Page 32 - July-August 2018 GSE Report Flip Book

FANNIE MAE AND FREDDIE MAC
JJUALN. U- ARUYG. 22001188
• Risks to the Government. Three of the four approaches to restructuring the secondary market that CBO analyzed would keep some type of explicit federal guarantee of MBSs to provide stability to the market during a financial crisis. Under those approaches, the government would continue to bear most of the risks on new guarantees during a financial crisis, but the approaches differ in the extent to which private guarantors and investors would share risks under normal market conditions.
Alternatively, if the secondary market were largely privatized, there would be no explicit federal guarantees on most residential mortgages. But some type of government intervention might be necessary to stabilize mortgage markets during a financial crisis.
SHARES OF THE MARKET FOR NEW SINGLE-FAMILY
augusT 2018 TransiTioning To alTernaTive sTrucTures for Housing finance: an updaTe
RESIDENTIAL MORTGAGES
Figure 4.
2004-2024
Shares of the Market for New Single-Family Residential Mortgages, by Guarantor or Holder, 2004–2028
or Freddie Mac fail could have been extremely damag- Because the federal guarantee of the GSEs’ securities
• Availability of Mortgages and Changes in Interest Rates. New structures
ing to the mortgage and housing markets—and, to a was implicit rather than explicit, the costs and risks to
lesser extent, to investors in the GSEs’ debt securities taxpayers did not appear in the federal budget before
for the secondary market that emphasized private capital would lead to
and MBSs. Those investors include many U.S. banks the financial crisis. That lack of transparency made it
slightly higher interest rates and slightly lower home prices under normal
and foreign central banks. If Fannie Mae or Freddie Mac more difficult for policymakers to assess and control the had defaulted on itcs onbldigitaitoionnss,(bthecsaoluvsenecythoef ofetheesr that thGeSGEsS’ cEostscuanrdrernistklys. cInhadrgdietiofonr, theuirnpriced implicit financial institutions would have been threatened. As the guarantee, which reduced interest rates for mortgage GSEs grew over the years, the perception that they had borrowers, helped cause more of the economy’s capital to
Percent
Actual
Projected
7
100 75 50 25 0
Private Company
FHA
VA or RHS
Fannie Mae or Freddie Mac
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
Source: Congressional Budget Office, using data from the Mortgage Bankers Association provided by Haver Analytics.
The market shares shown here represent all of the single-family residential mortgages originated in a given year, grouped by the entities that guarantee or (in the case of unguaranteed mortgages) hold those loans. “Single-family” mortgages are loans for units that house one to four families.
FHA = Federal Housing Administration; RHS = Rural Housing Service; VA = Department of Veterans Affairs.
become “too big to fail” reinforced the idea that they were federally protected.
The GSEs’ low funding costs, combined with the very
© 2018 by Canfield Press, LLC. All rightlsowresceaprviteadl .requirements set for them by the govern- www.canIfinevledsptorerss’ sa.scsuomption that Fannie Mae’s and Freddie 33
be invested in housing than might otherwise have been the case.
the gsEs in Conservatorship
ment, encouraged Fannie Mae and Freddie Mac to take more risks than they might have otherwise. One way that the GSEs increased their risk was by investing in
Mac’s securities carried an implicit federal guarantee was proved correct when the federal government took over the two GSEs in September 2008 rather than let them
lower-quality mortgages, such as subprime and Alt-A become insolvent. The Housing and Economic Recovery