Investments

Academics push for return to GSE-free mortgage finance

Fannie Mae and Freddie Mac dominate the mortgage market, thanks to the advantages both have enjoyed as government-sponsored enterprises, academics said during a House Committee on Financial Services hearing on Wednesday. But, they added, history shows a private market is fully capable of running the show.

While the outsize role that both GSEs play has led some to suggest that housing market cannot function without them, the anomaly is that no other developed country in the world has a government-sponsored enterprise similar to Fannie Mae or Freddie Mac, they said.

"Along with incorrectly saying that GSEs made U.S. housing finance ‘the envy of the world,’ it was often additionally claimed (without supporting data) that the U.S. had the highest home ownership rate in the world," said Alex Pollock resident fellow for American Enterprise Institute

He added, "This seemed plausible to Americans, but was wrong."

The majority of academics pointed out that while there is no ideal housing finance system, most developed countries have proven that private capital can fund the vast majority of demand for housing finance, as it did in this nation before the credit crisis. The comments should come as no surprise. Chair Jeb Hensarling (R-TX) is a noted conservative known for pushing limits on government involvement in the nation's financial actives.

The enterprises did not invent government-supported mortgage-backed securities. That honor goes to Ginnie Mae, an agency within the Department of Housing and Urban Development, they said. And they should not command control of the market.

Additionally, all the innovations in asset-backed securitization — including prime jumbo MBS and commercial mortgage MBS — were fully developed in the private sector, said Dwight Jaffee, professor of banking, finance and real estate of Haas School of Business at the University of California, Berkley.

"The conclusion is clear: the private markets are fully capable of efficiently carrying out all of the GSE mortgage investment and securitization activities," Jaffee said.

Many of the panelists pointed to Canada and Denmark as the ideal housing models America should replicate to produce a sustainable mortgage market.

For instance, the Canadian mortgage market is dominated by the top five commercial banks that have a 75% market share. As a result, the market is well developed with a mortgage debt-to-GDP ratio of 65%, explained Michael Lea, director of the Corky McMillin Center for Real Estate at San Diego State University

The Danish mortgage market takes an approach to interest rate risk in its funding that is explicitly governed by what is called the ‘matching principle,’ meaning that the interest rate and prepayment characteristics of the mortgage loans being funded are passed on entirely to the investor in mortgage covered bonds.

Overall, it would seem that the U.S. can live in a world without explicit government guarantees if private capital and investors took over.

"A high rate of homeownership and a stable mortgage market meeting the needs of consumers and lenders can be achieved without the degree of government intervention that exists in the U.S. today," Lea said.

He concluded, "In that respect the U.S. clearly can learn much from international housing finance systems."

cmlynski@housingwire.com

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