The Perils of Privatizing the U.S. Mortgage Finance System

8/7/2019 The Perils of Privatizing the U.S. Mortgage Finance System

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The Perils of Privatizing the

U.S. Mortgage Finance SystemDavid Min March 2011


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The Perils of Privatizing theU.S. Mortgage Finance System

David Min March 2011


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1 Introduction and summary

5 Privatizing the mortgage markets would increase the

too big to fail problem

7 Privatizing the mortgage markets would shrink liquidity

and harm consumers

9 The lack of available capital for a privatized system

suggests sharp liquidity reductions

12 Privatization of the mortgage markets is likely to result

in greater instability

13 Arguments using the jumbo market as evidence are flaw

15 Conclusion

16 Endnotes

17 About the author

Contents


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1 Cnr r Amrican Prgrss | t Prils Privaizing u.S. Mrgag Financ Ssm

Introduction and summary

Te U.S. Congress and he Obama adminisraion are now earnesly engaged in he

complicaed process o reorming our naions morgage nance sysem. Te deci-

sions hey make will have enormous impacs on he shape o he U.S. nancial mar-

kes and may well decide wheher homeownership remains a par o he American

Dream or middle-class amilies or insead a disan hope or only he wealhy.

Increasingly, many conservaives are calling or he privaizaion o he morgage

markes, advocaing he winding down o he morgage gians Fannie Mae andFreddie Mac wihou any replacemen. Tis privaizaion argumen ignores he ac

ha he modern U.S. banking sysem, which provided an unprecedened degree o

sabiliy and prosperiy rom he 1940s hrough he early 2000s, was dependen on

a srong governmen role, including a high degree o risk regulaion and a govern-

men backsop in he orm o a ederal guaranee or deposi insurance and a

ederal guaranee or morgage-backed securiies issued by Fannie and Freddie.

In a whie paper published lae las year by he Cener or American Progress,

Fuure o Housing Finance Reorm, I demonsraed ha privaizing he morgage

markes would resul in some airly radical changes, including:

Limied availabiliy o long-erm, xed-rae morgages Sharp increases in he coss o morgages Large reducions in he availabiliy o morgage credi A higher sysemic suscepibiliy o housing bubbles A lack o morgage credi during downurns

In response o hese acs, advocaes o privaizaion largely responded wih wo

argumens. Firs, hey criicized he alernaive o privaizaionnamely, provid-ing a governmen guaranee o some kind on home morgagesclaiming ha

his would provide a major bene o he banking indusry. Second, privaizaion

advocaes argued ha he privae secor can provide 30-year xed-rae morgages

and broad liquidiydespie he large amoun o evidence o he conrary. Tey
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poin o he hisoric availabiliy o aordably priced 30-year xed-rae loans (a

leas up unil he nancial crisis) in he so-called jumbo marke, which serves bor-

rowers seeking high-balance loans, as evidence ha a privaized sysem can mee

he needs o he broader morgage marke.

Boh o hese claims are awed. Te rs claimha an explici governmen guar-anee would unduly bene he banking indusryis wrong in several ways. Firs,

i ignores he ac ha a governmen guaranee already exiss or oo big o ail

nancial insiuions, as evidenced by boh he 2008 bailous (boh he roubled

Asse Relie Program and he various Federal Reserve programs) and recen sudies

indicaing ha hese rms enjoy a oo big o ail subsidy in heir cos o unding.1

Second, i ignores he ac ha hese same oo big o ail nancial insiuions

would be he primary beneciaries o a privaized morgage nance sysem because

hey are he only ones wih eiher he securiizaion inrasrucure or excess balance

shee capaciy o signicanly increase heir morgage nancing aciviies. As such,privaizing he U.S. morgage marke would deliver up o hese big nancial insiu-

ions a major windall, urher cemening heir saus as oo big o ail, paricularly

given he high sysemic imporance o residenial morgage deb.

Finally, his claim ignores he ac ha a well-designed explici governmen guar-

anee, wih large buers agains loss such as an insurance und and high capial

requiremens, would be ar more onerous or hese large nancial insiuions han

he ree, unpaid guaranee ha hey already enjoy by virue o being oo big o ail.

