NCPA - National Center for Policy Analysis

Future of the U.S. Housing Market

May 9, 2011

If the proposed Dodd-Frank Act (DFA) is adopted substantially as written, and there are no changes in the other provisions the act has added to the laws governing mortgage lending, it will lead to certain adverse consequences that cannot be corrected through regulatory action, according to Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.

In his new study, Wallison makes the following points:

  • The housing finance system of the future will place immense financial risks and regulatory costs on mortgage originators and securitizers.
  • It will fail to prevent the growth of subprime and other low-quality lending.
  • It will virtually ensure the continued existence of the government-sponsored enterprises Fannie Mae and Freddie Mac.
  • It will impair the development of a robust private-sector housing finance system in the United States.
  • And it will provide insurmountable advantages for the largest banks in the limited private securitization system that might exist.

For all these key reasons, the DFA's housing market finance provisions should be repealed and replaced with a nongovernmental plan that relies primarily on a statutorily defined prime mortgage to prevent the deterioration of mortgage underwriting standards in the future, says Wallison.

Source: Peter J. Wallison, "Dodd-Frank and Housing Finance Reform: A Cure That's Worse Than the Disease," American Enterprise Institute, May 2011.

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