Housing Finance Reform: Should There Be a Government Guarantee?

In 2007 and 2008, the mortgage market failed. It failed in a number of dimensions: Default rates rose to their highest levels since the great depression, and mortgage liquidity ground to a halt. This failure has produced recriminations: Blame has been laid at the feet of borrowers, brokers, lenders, investment banks, investors and government and quasi-government entities that guaranteed mortgages. These recent events have produced an important debate: Whether the U.S. mortgage market requires a federal guarantee in order to best serve consumers, investors and markets. My view is that such a guarantee is necessary. I will divide my argument into four areas:(1) I will argue that the United States has had a history of providing guarantees, either implicit or explicit, regardless of its professed position on the matter. This phenomenon goes back to the origins of the republic. It is in the best interest of the country to acknowledge the existence of such guarantees, and to price them appropriately before, rather than after, they become necessary.(2) I will argue that in times of economic stress, such as now, the absence of government guarantees would lead to an absence of mortgages.(3) I will argue that a purely "private" market would likely not provide a 30 year fixed rate pre-payable mortgage. I think that this is no longer a particularly controversial statement; what is more controversial is whether such a mortgage is necessary — I will argue that it is.(4) I will argue that in the absence of a federal guarantee, the price and quantity of mortgages will vary across geography. In particular, rural areas will have less access to mortgage credit that urban areas, central cities will have less access than suburbs. Condominiums already are treated less favorably than detached houses, and this difference is likely to get larger in the absence of a guarantee.