Mortgage Finance System Research Articles

Appraisal of the housing delivery mandate of selected government agencies in Nigeria

In spite the concerted efforts made by housing stakeholders in formulating and implementing the 2012 National Housing Policy to bridge the gap between housing demand and supply, the housing situation remains in crisis and hampering on existing policies, sustainable housing delivery with consequent socio-economic, environmental, and political implications. These challenges call for an appraisal of the 2012 National housing policy towards identifying effective mechanism for the policy’s implementation. This paper assessed the roles of the housing policy’s implementing agencies (Federal Housing Authority and Federal Mortgage Bank of Nigeria), identify the challenges faced by the agencies and provide strategies for effective implementation of the National housing policy in Nigeria. In conducting this study, a mixed methods approach was adopted. The study identified the roles played by the designated agencies towards ensuring effective implementation of the National housing policy to include facilitating the development and management of real estate across all states, provision of sites and services for all income groups. Some of the major challenges found to be affecting the provision of adequate housing include increasing cost of procuring land and building materials, poorly developed mortgage finance system and high interest rates on mortgages and cumbersome building plans approvals processes. Though the agencies made concerted efforts in living up to their responsibilities, the efforts are not enough as housing deficit continues to increase. It is therefore suggested that all the tiers of government should ensure the provision of adequate infrastructure and appropriate land titles for both implementing agencies and private firms, create enabling environment for private sector participation in long-term housing finance and encourage the use of indigenous and alternative building materials to reduce construction cost.

Analysis of the Proposed 2020 FHFA Rule on Enterprise Capital

ABSTRACT This article examines the Federal Housing Finance Agency (FHFA)’s 2020 notice of proposed rulemaking (2020 NPR) for the government-sponsored enterprises’ capital standards and finds that there are several issues of concern that will distort the relationship between capital and risk. We urge FHFA to better tailor its proposed risk-based capital requirements to the risk and mission of these monoline entities and rely less heavily on a Basel-like framework. We offer a package of specific adjustments that will better align capital with risk, without reducing the overall rigor or stringency of the capital standard. Better tying capital to risk will result in a better regulated and stronger mortgage finance system.

Covered bonds, loan growth and bank funding: The Swiss experience since 1932

AbstractThe global financial crisis triggered discussions about what factors constitute a stable mortgage finance system. This paper contributes to these discussions by empirically analysing the Swiss mortgage finance system from a macroeconomic and banking sector balance sheet perspective. Our analysis is based on a novel and near‐comprehensive data set of mortgage bond (Swiss Pfandbrief) issuances over the sample period from 1932 to 2014. The empirical results suggest that growth in the volume of the Swiss Pfandbrief does not induce more loan growth than expected given the state of the economy and that compared with other bank refinancing activities, the Swiss Pfandbrief provides a stabilising source of funding.

Introduction to Special Issue: The Appropriate Role of Government in U.S. Mortgage Markets

The U.S. mortgage finance system was one of the focal points of the 2007-08 financial crisis, yet legislative decisions about the appropriate role of the federal government in the system remain unsettled. Policy deliberations have focused on Fannie Mae and Freddie Mac—the two enormous government-sponsored enterprises that were placed into federal conservatorship in September 2008. The two GSEs have long been the centerpieces of a mortgage finance system that relies on capital market financing of U.S. residential mortgages. This volume contains eight articles that touch on several key components of housing finance reform. We hope that the insights offered here will assist legislative efforts aimed at promoting a more efficient, equitable, and financially sound mortgage system in the future.

Peas in a Pod? Comparing the U.S. and Danish Mortgage Finance Systems

Like the United States, Denmark relies heavily on capital markets for funding residential mortgages, and its covered bond market bears a number of similarities to U.S. agency securitization. This article describes the key features of the Danish mortgage finance system and compares and contrasts them with those of the U.S. system. In addition, it highlights characteristics of the Danish model that may be of interest as the United States considers further mortgage finance reform. In particular, the Danish system includes features that mitigate refinancing frictions during periods of falling home prices, and it offers borrowers the option to repurchase their mortgage at the market price, mitigating “lock-in” effects. Danish mortgage intermediaries also have high capital ratios relative to their risk exposures, a characteristic that contributes to the stability of the Danish market.

