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Housing Finance Should Take Cues From Other Countries – FSC

by devteam June 13th, 2013 | Share

<pThe House FinancialrnServices Committee (FSC) held a hearing today titled: “Beyond the GSEs:rnExamples of Successful Housing Finance Models without ExplicitrnGovernment Guarantees.” According to Jeb Hensarling (R-TX),rncommittee chairman, “The hearing will examine the mortgagernfinance systems of other countries to determine whether a sustainablernsystem of housing finance is possible that does not rely onrngovernment-sponsored enterprises or government subsidies.” </p<pFive witnesses werernscheduled to appear before the committee. We have extracted arnportion of the testimony of three.</p<pDr.rnDwightrnM. Jaffee,rnBoothrnProfessorrnofrnBanking,rnFinance,rnandrnRealrnEstaternHaasrnSchoolrnofrnBusinessrnUniversityrnofrnCalifornia,rnBerkeleyrnsaid that current discussion regarding GSE reform focuses on twornalternatives. The first would allow the private markets to replacernGSE functions and the second would create a government successor torncontinue guarantees against borrower defaults. His research, hernsaid, leads him to a strong endorsement of the former for twornreasons.. </p<p"First,rnthere is strongrnevidence</bthat the privaternmarketsrnwould operaternat a standard substantiallyrnhigher</bthanrnthat actuallyrnexperiencedrnunderrnthernGSErnregime."rn He cited as evidence that mortgages originations have always been arn100 percent private market activity; banks and other privaterninvestors have always owned the vast majority of mortgages, and mostrnof the innovations in the market – asset backed securities,rncommercial mortgage backed securities, and jumbo mortgages came fromrnthe private sector and mortgage backed securities (MBS) were notrninvented by the GSEs but by Ginnie Mae.</p<pSecond,rnexperiencernindicatesrnthat a newrngovernmentrnmortgagernguaranteernprogramrnwouldrnagain leave taxpayersrnatrnhighrnrisk, whilerncreatingrnlittlernor no sustainablernincrease</bin Americanrnhome ownership." Jaffee said, however, that there is a validrnrole for the FHA and VA to operate in their traditional manner withrnprecisely defined programs to provide benefits to lower incomernhouseholds and service veterans. </p<pThernEuropeanrnUnionrnrules prohibit memberrnstatesrnfrom creatingrnentities such as the GSEs, since the subsidies are consideredrnanrnunfairrntradernadvantage.rnA comparison of these EUrncountriesrnwith the U.S. thus provides another test ofrnthe GSE impact. The results show the Europeanrncountries outperformingrnthernU.S. on virtuallyrneveryrnmeasurernof housingrnandrnmortgagernmarketrnperformance.rnPerhapsrnthe most stunning claim,rnis that the U.S. home ownership raternequalsrnonlyrnthernaveragernof 15rnmajor WesternrnEuropeanrncountries and that the market has been substantially more stable thanrnthat of the U.S.</p<pDr.rnMichaelrnJ.rnLearnDirector ThernCorkyrnMcMillinrnCenterrnforrnRealrnEstaternat SanrnDiegornStaternUniversityrnalso compared the current U.S. housing finance system to that ofrnother countries, focusing on Canada, Denmark, Germany, and the UnitedrnKingdom. </p<pThe U.S. is unusualrnin the extent of government involvement Lea said. Of the 13rncountries he has surveyed only Canada and Japan have governmentrnguarantee programs and only Canada and the Netherlands haverngovernment-owned mortgage insurance companies. In those countriesrnthat do have government mortgage support the market share of thatrnsupport is far less than the 90 percent in the U.S. and that supportrncomes through the banking systems, such as through deposit insurancernor catastrophic support.</p<pSecond,rnno other developed country has a GSE. They were created primarilyrnfor political rather than policy reasons and rose to dominance as arnresult of economic and consumer protection policy. “Itrnisrnfairrntornsayrnthatrnpolicyrnmakersrnneverrnintendedrntorncreaternarnduopolyrnprovidingrnoverrn75rnpercentrnofrnallrnmortgagerncreditrninrnthernUS,” Lea said.</p<pThird, only onernother country, Denmark, uses a fixed-rate mortgage (FRM) as a majorrninstrument and it has a safer and more efficient way to fund it. ThernFRM has large costs to the consumer, lender, and government and itsrncontinued dominance should not be a public policy objective. Averagernmortgage rates may be lower if borrowers switch to shorter termrnfixed-rate and adjustable rate mortgages.</p<pLawrencernJ.rnWhite,rnProfessor of Economics,rnStern School of Business,rnNew YorkrnUniversityrnsaid that housing is no exception to the rule that when prices arernreduced, in this case through government subsidies, people will buyrnmore of it. Tax incentives for home ownership and subsidies embeddedrnwithin the GSE programs have led households to buy more house, thatrnis larger and better appointed homes on bigger lots. This has meantrnin turn that more of the economy’s resources have been devoted tornhousing and less to other investments that would have been morernproductive. These would include business investments in plants andrnequipment, government investments in schools and roads, andrnindividuals’ investments in better education and training. </p<pWhite specifically referenced arnstudy, although 25 years old, that estimated that the U.S. housingrnstock was 30 percent larger and the GDP 10 percent smaller than itrnwould have been in the absence of widespread subsidies. More recentrnstudies (not specified), he said, have substantiated these findings and, further,rnmost of these subsidies have tended to benefit upper-incomernhouseholds.</p<pThese subsidyrnprograms have tended, at best, to have only marginal effects on homernownership rates and rental subsidy program would tend to have thernopposite effects. Again, the subsidy programs tended to affect upperrnincome households who would buy anyway and thus used the subsidies tornleverage more house.</p<pWhite said forrnoverall housing policy the most important policy measures would berncutbacks in the overall levels of subsidies and replacing thernmortgage interest deduction with a tax credit would be a good placernto start. He also favors phasing out the GSEs and replacing themrnwith a housing system that is largely privately supported. </p<pAlso testifyingrnduring the hearing were Alex J. Pollock, Resident Fellow, AmericanrnEnterprise Institute and David Min, Assistant Professor of Law,rnUniversity of California at Irvine

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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