In he aggregae, hen, privaizaion would provide a ar greaer bene o he

banking indusry and pose a ar greaer risk o axpayers han an explici, well-

designed governmen guaranee. o he exen ha privaizaion led o oo big

o ail banks aking on a greaer role in he $10 rillion U.S. residenial morgage

marke, his would increase axpayer exposure o losses due o he implied guar-

anee on he liabiliies o such rms, wihou any corresponding increase in he

proecions (sringen regulaion, an insurance und) ha ordinarily accompany

such a guaranee.

Te second claimha he jumbo morgage marke proves ha a privaized sys-em would widely provide good morgage producs such as he 30-year xed-rae

morgageis also decien. Te jumbo marke provides morgages, or he mos

par, o high-income, high-wealh borrowers. No one dispues ha purely privae

markes can serve his marke well, jus as hey have always done.
http://www.americanprogress.org/issues/2010/11/pdf/housing_finance.pdfhttp://www.americanprogress.org/issues/2010/11/pdf/housing_finance.pdfhttp://www.americanprogress.org/issues/2010/11/pdf/housing_finance.pdfhttp://www.americanprogress.org/issues/2010/11/pdf/housing_finance.pdf


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In ac, our curren sysem explicily assumes ha more wealhy Americans can

receive morgage nance wihou a governmen guaranee, which is why here

are dollar limis on he loans Fannie and Freddie can securiize. Bu because he

jumbo markes hisorically served his limied marke segmen does no provide

any evidence i can serve he much larger conorming marke o home mor-

gages currenly served by Fannie and Freddie.

Conversely, here are many reasons o believe he jumbo marke would no pro-

vide eiher broad liquidiy or coninue o provide 30-year xed-rae morgages i

we privaized he U.S. morgage markes. As our whie paper demonsraes, he

experiences we have had wih purely privae morgage markes, including during

he pre-New Deal era as well as in he conemporary commercial real esae mar-

ke, give us some srong daa poins indicaing ha a privaized morgage marke

would lead o sharp reducions in liquidiy and he unavailabiliy o he 30-year

xed-rae loan or mos Americans.

Te jumbo marke generally avors adjusable-rae morgages over 30-year xed-

rae loans, originaing more ARMs han xed-rae morgages in mos years, and

ar more so han in he conorming marke served by Fannie and Freddie. o he

exen ha he jumbo marke has oered 30-year xed-rae loans, hese have been

inegrally ied o he governmen-suppored segmen o he marke.

Obviously, Fannie and Freddie hisorically se a marke sandard in providing

aordably priced 30-year xed-rae morgages, one he jumbo marke mus com-

pee wih. Fannie and Freddie also hisorically provided he marke inrasrucure

ha aciliaes he availabiliy o aordable jumbo 30-year xed-rae loans. Jumbo

lenders have largely hedged hese morgages hrough he deep and liquid orward

markes or Fannie and Freddie securiies.

In shor, i we privaized he marke served by Fannie and Freddie, we would be

removing boh he incenive andhe abiliy o privae lenders o oer aordable

30-year xed-rae loans.

Moreover, here are serious reasons o quesion he scalabiliy o privae morgage

nance in he absence o a governmen role. Currenly, here are wo main sourcesor privae morgage nancing:

Deposi-backed loans oered by banks and hris, which o course are

also guaraneed by he ederal governmen hrough he Federal Deposi

Insurance Corporaion


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Privae-label morgage securiizaion, he Wall Sree-dominaed process o

bundling morgages and issuing securiies o invesors based on he cash ows

rom hose morgages

I is highly unlikely eiher o hese are capable o accouning or a signican

increase in morgage nancing, or reasons explained in deail in he pages haollow. In he absence o a governmen guaranee, i is difcul o undersand

where morgage liquidiy would come rom, wih he near-cerain oucome being

a major reducion in he availabiliy o morgage loans.

Cerainly, here were major problems wih Fannie and Freddieproblems ha

mus be addressed as Congress and he Obama adminisraion move ahead wih

housing nance reorm. Bu policymakers should also acknowledge he signican

benes provided by hese eniies as well. Te clear and sensible policy soluion

should be o ry o keep as many o he benes we enjoy as possible while elimi-

naing he problems.

