Why the US Government Should Guarantee Your Mortgages
Congress may finally be inching toward an overhaul of the US housing finance system. That’s good. But getting reform right is more important than getting it done. To us, that means ensuring the government retains a clearly defined role in the mortgage market.
Policymakers have been trying to reform housing finance for nearly a decade, and shrinking the government’s footprint is a priority for many of them. In fact, one of the several proposals that have surfaced in recent years envisions no government involvement in the mortgage market at all.
It’s not hard to see why. When the US housing bubble burst in 2008, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac suffered massive losses, forcing the government to take over both and the taxpayers to foot the bill. Who wouldn’t want to avoid a repeat performance?
An Explicit Government Guarantee and a Cushion for Taxpayers
We agree that the system needs reform and that taxpayers should be partly insulated against future losses. But a housing market entirely without government involvement is unrealistic. Housing is crucially important to the health of the US economy, and it’s hard to imagine any government—today or tomorrow—sitting on its hands in a future crisis. That’s why we think the government should explicitly guarantee securities issued by Fannie and Freddie or their successors.
That’s not to say taxpayers should bear the risk alone. Investors, too, should be on the hook if loans default. Fortunately, the GSEs have already made considerable progress on this with the introduction of credit risk transfer (CRT) securities, which require private investors to absorb a share of the losses when there are defaults.
We think there’s room to expand this approach and would support reform that requires a significant private capital cushion before the government guarantee kicks in. It’s also important that the guarantee be appropriately priced. We suggest this premium be deposited in a government-established mortgage insurance fund to help set a fair price.