Friday, December 21, 2012
Back in 1938, the Roosevelt Administration, in order to save the housing finance industry, created a federal agency called the Federal National Mortgage Association. The FNMA got banks lending to home buyers by agreeing to purchase the loans from the banks, so long as the loans met certain quality standards.
It was a smashing success! The banks made high quality loans to borrowers (20% down payment, fixed rate, roughly 30% debt-to-income ratio), then sold the loans on the secondary market to the FNMA, and housing boomed. By the 1960s, the FNMA owned about 80% of all the home loans in the United States.
But wait! The federal government owned about 80% of all private home loans in the United States? Wasn't that a little, well . . . socialist? Couldn't private industry do it instead? Yes, indeed. So in 1968 the federal government did something unprecedented: it privatized an entire federal agency. The agency became Fannie Mae, with a public offering and everything. In return for certain tax advantages, it had certain obligations to the federal government, but it was a private entity. And soon it was competing with other private entities purchasing loans on the secondary market, all of whom were securitizing those loans and selling the securties -- mortgage-backed securities. Those entities were competing for loans, so they couldn't be too picky about quality any more.
Fast forward to 2008. Remember that old LendingTree ad, "When Banks Compete, You Win!"? We all found out that was true -- so long as by "win" we meant "live in economically disastrous times."
Suddenly, things were a lot like 1937 again: the housing finance industry was dead. Banks weren't lending -- it was too risky, since borrowers couldn't repay their loans and third parties wouldn't buy mortgage-backed securities. How could the industry be revived?
Fannie Mae, on the verge of failure, was re-nationalized. Quality standards were imposed, mortgages were acquired and re-financed with an assist from the federal government, and banks could make loans and sell them to Fannie Mae. Extremely slowly, haltingly, the housing finance industry began to revive.
Back in 2008, I predicted this would happen. It didn't take a genius, that's for sure. As I wrote back back then (Nationalization, De-Nationalization, Re-Nationalization), we have a history of nationalizing, de-nationalizing and re-nationalizing lending in the United States. We tend to nationalize in a crisis, ending the crisis, then de-nationalize because of our ideological preference for a laissez-faire market system . . . which leads eventually to a crisis . . . repeat.
All that had to happen in 2008 was that history needed to repeat itself, and that was the path of least resistance. But, it also seemed likely that, if it worked -- if the re-nationalized Fannie Mae got the housing finance industry stabilized -- then it wouldn't be long before someone realized that the federal government owned a huge protion of the home loans in the United States and that would seem a little, well . . . socialist. Therefore, as soon as the program was successful, people would want to get rid of it.
The superb news site ProPublica, as part of its series on the housing crisis, is running a very interesting article entitled, We’ve Nationalized the Home Mortgage Market. Now What? It makes the point that suddenly things look alot like 1968 again: 9 out of 10 home loans in the U.S. today are backed by the federal government through Fannie Mae. The chart below, from the article, shows the percentage of home loans backed by the federal government.
What happens next? Well, if history is any guide, the cycle will continue. We will de-nationalize the industry, until the next crisis; then we will re-nationalize the industry to solve the crisis; then we will wonder why an industry that could be private is nationalized, so we will de-nationalize it . . . etc. etc.
Mark A. Edwards
Wednesday, October 3, 2012
Monday, February 13, 2012
The following is a guest post from Rebecca Tushnet of Georgetown. Check out her impressive scholarly contributions here. Also, if you're interested in false advertising and other IP issues, then you really should follow her blog. Without further ado:
I recently started teaching the subprime mortgage crisis in my first-year Property class. We use Dukeminier et al., though I’ve supplemented with a bunch of other material, in part because the book came out in 2010. When I was preparing the syllabus, I’d planned to teach McGlawn v. Pennsylvania Human Relations Commission, 891 A.2d 757 (Commonwealth Ct. Penn. 2006), which I found out about in the excellent book Integrating Spaces: Property Law and Race. But then I saw that the most recent edition of the Dukeminier casebook had added a new section on subprime mortgages that contained Commonwealth v. Fremont, on which McGlawn relies for principles about what subprime loans were unfair, so—busy and trusting—I put Fremont on the syllabus instead.