Peas in a Pod? Comparing the U.S. and Danish Mortgage Finance Systems

Like the United States, Denmark relies heavily on capital markets for funding residential mortgages, and its covered bond market bears a number of similarities to U.S. agency securitization. This article describes the key features of the Danish mortgage finance system and compares and contrasts them with those of the U.S. system. In addition, it highlights characteristics of the Danish model that may be of interest as the United States considers further mortgage finance reform. In particular, the Danish system includes features that mitigate refinancing frictions during periods of falling home prices, and it offers borrowers the option to repurchase their mortgage at the market price, mitigating ?lock-in? effects. Danish mortgage intermediaries also have high capital ratios relative to their risk exposures, a characteristic that contributes to the stability of the Danish market.

What to Do About the GSEs?

Fannie Mae and Freddie Mac, the two large government-sponsored enterprises (GSEs) that are at the center of US residential mortgage finance, are “elephants in the room” that are being ignored as part of broad-brush financial sector reform. Neither the Dodd–Frank Act nor recently proposed overhauls of Dodd–Frank have addressed reform of the GSEs’ structures, although the GSEs were placed in government conservatorships in early September 2008 and have remained in that state since then. In this article, we review what the GSEs do and how they got themselves into financial difficulties, and we provide an overview of some of the major proposals for reforming the US residential mortgage finance system. We conclude with our own ideas and suggestions for how housing finance, as well as housing policy more generally, should be reformed.

Common Ground: The Need for a Universal Mortgage Identifier

The U.S. mortgage finance system is a critical part of our nation’s financial system, representing 70 percent of U.S. household liabilities. It is also highly complex, with many finance channels, participants, and regulators. The data produced by this system reflect that complexity; unfortunately, no single identifier exists to link the major loan‐level mortgage datasets. The establishment of a single, cradle‐to‐grave, universal mortgage identifier that cannot be linked to individuals using publicly‐available data would significantly benefit regulators and researchers by enabling better integration of the fragmented data produced by the U.S. mortgage finance system. Such an identifier could additionally serve as the foundation of a system that could benefit private market participants, as long as such a system protected individual privacy.

The Paths to Mortgage Finance Reform and Their Budgetary Implications

The passage of the Housing and Economic Recovery Act in July of 2008 expanded the federal government’s authority to place Fannie Mae and Freddie Mac into conservatorship. As exercised, under the conservatorship the government secured the right to stock warrants worth 79.9% of the company as well as a ten percent dividend on its gross investment. The existing shareholders kept the other 20.1%.However, the terms of the conservatorship were repeatedly amended. As the two GSEs returned to profitability, the government amended the conservatorship to lay claim to the entire net worth of the two government-sponsored enterprises, which it swept into Treasury’s coffers each quarter. This move effectively froze out the non-government shareholders from any residual profits.It also allowed the federal government to report sharply lower deficits than would have otherwise been the case. As of 2014 the government had recouped its core $187.5 billion investment in the two and Congress is now contemplating major reforms of the mortgage finance sector.The current reform plan that has garnered bipartisan support, the one proposed by Senators Tim Johnson and Mike Crapo, would wind down Fannie and Freddie and replace them with new entities. In doing so it would also largely codify the Treasury’s zeroing out of Fannie and Freddie’s private shareholders.In order to allow the new entities to begin with a fresh balance sheet, the legislation would have the federal government explicitly guarantee the $5.2 trillion of debt of Fannie Mae and Freddie Mac. While a booming economy could gradually reduce that figure with few untoward consequences for the government, if the housing market were to have another swoon, the government would undoubtedly find itself having to cover some portion of this debt.Explicitly guaranteeing the debt incurred by Fannie Mae and Freddy Mac represents an unprecedented step for the government, and something the Treasury previously went to some lengths to avoid. Such an explicit guarantee is also contrary to long existing statute, which even today denies creditors any right to taxpayer backing. Neither the public assumption of all GSE debt nor the effective confiscation of the private shareholders’ GSE stock send an affirming signal to private investment.Reform of the U.S. housing market is past due: if we hope to rebuild our mortgage finance system on a foundation of private capital, then property and contractual rights must be respected.

