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A pragmatic plan to free the mortgage market from Washington

"Since the collapse of Fannie Mae and Freddie Mac, American housing finance has essentially become a nationalised industry. The government now backs roughly 90 per cent of all new mortgages in the country, mainly through the failed mortgage finance companies that are in federal “conservatorship”. Washington therefore sets the price of mortgage finance – probably at the wrong level.

"We have ample evidence of what happens when the government distorts the massive mortgage market. A significant contributor to the financial crisis was the government’s mispricing of risk, and the resulting perception that mortgages were effectively as safe as US Treasuries. To make matters worse, there is little evidence that these government subsidies substantially improved home ownership rates or affordability.

"A bipartisan proposal to wind down Fannie and Freddie has been introduced in the Senate. It would provide government backing for new mortgages in return for stricter underwriting standards, a requirement that the private sector absorb losses of up to 10 per cent of the value of the loans, and the creation of an industry-funded mortgage guarantee fund to further shield taxpayers from the cost of any bailout. But without support in Congress, this proposal is likely to stall. There are legitimate concerns that it would leave the government with an outsize role in the housing market – and that it could make mortgage finance unaffordable for some households."

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Read full Financial Times article here.

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