A Pragmatic Plan for Housing Finance Reform
Jun 19, 2013
Ellen Seidman, Senior Fellow at the Urban Institute; Phillip Swagel, senior fellow at Milken Institute; Sarah Rosen Wartell, President of the Urban Institute; and Mark Zandi, Chief Economist of MoodyaEUR(TM)s Analytics
Publisher: Milken Institute

In "A Pragmatic Plan for Housing Finance Reform," the authors articulate a vision and core principles without prescribing detailed legislative imperatives. They argue that continued flexibility consistent with basic principles will be essential as a new housing finance system develops in an environment of significant demographic and economic volatility.

When considering how a future housing finance system should operate, the authors emphasize the importance of diverse sources of mortgage funding; participation in the system by lending institutions of all sizes; and the need for explicit, paid-for government guarantees to cover catastrophic losses.

Recognizing that ensuring access and affordabilty in a new housing finance system is essential to a vibrant economy, the paper's authors also recommend the establishment of a Market Access Fund (MAF). Among the components included in the MAF: a Research and Development Fund to pilot testing of innovate products that expand the market for sustainable homeownership; a Credit Support Fund to increase access for sustainable homeownership and the rental market; and two funds that were created in 2008 to be funded by Fannie Mae and Freddie Mac, the Capital Magnet Fund, which would attract private capital investment in affordable housing and community development, and the National Housing Trust Fund, a block grant program to preserve the supply of rental housing for extremely low-income families.

The authors called for an end to Fannie Mae and Freddie Mac, recommending that the remaining assets to be sold to private investors to help repay taxpayers for backing these institutions. However, the authors do see a continued role for the Federal Housing Administration (FHA), which primarily support first time homebuyers and affordable rental housing. That mission would be more explicitly defined in the author's proposal; under the new system, the FHA's share of the single family market would fall back to historical norms of 10-12% of mortgage originations. That is in contrast to today's share, which is at least 20%.

The paper does not address changes to the Federal Home Loan Bank System.