Privaizing he morgage markes would do exacly he opposie, eliminaing he

benes provided by he curren sysem, among hem broad liquidiy and he

availabiliy o consumer-riendly producs like he 30-year xed-rae loan, while

enrenching or even worsening problems such as axpayer risk, implied govern-

men guaranees or privae nancial insiuions, and oo big o ail.

Advocaes o privaizaion provide sound advice in warning policymakers o avoid

recreaing he governmen-sponsored eniies. Bu a he same ime, policymakers

should be even warier o recreaing he privae-label securiizaion sysem o he pas

via complee privaizaion o he U.S. morgage marke, which was aer all ar more

culpable in causing he recen morgage crisis and he axpayer losses ha resuled.


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Privatizing the mortgage markets would

increase the too big to fail problem

As we learned rom he series o banking panics ha regularly occurred prior o he

Grea Depression o he 1930s, banking poses an enormous amoun o sysemic

risk. Bank ailures can quickly lead o bank panics, causing an enormous loss o

wealh and economic devasaion. Tis is why governmens bail ou heir nancial

insiuions in imes o roublehey believe he cos o leting a nancial panic go

unchecked is much higher han he cos o he bailou. Tis is paricularly rue or

residenial morgage lending, given he economic and social imporance o housing.

Exacerbaing he sysemic risks posed by morgage banking, we have he con-

emporary problem o oo big o ailwhen nancial insiuions are so large

and inerconneced ha he unsuppored ailure o a single one o hem would,

i is believed, cause he downall o he global nancial sysem, leading o major

economic disress. Because o his oo big o ail saus, large nancial insiu-

ions are believed o enjoy an implici governmen guaranee on heir obligaions.

Tis axpayer guaranee provides signican subsidies o he bigges banks, as hey

enjoy signicanly lower unding coss han smaller nancial insiuions.2

I is hese larges nancial insiuions ha would bene he mos i we adoped

eiher o he Obama adminisraions privaizaion proposals, as was recenly poined

ou in a noe rom MF Global.3 Under eiher o he privaizaion approaches, we

would be asking privae lenders o ake on he $5.5 rillion in morgage nancing

primarily or working- and middle-class householdsha is currenly provided

by Fannie and Freddie. o he exen such lending occurred, i would be nanced

eiher by lenders willing o hold loans o mauriy on heir balance shees, or rom

he privae-label securiizaion o morgages. In boh areas, oo big o ail nancial

insiuions have a decided advanage over heir smaller compeiors.

Te six larges U.S. nancial insiuionsBank o America Corp., Wells Fargo

& Co., JP Morgan Chase & Co., Ciigroup Inc., Goldman Sachs Group Inc., and

Morgan Sanleyaccoun or more han a hird o all balance-shee-nanced

residenial morgage lending. Tis concenraion is increasing due o heir lower


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cos o unding and excess balance shee capaciy. o he exen ha privaiza-

ion led o increased balance shee lending, his would unduly accrue o hese

oo big o ail banks.

Tese same six rms, which currenly hold abou $9.275 rillion in asses, have

even greaer marke power in he invesmen banking secor, paricularly givenhe consolidaion ha occurred in he aermah o he 2007-2008 nancial

crisis, which included he mergers o Chase and JP Morgan, Bank o America and

Merrill Lynch, and Wells Fargo and Wachovia, among ohers. Tus, hey are likely

o dominae any privae-label securiizaion ha may reemerge rom he crisis.

In shor, privaizaion o he morgage nance sysem would resul in oo big o

ail nancial insiuions becoming even bigger and more sysemically imporan.

I would also encourage greaer concenraion in he nancial sysem. As a resul,

he axpayer guaranee enjoyed by hese insiuionsa guaranee ha is given

or reewould be even more pronounced, providing greaer advanage o heseinsiuions.4 Les we orge, i was hese rms ha caused he nancial crisis.


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Privatizing the mortgage markets would

shrink liquidity and harm consumers

I is difcul o predic exacly wha would happen i we privaized he morgage

nance sysem because he purely privae morgage sysem has been so rare in

modern hisory. Since he New Deal, he ederal governmen has guaraneed mos

o he U.S. residenial morgage marke, eiher hrough ederal deposi insurance

or guaranees on securiizaion. And here are no conemporary examples o an

advanced economy ha does no provide signican levels o governmen suppor

or is morgage markes.5

Ta being said, he ew examples o privaized morgage sysems ha have exised

srongly sugges ha in he absence o a governmen guaranee here would be

some exreme and undesirable consequences. In Fuure o Housing Finance

Reorm, or example, I noed ha he democraizaion o he U.S. housing

nance sysem, in which accessible morgage nance (such as he 30-year xed-

rae loan) was made available o working- and middle-class households, was

enirely a produc o he New Deal banking and housing reorms.