On security of collateral in Danish mortgage finance: a formula of property rights, incentives and market mechanisms

Specialized mortgage intermediaries in Denmark have for over 200 years provided owners and buyers of real property wide access to credit. The present paper sets out to explore the safeguards that nurtured development of a robust, market based financing system and a deep mortgage market. Observations are made on the nature of collateral performance in respect to property rights, mortgage law and market development in search of general features of required institutional arrangements. The robustness of the Danish mortgage finance system is largely accredited to the securitization model based on the balance principle that assigns risks and responsibility to market players in a self-disciplinary manner and protected the mortgage banks against cash flow mismatches even during deep crisis, as history attests. It is shown how property registers and effective enforcement have created transparent property rights and practically reduced legal risks of mortgaging to zero. Standardization and scale of economics supported collateral efficiency, as measured in terms of simplicity, transparency, rapidity and costs. The Danish mortgage finance system illustrates the critical role of government in insuring the quality and enforceability of mortgage collateral, and reducing uncertainty for market players throughout the entire process. The paper suggests that sound incentive structures of the securitization model, strong commitment mechanisms and the market mechanisms constituted a complex formula of safeguards that—rather than specific capital coverage requirements—created the preconditions required for a well-functioning mortgage market.

GSE Reform Policy Issues

There is a widespread policy consensus that the U.S. government should be playing a smaller role in residential mortgage finance and that Fannie Mae and Freddie Mac should be wound down and eventually shuttered. But the issue of how extensive the federal government’s role should be—in essence, whether it should have a role in backstopping the bulk of the mortgage market—has eluded consensus, and the post September 2008 status quo has persisted. This panel discussion summary starts with a section by Professor Lawrence White that briefly provides background on this issue; summarizes the current status of the GSEs and the major pieces of legislation that have been introduced in the Congress to address these issues; and offers a set of important questions that ought to be asked about housing and housing finance policy more generally. Adam LaVier starts with some of the current impediments to housing finance policy reform in Washington; poses the question of whether legislative action is necessary; discusses the measures that might move policy forward in the Senate, House, and Obama administration; suggests what the Federal Housing Finance Authority (FHFA) might do in the near term under its new director Mel Watt; and presents four possible end-game scenarios. Then, Laurie Goodman makes a case that while a consensus is slowly emerging on what a future housing finance system ought to look like, GSE reform is a long way off. It is easier to agree on themes and much harder to agree on the specific structural, risk-sharing, and operational details and how to get from here to there. As a result, she considers GSE reform unlikely before the 2016 election. She believes four “plumbing” issues need to be resolved: 1) What does the transition look like? 2) Should insurance be provided by guarantors only or a combination of guarantors and the capital markets? 3) What does the ultimate structure look like? 4) Is mortgage insurance separate from the guarantor function? Finally, Andrew Davidson notes that while a broad consensus is developing that home buyers seeking financing would be best served by a system in which mortgage-backed securities had an explicit government wrap with private capital standing in front of that wrap, there is little consensus on the nature of the entities that would provide the private capital and the role of the government in providing standards and regulating the suppliers of private capital. He thinks cooperatives may be the best form of organization to deliver private capital, stability, standardization, and risk sharing to the mortgage securitization process. The existing GSEs could be transformed into originator-owned cooperatives with little disruption to the mortgage finance system.

The German housing system: fundamentally resilient?

The initial research question was: How can we explain the fact that the German housing system was seemingly unaffected by the financial crisis? The relative macro-economic stability of the German economy is part of the story, but the initial question led to a more fundamental analysis of why there had been no precrisis excesses in the German housing market. The longer term lack of volatility in Germany is just as in need of explanation as the excesses elsewhere. An important part of the explanation may be the particular tenure structure of the German housing market—which is characterized by a low homeownership rate and a large market share for private landlords. This structure was shaped over time by institutional development. In particular, mortgage finance systems and habits did not develop independently of that tenure structure. Equally that tenure structure arises in part from regulation and housing subsidy systems that do not favour homeownership.

Guaranteed to Fail: Fannie Mae and Freddie Mac and What to Do about Them**

Abstract In July 2008, in a column in the Canadian newspaper National Post, David Frum, the former speechwriter for President George W. Bush, wrote: “The shapers of the American mortgage finance system hoped to achieve the security of government ownership, the integrity of local banking and the ingenuity of Wall Street. Instead they got the ingenuity of government, the security of local banking and the integrity of Wall Street.” He has a point.

