The Future of U.S. Housing Finance Reform

Phillip Swagel

The B.E. Journal of Macroeconomics, 2012, vol. 12, issue 3, 32

Abstract: This paper proposes a reform for the U.S. housing finance system in which the private sector is the main supplier of capital for housing, while the U.S. government would provide a secondary guarantee on conforming mortgage-backed securities (MBS). Competition plays a key role, with multiple firms securitizing eligible loans into government-backed MBS, both to help address the problem under which the now-dominant firms of Fannie Mae and Freddie Mac are “too big to fail” and to help ensure that any implicit subsidy from underpriced government insurance flows through to homeowners in the form of lower interest rates. The paper discuss transition steps, including raising the price of the government guarantee, reducing the quantity of insurance offered by the government, narrowing the scope of mortgages eligible for the government insurance, and requiring firms that securitize government-insured MBS to arrange for more private capital in a first-loss position.

Date: 2012
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DOI: 10.1515/1935-1690.110

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