Prior o he New Deal, morgages were only available o higher-income and

higher-wealh borrowers, and even hen only on erms ha were very riendly o

lenders and exremely onerous or consumers, wih high oaing ineres raes,

shor duraions, ineres-only or negaive amorizaion (he loan balance was no

paid down or even grew higher over ime), high down paymens (ypically 50 per-

cen), and eauring bulle paymens o principal when he loan came due (orcing

he borrower o renance or pay o he loan every ew years).6

As a resul, homeownership hovered a around 40 percen rom he lae 1800s

o he Grea Depression, a remarkably low gure considering he widespread

availabiliy o cheap land (he ederal governmen was lierally giving away landduring his period, or example wih he Homesead Ac o 1862 and he Enlarged

Homesead Ac o 1909 among oher programs).
http://www.americanprogress.org/issues/2010/11/pdf/housing_finance1.pdfhttp://www.americanprogress.org/issues/2010/11/pdf/housing_finance1.pdfhttp://www.americanprogress.org/issues/2010/11/pdf/housing_finance1.pdfhttp://www.americanprogress.org/issues/2010/11/pdf/housing_finance1.pdf


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While he pre-New Deal morgage sysem is obviously a very daed example, i is

sriking ha in some imporan ways, i resembles he curren (smaller) marke

or commercial real esae nance, which largely lacks governmen suppor.7 As

Special Advisor o Presiden Obama and Harvard Law School Proessor o Law

Elizabeh Warren noes, commercial real esae loans oday generally have erms

ha closely resemble pre-New Deal residenial morgages: shor erm, ineresonly, high ineres raes, and high (oen 50 percen) down paymens. And o

course hese loans are generally reserved or higher-wealh borrowers.

More recenly, we saw he privae-label securiizaion marke o he pas decade hew-

ing o his amiliar patern, as i displayed a srong bias in avor o riskier adjusable-

rae morgages over saer long-erm, xed-rae loans. In oal, ARMs accouned or

70 percen o all morgages nanced by privae-label securiizaion rom 2001-2008,

compared o 12 percen or loans nanced by Fannie and Freddie).8

Tese examples all poin o he same conclusion: Privaizaion would lead oa sharp reducion in morgage liquidiy and a ransiion away rom consumer-

riendly producs, including he 30-year xed-rae morgage.
http://cop.senate.gov/documents/cop-021110-report.pdfhttp://cop.senate.gov/documents/cop-021110-report.pdf


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The lack of available capital for a

privatized system suggests sharp

liquidity reductionsA privaized morgage sysem would also ace difculies in atracing invesmen

capial, making i likely ha such a sysem would see a severe reducion in mor-

gage liquidiy, and hus he availabiliy o morgages o consumers.

Currenly, mos U.S. morgages are nanced by he purchase o securiies guaran-

eed by Fannie Mae, Freddie Mac, and Ginnie Mae (called agency securiies).9

Te ineres-rae-sensiive invesors who purchase hese governmen-guaraneed

securiies are predominanly made up o oreign cenral banks, xed-incomeinvesors such as pension unds, and regulaed nancial insiuions, as he Federal

Reserves Flow o Funds repors show.

Tese invesors ypically purchase U.S. governmen agency securiies because o

invesmen objecives (oen required by charer or law) or regulaory incenives.

Te atracion o hese governmen-guaraneed securiies o invesors and regula-

ors is hey bear essenially no credi risk, don require cosly and ime-consuming

due diligence, and are very liquid because hey can be resold a any ime ino he

secondary markes.10

Conversely, morgages ha are no backed by he ederal governmen, which bear

credi and ineres-rae risk and require independen due diligence, are nanced

eiher by lenders who hold loans on heir balance shee or hrough privae-label

securiizaion, which are nanced by credi-risk-sensiive invesors.11 Since he

savings and loan crisis o he lae 1980s, such nonguaraneed lending accouned or

12 percen o 25 percen o convenional (no subprime) loans in any given year.

