This document discusses the state of housing finance in the United States. It argues that the government continues to dominate the housing market through Fannie Mae, Freddie Mac, and FHA, accounting for 75-80% of the market. It also notes obstacles to reducing this government domination like a lack of congressional action on reform and the view of the new FHFA director that housing finance reform is not a priority. Additionally, it criticizes the long-standing policy focus on expanding homeownership through increased leverage and assisting borrowers with poor credit, arguing this has not meaningfully increased homeownership rates and crowds out private retirement savings.

1. The State of Housing Finance in
the United States
C. D. Howe Institute
Housing Markets and Policy
June 26, 2014
Edward Pinto, Codirector
AEI International Center on Housing Risk
HousingRisk.org
The views expressed here are those of the author alone and do not necessarily represent
those of the American Enterprise Institute.
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2. US Housing and Financial Crisis
• Crisis largely stemmed from a failure to
understand build-up of housing risk:
– Mortgage risk
– House-price (collateral) risk
– Capital adequacy
• Combined with a housing finance market
dominated by government players and
distortionary policies 2

3. Regulatory and market obstacles to privatization
dwarfed by institutional and policy headwinds
• The continued dominance of Fannie/Freddie/FHA
– Likely be at 75-80% of the market for the foreseeable
future
• Renewed policy and regulatory efforts to debase
credit standards
• The lion’s share of the 20-25% going to the private
sector will continue to be served by portfolio lenders,
leaving little room for private MBS
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4. Institutional obstacles to reducing
government domination
• No imperative on Congress to pass reform legislation.
– GSE charters are perpetual and cannot be abandoned
– Loan limits set at no lower than 2007 market peak
– Treasury obligated to provide GSEs an additional $200+ billion in capital
support beyond existing bailout
– No time limit on conservatorship
– Exempt from QM’s 43% total DTI limit until earlier of Jan. 2021 or exit from
conservatorship and these be extended or amended by CFPB
– Exempt from QRM’s 5% risk retention as long as in conservatorship and
this can be amended by FHFA
– GSEs give the appearance of being profitable and “profits” go to Treasury
– New leadership at FHFA
• Director Watt has stated that housing finance reform is off his radar
• Full speed ahead for GSEs with no footprint shrinking under his watch
• The devil you know….
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5. “Affordable housing” continues as the
driving issue
• Look no further than the recent announcements from
FHFA, FHA, and the 6 Democratic senators who have
demurred on the Johnson-Crapo Housing Finance bill
– Despite progress, however, housing finance market
conditions are far from what could reasonably be
considered satisfactory or normal.…[s]ome originators and
mortgage insurers have placed additional conditions –
such as higher minimum credit score requirements – on
top of the acceptable credit standards of each Enterprise.
These credit overlays result in the rejection of many loans
that would otherwise meet Enterprise credit standards
(emphasis added) – FHFA Director Mel Watt. May 13,
2014
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6. A misguided housing policy
• For past 50+ years our single-family housing policy been based on:
– The use of ever greater leverage in a futile attempt to expand
homeownership by helping unqualified borrowers buy homes
• Homeownership rate 62% both in 1960 and 2014 (net of 90+
delinquent loans)
– Increased dramatically from 1940 to 1960 for both Blacks and whites
– Home lending until 1960 was not highly leveraged, making it a low risk
means to build wealth
– “A government effort to assist families with limited resources and poor
credit history take on increased leverage seems a curious public policy.”
former FHFA acting director Edward DeMarco, May 13, 2014
• High leverage policy even more curious since used to finance homes in
neighborhoods with highest levels of house price volatility and
effectively crowds out private retirement savings using defined
contribution plans
• It is no wonder borrowers with limited resources fail to build wealth
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