government involvement in the housing finance system will inevitably involve serious losses for the taxpayers, says Peter J. Wallison, codirector of the American Enterprise Institute's program on financial policy studies.

A U.S. housing finance system would function well without GSEs or any other form of government financial support simply by ensuring that the mortgages allowed entry into the securitization system are of good quality.

  • The history of government support for housing finance shows that it invariably results in massive taxpayer losses, but produces very few of the benefits for the country -- such as increases in homeownership or lower interest rates for housing finance -- that the government is seeking.
  • Instead of basing the financing of housing on government backing, a robust system of housing finance can be based on ensuring the quality of mortgages.
  • This is how other developed countries generally structure their residential finance systems, and in doing so they achieve better outcomes than the United States without any substantial taxpayer costs.

Once this system is adopted, and rules are in place that ensure mortgage quality, the GSEs can be gradually withdrawn from the market by reducing the conforming loan limit over a period of years.  As that happens, it is highly likely that the private sector will take over the areas from which the GSEs have withdrawn, says Wallison.

Source: Peter J. Wallison, "A New Housing Finance System for the United States," Mercatus Center, March 2011.

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