US residential real estate credit is one of the largest asset classes in the world, and it’s largely backed by taxpayers.
Taxpayers fund or guarantee more than 90% of new mortgages. This arrangement is not only a government monopoly; it’s inherently unstable.
Private capital must be brought back to the mortgage market to increase the resiliency and dynamism of the housing financial system, according to AEI Visiting Scholar Phillip Swagel, who testified on Tuesday before the Senate Banking Committee. If you missed it, here’s the skinny:
“Fannie Mae and Freddie Mac stand behind virtually all new conforming mortgages through the two firms’ guarantees on the mortgage-backed securities (MBS) into which the two firms bundle the home loans they purchase from originators…
With the U.S. Treasury committed to ensuring that Fannie and Freddie remain solvent, the U.S. government effectively backstops conforming loans, leaving taxpayers exposed to considerable losses in the event of another housing downturn…
It would be useful for reform to allow for a diversity of sources of funding for housing, and for private capital to come in a number of forms and through a variety of mechanisms. This will help make the future housing finance system more resilient to economic and market events that affect particular parts of financial markets and thus impinge on the availability of funds for housing.”
Other AEI scholars, such as Peter Wallison and Alex Pollock, go a step further. In their view, GSEs must be unwound entirely to protect taxpayers. It’s not a question of adding some private capital to the mortgage market. It’s a question of having a mortgage market that functions entirely on private capital without a government guarantee. This is the only way to eliminate moral hazard that ultimately will lead to another crash.
This afternoon join AEI for a spirited panel discussion, “What should be done with Fannie and Freddie?” (May 15, 2:00pm-4:00pm, AEI 12th floor), with Mark Calabria (Cato), Robert Couch (Bipartisan Policy Center), James Parrott (Fmr. National Economic Council), David Stevens (Mortgage Bankers Association), and AEI’s Peter Wallison and Alex J. Pollock. See you there!