Tese nancing sourcesbalance-shee lending and privae-label securiizaion

boh ace major challenges going orward.

Balance-shee lending dominaed U.S. morgage nance in he pos-New Deal

era as heavily regulaed and ederally insured banks and hris provided mos o

he home morgages made o U.S. consumers. Bu since he 1970s, balance-shee
http://www.federalreserve.gov/RELEASES/z1/http://www.federalreserve.gov/RELEASES/z1/http://fhfa.gov/webfiles/15722/Updated_assumptions_2009_050510.pdfhttp://fhfa.gov/webfiles/15722/Updated_assumptions_2009_050510.pdfhttp://www.federalreserve.gov/RELEASES/z1/http://www.federalreserve.gov/RELEASES/z1/


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As a resul, invesors remain exceedingly wary. Since he nancial crisis, here have

been only wo privae-label securiizaion deals, amouning o less han $600 million.

Tis is no o say privae-label securiizaion won reemerge. I will , alhough

here are sill some near-erm hurdles o regaining he avor o invesors. Bu going

orward, i would seem sae o say ha privae-label securiies, even ones designedo have minimal credi risk, will receive signican amouns o independen due

diligence rom invesors, which in urn will decrease liquidiy or hese securiies.

Te need or ime-consuming independen due diligence and he relaive illi-

quidiy o such securiies mean he available pool o capial willing o purchase

privae-label securiies will be much smaller han he pool o capial willing o

purchase governmen-guaraneed securiies.12 So i is difcul o imagine, under

hese circumsances, ha privae-label securiizaion could once again accoun or

38 percen o morgage originaions as i did in 2006, le alone ake on mos o he

morgage marke, as privaizaion advocaes are proposing.13

In summary, he major sources o nancing or a privaized morgage sysem seem

likely o be inadequae o mee he curren needs o he $10 rillion-plus U.S. resi-

denial morgage marke.


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Privatization of the mortgage markets

is likely to result in greater instability

Based on he limied hisorical evidence, i appears likely ha privaizaion would

lead o greaer insabiliy and more exreme boom-bus cycles. Te pre-New Deal

morgage banking sysem was enormously unsable, experiencing exreme bub-

ble-bus cycles every 5 years o 10 years, wih high resuling social coss. During

he recen residenial morgage crisis, he purely privae porion o he morgage

markeprivae-label securiizaionwas he larges driver o morgage-relaed

losses, accouning or 42 percen o serious delinquencies despie being respon-

sible or only 13 percen o all ousanding morgages.14

And commercial real esae nance, which is essenially privaized, has experi-

enced a bubble-bus cycle even more exreme han ha in residenial real esae,

wih a naional price decline o more han 40 percen rom is peak, greaer han

he 30 percen price drop experienced in residenial real esae.

Privaized morgage markes are more volaile or a leas wo reasons. Firs, pri-

vae lenders and invesors end o exhibi srong procyclical endencieswhen

imes are good, hey wan o make more money and so overleverage hemselves,

and when imes are bad, hey wan o reduce losses and so excessively pull back

on lending. Second, as noed above (and unsurprisingly), privae lenders exhibi

a srong endency oward originaing lender-riendly morgages. Te highly oner-

ous erms o hese loans creae a high degree o sysemic insabiliy by increasing

he likelihood o deaul and oreclosure.

O course, he greaes period o morgage marke sabiliy in U.S. hisory was he

pos-New Deal era, aer high levels o governmen suppor were inroduced, rs

in he orm o deposi insurance and hen in he orm o governmen-guaraneed

securiizaion. Coupled wih he oo big o ail problem, his hisorical daasuggess ha a privaized morgage sysem would acually pose greaer risk o he

axpayer han he saus quo.
http://online.wsj.com/article/BT-CO-20110222-710882.htmlhttp://online.wsj.com/article/BT-CO-20110222-710882.html


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Arguments using the jumbo

market as evidence are flawed

Some have poined o he availabiliy o compeiively priced 30-year xed-rae

morgages in he jumbo marke, which serves borrowers seeking high-balance

loans ha all above he loan limis o Fannie Mae and Freddie Mac, as evidence

ha privae capial can serve he needs o he broader morgage marke.