Here’s the thing: McGlawn introduces students to a number of actual victims of predatory lending, including the financial and emotional losses they suffered, while Fremont simply recites the predatory features of the loans, making it harder to see why we should care. Then, in the questions following the case, the Dukeminier casebook asks why consumers took these terrible loans. It cites some law & economics scholarship and some behavioral economics, suggesting that the problem was excessive consumer optimism (as opposed to, in McGlawn, a fair amount of pure fraud as well as misunderstanding).
What the casebook doesn’t ask is why lenders made these terrible loans. The questions we ask influence the answers we get. It’s also notable that the casebook only asks about the consumers in a paragraph that suggests (contrary to all credible evidence) that the Community Reinvestment Act had some causative relationship to the subprime crisis.
The casebook additionally says in the same paragraph, “Because a large proportion of home mortgage loans are sold into the secondary mortgage market, most equitable defenses are unavailable to homeowners as a result of the holder-in-due-course doctrine.” Most students won’t really know what that means; I’ve found that they are disturbed enough by the concept of void versus voidable title—which shows up earlier in the course in the O’Keefe v. Snyder case. But it may be worth telling students that this statement—the foundation of securitization of mortgage loans—is not as certain as the casebook presents it. Among other things, if the note and mortgage were actually assigned in order to perform the foreclosure after the loan went into default (which wasn’t supposed to be the sequence but apparently often was), it’s not clear why the holder is a holder in due course with no notice of the problem with the underlying debt.
I don’t think Dukeminier et al. is an evil casebook, nor do I think that the authors consciously chose to strip out the homeowner-victims in order to reduce them to people who made bad bets and must inevitably suffer the consequences. (And many of the chain of title problems were just coming to light in 2010, which explains why they aren’t in the casebook.) But case selection and questions asked of students have powerful effects on what new lawyers think of as the baseline of the law, and this new section in the casebook is a good example.
Wednesday, February 8, 2012
It seems as though every day for weeks now we've been told a settlement between state attorneys general and fraudulent foreclosers -- by which I mean the largest home mortgage lenders in the country -- is imminent. The banks appear to be balking because they expected the type of suit filed by New York Attorney General Eric Schneiderman to be prohibited under the settlement -- but since Schneiderman is one of the key players in the settlement talks, there seems to have either been a serious misunderstanding or a serious play for leverage by Schneiderman. For an excellent analysis of the negotiations, and of the foreclosure crisis generally, I can't recommend Yves Smith's blog Naked Capitalism highly enough.
One issue that MUST be non-negotiable is the ability of people who were wrongfully foreclosed upon to maintain civil suits against their foreclosers. There is no indication that such suits will be barred under the settlement, but since the negotiations are not transparent we can't know until the settlement is announced. My first year property students have now spent weeks studying the crisis -- in part because I'm hoping to ready these young lawyers-to-be to take up the fight to ensure that foreclosure fraud doesn't pay and that its victims receive restitution. But if the state attorneys general negotiate away the only avenue victims of wrongful foreclosure have for relief, it will be the final injustice in a long, long line of them in this crisis. Not to mention a defeat for the rule of law.
For a very good discussion of how we should assess the settlement, when it is finally arrived at and released to public scrutiny, see this article by Richard Eskow.
Mark A. Edwards
Monday, January 16, 2012
Is the residential housing market improving? That's a difficult question to get a straight answer to. Last month, the National Association of Realtors announced that it had double-counted some home sales since January 2007, and revised five years worth of sales numbers, reflecting a much weaker market than previously understood.
A New York Times article also demonstrates that we need to be cautious in taking national statistics, or even state and regional-level statistics, at face value. For example, a new report indicates that home sales in New Jersey picked up in the latter part of 2011, with increases in contracts signed in six of the seven months between May and November. However, the report also reveals "A great division in market fortunes between northern and southern Jersey — and urbanized areas close to Manhattan and more rural regions..." For example:
"Salem County, rich in historic houses and farmland but short on well-paying jobs or a quick commute to an urban center, has the largest inventory of all 21 counties surveyed: 44.5 months’ worth of houses, the preponderance of them priced under $400,000."
“Simply put,” said Dawn Rapa, a Coldwell Banker Elite agent working in rural Salem County, “the only people I’ve seen selling their houses recently are those who absolutely had to — because they were in financial disarray, a job change, divorce or death.”
