Private Mortgage Finance System Is the Answer

April 22, 2011

As Congress prepares to debate how to replace Fannie Mae and Freddie Mac, those in politics and real estate who support a government-backed housing finance system are predicting calamity.  Institutional investors, they say, will not buy U.S. mortgages or mortgage-backed securities unless they are guaranteed by the government.  The numbers tell a different story, says Peter J. Wallison, a senior fellow at the American Enterprise Institute.

  • According to the Federal Reserve's flow of funds data, nonbank institutional investors had assets of $28 trillion in the fourth quarter of 2010.
  • About $13 trillion of this amount was invested in fixed-income or debt securities -- but only $1.8 trillion was invested in U.S. government-backed securities issued by government agencies or the government-sponsored enterprises Fannie and Freddie.
  • Thus, less than one-seventh of the funds invested in debt securities by institutional investors were invested in government-backed mortgage securities.
  • By contrast, at the end of 2010, nonbank institutional investors had assets consisting of $2.6 trillion in both residential and commercial whole mortgages.
  • Whole mortgages are not guaranteed by Fannie and Freddie or the Federal Housing Administration.
  • This means that even after the financial crisis, institutional investors held a larger dollar amount of mortgages that are not backed by the government than the mortgages that are perceived as government-guaranteed.

What all this shows is that institutional investors are not particularly interested in government-guaranteed assets.  Thus, if we want U.S. and foreign institutional investors to invest in our mortgage market, we should be looking to a private system of mortgage finance, and not one run or backed by the government, says Wallison.

Source: Peter J. Wallison, "Government Mortgage Guarantees Are Unnecessary," The Wall Street Journal, April 21, 2011.

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