While representatives of the Committee on Financial Services agreed during a hearing on Wednesday that the government should not back nearly 100% of the mortgage market, most are weary that a world without explicit government guarantees is dodgy.
There are a number of questions and issues that are repeatedly raised in the context of a mortgage system that is largely devoid of government guarantees. The biggest one is whether the 30-year, fixed-rate mortgage would still be available to borrowers under a system of private finance.
While academics on the panel, specifically Lawrence White, professor of economics at the Stern School of Business at New York University, believe the answer is a highly likely 'yes' given that 30-year FRMS were offered to borrowers for jumbo loans prior to the financial crisis, representatives were less convinced.
Rep. Carolyn Maloney, D-NY, questioned how much risk the government should bear and how much should be borne by private investors, considering the sector was a primary driver in the financial crisis, she stated.
"When we compare our housing financial system to other countries, we need to look at the whole market, not just mortgage-backed securities. Other countries provide more government support for rental housing than the U.S., and many have explicit government guarantee[s]," Maloney explained.
She added, "It was the government-sponsored enterprises that established the 30-year, fixed-rate mortgage, and do we really want to lose something that provides a pathway to homeownership?"
Academics fired off comparisons of developed housing models — such as those in Germany and Canada — that they believed the United States could similarly follow in reshaping its housing market.
However, Representative Maxine Waters, D-Calif., firmly believed that such a shift in homeownership rates to that seen foreign countries could lead to a macroeconomic collapse.
For instance, homeownership in Germany is roughly 40% compared to homeownership in the U.S., where it is about 65%. If the U.S. were to slide to homeownership rates of roughly 45%, there would be negative economic consequences.
David Min, assistant professor of law for the University of California at Irvine echoed Waters’ view, explaining that if the U.S. were to adopt similar housing models to those of Germany or Canada, the country would have to adopt additional policies for the housing market to perform appropriately.
With representatives apprehensive about a return to a predominately private-label sector and homeownership rates well above other developed countries, a successful mortgage market without explicit government guarantees seems implausible.
"The U.S. housing market is larger than anyone else’s, so how do we get the government out of control and who should make the profits," Rep. Gary Miller, R-Calif., questioned.
"How do we make it work here, today?"