In my work on the commercial real estate market, I've noted that a few large markets, such as New York City, Washington, D.C., and San Francisco, distort national and regional statistics for two reasons: (1) those real estate markets are largely immune to severe or long-term economic downturns because of there is still more demand than supply; and (2) property values are significantly higher in those markets than in the remainder of the country. In other words, Class A commercial real estate in New York has remained strong through the financial crisis. Those high-value transactions mask continued weakness in cheaper Class B and C assets, and make the commercial real estate market look more vibrant than it really is. Although I haven't taken a close look at the residential real estate statistics, it appears that the same distortions may be taking place.
Monday, November 28, 2011
The housing market remains in flux (to put it mildly), and many people who could afford to and have sufficient credit to purchase a house or condo are wondering if renting might be a better idea. Answering that question depends upon a number of variables, including the local real estate submarket and the economics of the properties under consideration. The New York Times has a tool that allows you to crunch the numbers and determine whether it is better to rent or buy a particular property. It tells me that the townhouse I'm currently renting would only be better to buy if I stay there 13 years, even if I assume a mortgage rate of 4%.
Friday, November 11, 2011
On October 27th, Delaware Attorney General Beau Biden filed a verified complaint asserting that MERSCORP, Inc., a Delaware corporation, has repeatedly violated the state's Deceptive Trade Practices Act. Delaware asserts that MERS's deceptive trade practices fall into three main categories:
1. Through its opaque registry of mortgages and assignments, MERS knowingly obscures important information from borrowers. This harms consumers because many borrowers do not know the true identity of the holder of their mortgage, which impairs their ability to raise defenses in a foreclosure action. It also makes it more difficult for borrowers to identify their lender to seek a modification.
2. MERS often acts as an agent without authority from its proper principal, in part because it "often" does not know the identity of its property principal.
3. "MERS is effectively a 'front' organization that has created a systemically important mortgage registry but fails to properly oversee that registry or enforce its own rules on its members that participate in the registry." The de-centralized structure of MERS has contributed to the robo-signing scandal and similar systemic breakdowns.
I have written about MERS before and am not a fan. You can download a copy of the Delaware complaint, an explanatory press release, and obtain other information at the Delaware Attorney General's website.
Monday, October 24, 2011
The Federal Housing Finance Authority (FHFA) today announced that it is overhauling the Home Affordable Refinance Program (HARP) in order to make it accessible to more Americans. HARP allows homeowners who are current on their existing mortgages, but "underwater" (meaning that their loans exceed the value of their homes) to refinance and take advantage of historically low interest rates. A homeowner who has a loan at 7%, for example, could refinance around 4%, saving hundreds of dollars per month in interest.
HARP only applies to mortgages owned or guaranteed by Fannie Mae and Freddie Mac. It only applies to loans where the borrowers are current on their obligations. Still, the modified program announced today could benefit many homeowners by (1) reducing or eliminating refinancing fees; (2) removing the 125% loan-to-value ratio ceiling for fixed-rate mortgages backed by Fannie and Freddie; (3) eliminating the requirement of an updated appraisal; and (4) extending HARP to December 13, 2013.
HARP has been around since April 2009, but fewer than 900,000 households have taken advantage of the program. However, based on data provided by FHFA, HARP refinancings have provided the bulk of refinancings in the past two years. Hopefully, this modified program will help underwater homeowners take advantage of low mortgage rates.
Although I think that this expansion of HARP is a positive move, it will do little to address the most significant problem facing the residential real estate market. We (the homeowners of America) remain massively overleveraged. The residential market and the broader economy cannot recover until a significant deleverage takes place. Unfortunately, neither the administration nor any of the GOP candidates have proposed a plan that will allow this deleveraging to take place in an orderly fashion. Our default (pun alert) deleveraging strategy is thus bankruptcy and foreclosure. HARP will help many homeowners make their monthly payments, but lowering interest rates (and presumably adding to the principal through closing costs) will do nothing to help homeowners deleverage.
Just another cheery observation for your Monday afternoon.
Monday, October 3, 2011
I'm teaching a course on the Financial Crisis this semester. We have been examining various explanations of the "cause" of the Financial Crisis. Freakonomics has a great piece by James Altucher that sums up much of our discussion.
