New rules for securitization could keep government out of housing
Investor confidence in mortgage-backed securities is not dependent on the presence of government guarantees on loans, the American Enterprise Institute for Public Policy Research said Thursday. An AEI research team advocating for a more robust housing market supports proposals to privatize the entire mortgage market. Despite a belief investors will only feel secure buying MBS backed by the government, AIE analysts said the opposite is true since "government market interventions have led to large-scale taxpayer bailouts twice in the last generation." The research team — Peter Wallison, Edward Pinto and Alex Pollock — made that conclusion in their latest AEI white paper, titled Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market. The key is to concentrate on prime mortgages and only allow those loans to be securitized, the AEI research team said. "The very low delinquency and default rates on prime mortgages will be attractive investments for institutional investors and will enable the housing finance secondary market to function effectively with no government support," the researchers wrote. "This will eliminate the potential for additional taxpayer losses in the future; reduce the likelihood and severity of housing price booms, busts, and attendant bubbles; and allow the eventual elimination of the GSE charters of Fannie Mae and Freddie Mac." At the same time, critics have bashed proposals to eliminate all government guarantees on the grounds those plans would scare aware investors and increase the cost of homeownership. Write to Kerri Panchuk.