Tis argumen is awed.Te jumbo marke serves higher-income, higher-wealh

borrowers, and no one dispues ha he privae markes can serve his marke

welljus as hey have always done. In ac, our curren sysem explicily assumesha wealhy Americans will be served wihou a governmen guaranee, which is

why here are loan limis or Fannie and Freddie.

Bu as discussed above, here are serious quesions abou he abiliy o he privae

markes o provide sufcien liquidiy o he broader U.S. morgage marke. Te

sources o capial ha currenly nance jumbo loans ace signican barriers o

scalabiliy and i is difcul o imagine ha balance-shee lending or privae-label

securiizaion can nance he $5.5 rillion in morgage originaions currenly held

by Fannie and Freddie in he absence o a governmen guaranee.

Moreover, he jumbo-morgage argumen ignores he inheren endency o

purely privae lenders oward producs ha are more onerous or borrowers. Tis

includes no only he horric experience o privae-label securiizaion in he

2000s bu also he jumbo marke more generally. From 1990 o 2007, he jumbo

markes originaed more adjusable-rae loans han xed-rae loans nearly every

year. Tis was in sark conras o he conorming marke, which originaed more

xed-rae loans han adjusable-rae loans every single year.15

Even o he exen ha long-erm, xed-rae morgages have been oered in hejumbo marke, hese have been inegrally ied o he governmen-suppored

segmen o he marke. Firs, Fannie and Freddie have se a marke sandard,

providing 30-year xed-rae loans a aordable prices. Obviously, heir privae

compeiors mus provide producs on erms and prices ha are compeiive wih

ha benchmark.


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Second, lenders were able o signicanly lower heir cos o unding jumbo

30-year xed-rae morgages hrough he marke inrasrucure ha exised

around Fannie and Freddie securiies. Prior o he nancial crisis, jumbo mor-

gages were requenly hedged hrough ransacions in he so-called o Be

Announced, or BA marke, he very deep and liquid orward marke or rading

securiies issued by Fannie and Freddie (which allows consumers o lock in heirmorgage raes, among oher hings).16

In oher words, Fannie and Freddie no only provide enormous marke pressure

on privae lenders o oer compeiively priced jumbo 30-year xed-rae loans

bu hey also provide he marke inrasrucure ha allows jumbo lenders o oer

lower pricing on his produc. I we privaized he marke served by Fannie and

Freddie, we would be removing boh he incenive andmuch o he abiliy o oer

aordable 30-year xed-rae loans. I is difcul o imagine ha he 30-year xed-

rae morgage would coninue o be oered broadly under hese circumsances.


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Conclusion

As he debae over morgage nance reorm becomes ully engaged on Capiol Hill,

i is imperaive ha boh he Obama adminisraion and Congress consider how o

preserve he benes o he sysem ha Americans righly value while making he

sysem saer and more proeced agains he kind o bubble-bus cycle ha led o

he Grea Recession o 2007-2009. Tere are many criicisms o he curren home

morgage nance sysem ha are appropriaely being explored bu our poliical

leaders mus also be careul no o hrow he baby ou wih he bahwaer.

Many pars o he U.S. morgage sysem ha policymakers have long placed high

value upon, in paricular he broad availabiliy o good, susainable morgage prod-

ucs such as he 30-year xed-rae loan, are inegrally ied o he governmen sup-

por ha has long been he mainsay o he modern U.S. morgage sysem. Tas

why policymakers mus very careully consider he consequences o privaizing he

morgage markes, many o which are incompaible wih core American values.

Americans place value on he idea ha middle-class and working-class households

should have access o homeownership, or in he alernaive, aordable renal

opions. Privaizaion o he home morgage marke is inconsisen wih his

idea. Americans also value small banks and hris, and disavor he dominaion

o banks ha are oo big o ail. Privaizaion is incompaible wih his ehos.

Americans place value on he availabiliy o consumer-riendly morgage producs

such as he 30-year xed-rae morgage, ye privaizaion would o course elimi-

nae his produc and il he scale owards producs ha are risky or consumers

and more proable or banks.