Friday, September 2, 2011
This week has been good news/bad news for Bank of America. Good news -- Warren Buffet invested $5 billion in new preferred shares, and gave investors a confidence boost in the bank. Bad news -- the New York Times reports this morning that the Federal Housing Finance Agency (FHFA), the "conservator" agency over Fannie Mae and Freddie Mac, is preparing to file a lawsuit against Bank of America, JP Morgan Chase, Goldman Sachs, Deustche Bank, and others, alleging that the due diligence that they conducted on residential mortgages prior to securitizing and selling them, violated federal securities law. This is, of course, in addition to the actions of the 50 state attorneys general, the $10 billion lawsuit by AIG against Bank of America, and the lawsuits by various private investors.
In other words, this is the perfect semester for me to be teaching my seminar on the Financial Crisis.
Tuesday, August 30, 2011
The New York Times explores how new limits on federally guaranteed mortgages will have a disparate impact on the housing market in big cities:
On Oct. 1, when the limit on federally guaranteed loans drops to $625,500 from the current level of $729,750, hundreds of buyers in the city and nearby suburbs will either have to come up with larger down payments to stay under the new limit or face the prospect of applying for jumbo loans — anything above $625,500 — which have higher interest rates. . . . “Across the country this is not a big deal,” said David Maundrell, the president of aptsandlofts.com “but in New York, because our prices are where they are, it’s going to be an issue.”
Monday, August 22, 2011
I admit that when I first read the title of this photo essay in the New York Times, I thought that it was about haunted houses. But sadly, it is a haunting reminder that the housing bubble was not just an American phenomenon. Although the architecture of the homes depicted in Valérie Anex's photo essay are uniquely Irish, the vibe is similar to the Guardian's photo essay "Detroit in Ruins," which we linked to earlier this year.
On a related note, also in today's New York Times, an editorial reminding us that despite the fact that American mortgage interest rates are at an all time low (as Steve posted this morning), millions of homeowners are still underwater on their mortgages. The editorial advises us that "Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans." More on this editorial later (if I make some progress on my class prep).
Tuesday, June 7, 2011
Five months ago, Bank of America filed foreclosure papers on the home of Maurenn Nyergers. The trouble for Bank of America is that Nyergers never had a mortgage - she paid cash for her house.
The case eventually went to court and Nyergers was able to prove she didn't owe Bank of America a dime. In fact, the judge ordered Bank of America to pay Nyergers' legal fees.
But then, Nyergers said she waited more than five months for a check. So the family's lawyer, Todd Allen, moved to seize the bank branch's assets. Allen instructed sheriff's deputies and movers to remove desks, computers, copiers, filing cabinets and any cash in the teller's drawers.
According to sources, bank employees were locked out of the branch and the bank's manager appeared "visibly shaken" and "bewildered." Yet, within the hour, a fairy tale ending; The bank manager handed over a check to the lawyer for the legal fees.
Friday, May 20, 2011
John Pottow (Michigan) has posted Ability to Pay on SSRN. Here's the abstract:
The landmark Dodd-Frank Act of 2010 transforms the landscape of consumer credit in the United States. Many of the changes have been high-profile and accordingly attracted considerable media and scholarly attention, most notably the establishment of the Consumer Financial Protection Bureau (CFPB). But when the dust settled, one profoundly transformative innovation that did not garner the same outrage as CFPA did get into the law: imposing upon lenders a duty to assure borrowers’ ability to repay. Ensuring a borrower’s ability to repay is not an entirely unprecedented legal concept, to be sure, but its wholesale embrace by Dodd-Frank represents a sea change in U.S. consumer credit market regulation. This article does three things regarding this new duty to assess a consumer’s ability to pay mortgage loans. First, it tracks the multifaceted pedigree of this requirement, looking at fledgling strands in U.S. consumer law as well as other areas such as securities law; it compares too its more robust embrace in foreign systems. Second, it offers conjecture regarding just how this broadly stated principle might be put into practice by the federal regulators. Finally, it provides a brief normative comment, siding with the supporters of this new obligation on lenders.
Thursday, May 19, 2011
One of the eye-opening aspects of blogging here is this: often, if one of us puts up a post that contains the word "mortgage," we get spam in the comments box. I would not be in the least surprised to find a comment on this post tomorrow that reads something like this:
This is a very interesting discussion of will mortgage scammers never cease. I like to read about will mortgage scammers never cease. Will mortgage scammers never cease is very important.
