Reform of the GSEs and Housing Finance
Jul 18, 2011
Publisher: Milken Institute

The federal government should move forward with housing finance reform as soon as possible, including allowing other mortgage finance-related companies to compete with Fannie Mae and Freddie Mac on a level playing field and selling Fannie and Freddie back into private hands. Private capital would then stand in front of a secondary government guarantee on mortgage-backed securities, according to "Reform of the GSEs and Housing Finance," a white paper released by the Milken Institute.

The goals of the proposal in the white paper are to ensure that Americans have access to mortgages in all market conditions, while making private capital the dominant funding source for housing and protecting taxpayers from a repeat of the $150 billion rescue of the two government-sponsored firms during the financial crisis. The paper was written by Milken Institute Senior Fellow Phillip Swagel, a professor at the University of Maryland School of Public Policy and former senior official at the U.S. Treasury during the financial crisis.

"While government guarantees of mortgages are needed for the foreseeable future to ensure that Americans can obtain mortgages at reasonable rates, housing finance reform must be done in a way that protects taxpayers against future bailouts," Swagel said.

The proposal in the paper is consistent with the options being considered by the Treasury Department for reforming the mortgage finance system and discusses how Fannie and Freddie should be organized, how the handling of mortgage-backed securities should be reformed, and what the expected impacts of these changes would be on interest rates.

According to Swagel, leaving the GSEs in conservatorship with the government playing a dominant role in housing finance, "would be the worst outcome for the U.S. financial system, the overall economy and future homeowners, who would not benefit from the innovation and competition that only the private sector can bring about; now is the time to move forward with reform."