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Endnotes

1 Prian Gandi and hann Lsig, Siz Anmalis in uS ban ScRrns: yr tax Dllars a Wr? (Ls Angls: uCLA AndrsnScl Managmn, 2010).

2 Iid.

3 Jar Sirg, hsing Financ: Fanni and Frddi Ain Dad y,MF Glal Financial Srvics bllin, Frar 11, 2011.

4 Mrvr, as Mds Ci ecnmis Mar Zandi pins , aprivaizd ssm wld rsl in a mr racrd, lss liqidmar, lading mr pral arirag pprniis rWall Sr rms. Crisian dRiis and Mar Zandi, Rspnding Criics a hrid Mrgag Ssm, Dismal Scinis, Frar 17,2011, availal a p://www.cnm.cm/dismal/aricl_r.

asp?cid=197265&src=mar-zandi.

5 Sm cmmnars arg a erp prvids a mdl rprivaizd mrgag mars, ning lac xplici gvrn-mn garans in erpan cnmis. tis claim is misladingcas i ignrs dminan rl implici gvrnmngarans prvidd erpan gvrnmns, similar ns prvidd u.S. gvrnmn Fanni Ma and FrddiMac. erpan cnris av alwas aild ir mrgagans, and is implid garan is xplicil acrd in crdi raings erpan nancial insiins ( and ir dligains) majr crdi raing agncis. In c, erpangvrnmns prvid a 100 prcn garan ir mrgagmars, as ms rcnl vidncd swping ails (in-clding an nainalizains and lan garans) in Grman,Dnmar, Ial, unid kingdm, and Irland. As n erpanCnral ban fcial as rprdl said, W dn l ans ail. Wdn vn l dr clanrs ail, as qd in: David Wssl, In FdW trs: bn brnans War n Gra Panic (Nw yr: Crwn

Plising Grp, 2009)

6 S, r xampl: Ricard Grn and Ssan M. Wacr, tAmrican Mrgag in hisrical and Inrnainal Cnx, Journalof Economic Perspectives 19 (4) (2005): 93114, availal a p://paprs.ssrn.cm/sl3/paprs.cm?asrac_id=908976.

7 Wil r is n dirc gvrnmn sppr r cmmrcialmrgag nancing, r is sm indirc gvrnmn spprr scr. Ardal mliamil ildings ar nancd inpar dirc invsmns mad Fanni Ma and Frddi Mac(ssidizd a lwr cs d mad pssil a gvrnmngaran). Cmmrcial ral sa d is als nancd a largdgr (sligl lss an al all sanding lans) ans,wic n rm drall insrd dpsi insranc. ta ingsaid, lvl gvrnmn sppr in cmmrcial mrgagnancing is gnrall cnsisn wi lvl gvrnmnsppr dscrid in prpsals r privaizing rsidnialmrgag mar (wic rain Fdral hsing Adminisran and

Vrans Adminisrain lnding and dral dpsi insranc rans and ris), s w in cmparisn is igl ap.

8 Fdral hsing Financ Agnc, Daa n Ris Caracrisicsand Prrmanc Singl-Famil Mrgags originad rm 2001rg 2008 and Financd in Scndar Mar (2010), avail-al a p://www.a.gv/wls/16711/RisCars9132010.pd.

9 Fanni Ma and Frddi Mac prcas and pl mrgags, and is-s scriis asd n mr gag pamns rm pl. Fan-ni and Frddi garan iml pamn principal and inrsn s scriis, sld n drling mrgag pamns insfcin (r xampl, cas a ig r-an-xpcdnmr lan dals), and gvrnmn was ndrsd sand ind Fanni and Frddi. Ginni Ma ds n pl andscriiz mrgags rar garans iml pamn principal and inrs r mrgag-acd scriis, issd ap -prvd priva paris and mad p lans insrd Fdralhsing Adminisrain and r gvrnmn agncis.

10 Dring 2000s sing l, invsrs and rglars camcnvincd a nngarand scriis cld m s saminvsmn criria, s lng as wr rad AA r AAA an

indpndn crdi raing agnc. ovisl, ig lss rasn s scriis, rsling in nrms lsss rg nancial ssm, illsrad magnid is rrr.