Refi-now [at] lowestrates [dot] com
Since these usually come in response to a post about the latest mortgage industry outrage, it (frankly) pisses me off.
And just tonight, during dinner, I got a call from someone in Newport, CA, claiming to be working for Fannie Mae. He told me my mortgage had "crossed his desk" and he wanted me to know, as a public service, that I could get a much lower rate, and he was prepared to tell me how. I told him . . . well, I suppose this is a family blog, but I told him that I did not think highly of him.
I was naive enough to think that the mortgage crisis would have put, if not an end, at least dampener on this type of despicable activity. This is exactly how so many people's lives were ruined, and exactly why the mortgage industry became such a chaotic, undisciplined, unethical nightmare that lenders can't even produce the note for mortgage loans on which they intend to foreclose.
But if it wasn't apparent before, it should be apparent now that the mortgage crisis -- that is, the crisis of the mortgage industry -- is in the past. Its particpants either walked away before the scam collapsed, or got bailed out if they were left holding the cards.
Now they're back in action. Want proof? The front page of the on-line version of today's New York Times has an ad for "Orange Home Loans As Low as 3.05% APR." Click on the link, and you get an offer for a 5 year fixed rate mortgage loan at 2.99% if you can put 20% down, but with monthly payments set as if the loan were a 30 year fixed rate. In other words, when 5 years have gone, and you need to re-finance, you'll have built up no new equity in the home because you've been paying as if you had 30 years to pay it off, not 5. You'll essentially have to purchase the home again, at a much higher rate. And this isn't some fly-by-night company. At least they require 20% down.
So the crisis of the mortgage industry is over. Instead, what we have now is a foreclosure crisis. A crisis that is rendering families homeless, destroying equity in homes, and in some places (here's looking at you, Florida) undermining the rule of law.
Soon we'll have a restitution crisis.
If we get any spam in response to this post, I'll post it as an addendum here.
Mark A. Edwards
[comments are held for approval (and now you know why), so there will be some delay in posting]
Christopher J. Mayer (Columbia Business), Edward R. Morrison (Columbia Law), Tomasz Piskorski (Columbia Business) and Arpit Gupta (Columbia Business) have posted Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide on SSRN. Here's the abstract:
We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased thirteen percent per month immediately after the program's announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.
Thursday, May 5, 2011
Cam Demiroglu, Evan Dudley, and Christopher James (Florida - Finance) have posted Strategic Default and the Foreclosure Process on SSRN. Here's the abstract:
Strategic defaults occur when borrowers default on their mortgages even though they can afford to continue to make their mortgage payments. Prior research suggests that the economic incentives in terms of the borrower’s equity in the home as well as non-economic factors such as moral attitudes about default are important determinants of strategic default. In this paper, we examine how differences in state foreclosure laws impact the likelihood of strategic default. Specifically, we examine how judicial review requirements and lenders’ recourse rights (deficiency judgments) affect the likelihood of default. We argue that state foreclosure laws should have little effect on the likelihood of non-strategic default and thus provide a good instrument for identifying the costs and benefits of strategic default. Consistent with this argument, we find that the effect of state foreclosure laws varies with the borrower’s equity position, with borrower-friendly foreclosure laws having a significantly greater effect on default rates for borrowers with negative equity. We also examine how recent state and federal loan foreclosure-prevention programs have affected the likelihood of strategic default. Overall, we find a significant reduction in the effect of state foreclosure laws on strategic defaults following the introduction of loan modification programs after late 2008. Our results suggest that programs meant to prevent foreclosures have also reduced the effectiveness of foreclosure laws that discourage strategic defaults.
Wednesday, May 4, 2011
Henry Rose (Loyola Chicago) has posted The Due Process Rights of Residential Tenants in Mortgage Foreclosure Cases (New Mexico Law Review) on SSRN. Here's the abstract:
The purpose of this article is to explore the rights of tenants who reside in buildings undergoing foreclosure to receive notice and an opportunity to be heard when foreclosures threaten to terminate their tenancies. The federal Protecting Tenants at Foreclosure Act of 2009 (PTFA) will significantly reduce the incidence of residential tenancies being terminated as a result of foreclosure. However, PTFA offers weak procedural protections if the mortgagee or the person who acquires ownership pursuant to a foreclosure seeks to terminate the tenancies of residents in the foreclosed building. In those states that require judicial foreclosures, the Due Process Clause of the Fourteenth Amendment to the United States Constitution should afford tenants faced with termination of their tenancies due to foreclosure with notice and an opportunity to be heard before their tenancies are terminated. In states that allow non-judicial foreclosures, Due Process protections are not likely to be available to tenants due to a lack of state action in the foreclosure process. PTFA should be amended to afford all tenants, including those who reside in non-judicial foreclosure states, with notice and an opportunity to be heard before their tenancies are terminated pursuant to a foreclosure.
Tuesday, April 26, 2011
Funding for HUD's housing counseling program has been eliminated. Not to worry: not many people need housing counseling these days.
The counseling program cost $88M, or approximately 1.25 C-130J long-range military transport planes.
Also from the same Department: Law Professor's laptop goes belly up during finals week; dog's leg is paralyzed, wife's back goes out. I apologize for the lack of posts lately, but it''s been a wild two weeks.
Mark A. Edwards
[comments are held for approval, so there will be some delay in posting]
Monday, April 25, 2011
Andrea Boyack (George Washington) has posted Laudable Goals and Unintended Consequences: The Role and Control of Fannie Mae and Freddie Mac (American Law Review). Here's the abstract:
The United States is struggling to emerge from an era of loose mortgage underwriting standards – lapses in credit analysis that led to origination and securitization of toxic loans. The fallout has been crippling, costing borrowers their homes, investors their money, and the government its taxes.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) passed last summer was the first comprehensive effort to address the problems in the system that led – in sequence – to the subprime crisis, the housing crisis, and the financial crisis. The Dodd-Frank Act, which contains over 2,300 pages of legislation, is very broad as well as very detailed – even though hundreds of rulemakings have yet to completely define its parameters. But this extensive legislation deliberately did not deal with the biggest elephant (or perhaps elephants) in the room: Fannie Mae and Freddie Mac. These government sponsored enterprises (GSEs), behemoths of the secondary mortgage market, are currently in conservatorship and have (so far) cost taxpayers over $130 billion. Yet our current residential mortgage market is utterly dependent upon them for credit and liquidity. With political pressures to stop taxpayer bailouts and the reality of a frozen mortgage market should Fannie Mae and Freddie Mac cease to exist, when it comes to the GSEs, the administration feels damned if they do and damned if they don’t.
For decades, the U.S. mortgage finance system was the envy of the world – the only industrialized nation to have a significant segment of housing costs covered by private capital through a securitization investment system. The United States is the only country to routinely offer homebuyers 30-year fixed-rate pre-payable mortgage loans. Better capital accessibility has made more homeownership opportunities more available to more Americans. The GSEs have performed a vital role in financing the production of rental housing as well. Our real estate capital markets set the gold standard worldwide for what is possible in freeing trapped asset values and increasing the wealth of borrowers and investors alike.
Over the past decade, this system undoubtedly became unhinged – and it is critical to reform its failings. But a complete wind-down of the government sponsored enterprises that are the linchpin of our housing finance system goes too far. Subtracting Fannie Mae and Freddie Mac from the finance equation may very well be market suicide, and the repercussions for borrowers, communities and investors would be dire indeed. Furthermore, this extreme step is unnecessary: the system’s failures can be adequately (and better) addressed within the GSE framework.
Undoubtedly there is still ample dirty “bathwater” to throw out as we reform the mortgage finance market system. But it would be an excruciating mistake to bow to political pressures and throw out the “baby” too. Current and future mortgage borrowers will only be adequately “protected” if they are empowered through access to capital, appropriately constrained by valid underwriting criteria. A well functioning market – rather than political scapegoating – is the best way to emerge from the recession and protect future buyers and investors alike.
This article first discusses the history and purposes of the GSEs and what went wrong with the system that led to the 2008 conservatorship and bailout. With reference to the Obama Administration’s February 2011 Report to Congress, “Reforming America’s Housing Finance Market,” Part II analyzes proposals to reform and wind down the GSEs in light of their likely legal and market impact. Part III offers some general suggestions on better approaches to crafting America’s future mortgage market and advocates for solutions more precisely tailored to remedy apparent systemic problems while achieving the identified policy goals.