11 Ms alanc-s lnding is sill acd dral gvrn-mn rg drall garand dpsi insranc prvidd rglad ans, ris, and crain r lndrs.

12 A rcn Fic Raings rpr mas a similar pin, ning aisricall, inrs-ra-snsiiv invsrs prvidd l u.S.mrgag nancing rg ir prcass gvrnmn agncscriis, wil crdi-ris-snsiiv invsrs av prcasdpriva-lal scriis. J-yng L and Rr Grssman, u.S.hsing Rrm Prpsal FAQs: Filling Vid (Nw yr: FicRaings, 2011).

13 Sm plicmars av argd r crain a rs u.S.mar r cvrd nds, asd n rlaiv sccss isnancing insrmn in erp. Cvrd nds ar a sr rid

insrmn, cmining sm lmns mrgag-acd scri-is and sm lmns crpra snir d. As I will argin an pcming papr, cvrd nds ar n an apprpria r unid Sas r a nmr rasns, inclding a ncrag (and ar ingrall cnncd wi) ig ail, a ar rdndan FDIC dpsir insranc, and signicanlincras ris axpar lss.

14 Jams b. Lcar, FhFAs Firs Annivrsar and Callngs Aad,Spc r Nainal Prss Cl, Jl 30, 2009.

15 Frrs Panrg, Singl-Famil Mrgags originad andosanding: 1990-2004, (Wasingn: ofc Fdral hsingenrpris ovrsig, 2005), al 2, availal a p://www.a.gv/wls/1151/mrmar19902004.pd; Fdral hsingFinanc Agnc, updad Assmpins usd esima Singl -Famil Mrgags originad and osanding, 1990-2009 (2010),al 2, availal a p://www.a.gv/wls/15722/updad_assmpins_2009_050510.pd.

16 Fllwing nancial crisis, i is lss clar a sc dging will as prvaln, givn sarp dirncs in liqidi a wrillsrad wn jms and cnrming lans.
http://www.economy.com/dismal/article_free.asp?cid=197265&src=mark-zandihttp://www.economy.com/dismal/article_free.asp?cid=197265&src=mark-zandihttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=908976http://papers.ssrn.com/sol3/papers.cfm?abstract_id=908976http://www.fhfa.gov/webfiles/16711/RiskChars9132010.pdfhttp://www.fhfa.gov/webfiles/1151/mortmarket1990to2004.pdfhttp://www.fhfa.gov/webfiles/1151/mortmarket1990to2004.pdfhttp://www.fhfa.gov/webfiles/15722/Updated_assumptions_2009_050510.pdfhttp://www.fhfa.gov/webfiles/15722/Updated_assumptions_2009_050510.pdfhttp://www.fhfa.gov/webfiles/15722/Updated_assumptions_2009_050510.pdfhttp://www.fhfa.gov/webfiles/15722/Updated_assumptions_2009_050510.pdfhttp://www.fhfa.gov/webfiles/1151/mortmarket1990to2004.pdfhttp://www.fhfa.gov/webfiles/1151/mortmarket1990to2004.pdfhttp://www.fhfa.gov/webfiles/16711/RiskChars9132010.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=908976http://papers.ssrn.com/sol3/papers.cfm?abstract_id=908976http://www.economy.com/dismal/article_free.asp?cid=197265&src=mark-zandihttp://www.economy.com/dismal/article_free.asp?cid=197265&src=mark-zandi


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About the author

David Min is Associae Direcor or Financial Markes Policy a he Cener or

American Progress. He leads he aciviies o he Morgage Finance Working Group,

a group o leading expers, academics, and progressive sakeholders in housingnance rs assembled by he Cener or American Progress in 2008 o beter under-

sand he causes o he morgage crisis and creae a ramework or he uure o he

U.S. morgage sysem. David also works on nancial marke issues or he Cener.

Prior o joining he Cener, he was a senior policy advisor and counsel wih he

Join Economic Commitee o he U.S. Congress, where he ocused on policy

soluions o he credi crisis, as well as oher macroeconomic and nancial

markes issues. David was ormerly he Banking Commitee counsel or Sen.

Charles Schumer (D-NY). Beore coming o Capiol Hill, David was a securiies

liigaor, rs as an Enorcemen Division atorney a he Securiies and ExchangeCommission, and laer in he Washingon, D.C. ofce o WilmerHale LLP.


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Documents

The Perils of Privatizing the U.S. Mortgage Finance System