TBA Trading and Liquidity in the Agency MBS Market

1. INTRODUCTION The U.S. residential mortgage market has experienced significant turmoil recent years, leading to important shifts the way mortgages are funded. Mortgage securitization by private financial institutions declined to negligible levels during the financial crisis that began August 2007, and remains low today. In contrast, throughout the crisis there continued to be significant ongoing securitization the agency mortgage-backed-securities (MBS) market, consisting of MBS with a credit guarantee by Fannie Mae, Freddie Mac, or Ginnie Mae. (1) Agency MBS the amount of $2.89 trillion were issued 2008 and 2009, but no non-agency securitizations of new loans occurred during this period. The outstanding stock of agency MBS also increased significantly during the crisis period, from $3.99 trillion at June 2007 to $5.27 trillion by December 2009. (2) A key distinguishing feature of agency MBS is that each bond either carries an explicit government credit guarantee or is perceived to carry an implicit one, protecting investors from credit losses case of defaults on the underlying mortgages. (3) This government backing has been the subject of a long-running academic and political debate. A second, less widely recognized feature is the existence of a liquid forward market for trading agency MBS, out to a horizon of several months. (4) The liquidity of this market improves market functioning and helps mortgage lenders manage risk, since it allows them to lock in sale prices for new loans as, or even before, those mortgages are originated. More than 90 percent of agency MBS trading volume occurs this forward market, which is known as the TBA (to-be-announced) market. In a TBA trade, the seller of MBS agrees to a sale price, but does not specify which particular securities will be delivered to the buyer on settlement day. Instead, only a few basic characteristics of the securities are agreed upon, such as the coupon rate, the issuer, and the approximate face value of the bonds to be delivered. While the agency MBS market consists of thousands of heterogeneous MBS pools backed by millions of individual mortgages, the TBA trading convention allows trading to be concentrated only a small number of liquid forward contracts. TBA prices, which are observable to market participants, also serve as the basis for pricing and hedging a variety of other MBS, which The main goal of this article is to describe the basic features and mechanics of the TBA market, and to review recent legislative changes that have affected the types of mortgages eligible for TBA trading. The article also presents some preliminary evidence suggesting that the liquidity benefits associated with TBA eligibility increase MBS prices and reduce mortgage interest rates. Our analysis exploits changes legislation to help disentangle the effects of TBA eligibility from other characteristics of agency MBS. In particular, we study pricing for mortgages that became eligible for agency MBS securitization through legislation 2008, but that were ruled ineligible to be delivered to settle TBA trades. We show that MBS backed by super-conforming mortgages trade at a persistent price discount the secondary market, and also that interest rates on such loans are correspondingly higher the primary mortgage market. Preliminary evidence suggests that these stylized facts are not fully explained by differences prepayment risk. We interpret our estimates to suggest that the liquidity benefits of TBA eligibility may be of the order of 10 to 25 basis points on average 2009 and 2010, and are larger during periods of greater market stress. Our institutional discussion and empirical results support the view that the TBA market serves a valuable role the mortgage finance system. This finding suggests that evaluations of proposed reforms to U.S. housing finance should take into account potential effects of those reforms on the operation of the TBA market and its liquidity. …

The Global Importance of Government Guarantees in Mortgage Finance

Critics of the federal government’s role in the mortgage markets often claim the United States is unique among developed countries in providing significant guarantees for home mortgage financing. A corollary to this critique is that European countries do not provide government guarantees for mortgage finance. Both of these statements are wrong, because they fail to understand the ways in which other countries, particularly European ones, support their residential mortgage markets. Those who believe the United States is unique in supporting its mortgage finance system focus on the government backing of the mortgage securitization entities Fannie Mae, Freddie Mac, and Ginnie Mae, which together account for about half of all outstanding U.S. home loans (about 90 percent since the 2008 financial crisis). These three institutions purchase and pool mortgages meeting certain standards and sell the cash flows from these mortgage pools to investors in the form of mortgage-backed securities, backed by a government guarantee. Critics of the government’s role in the U.S. housing finance market note that the United States is one of only a handful of countries that offer such guarantees for securitization — the others being Canada, Japan, and South Korea. What this argument ignores is that securitization is not an important source of mortgage finance for most of the world’s developed countries. In Western Europe, for example, traditional bank lenders — funded by deposits and, to a lesser extent, covered bonds (a type of bond that is collateralized by mortgages held by the issuing bank) — are the primary source of residential mortgage finance. Conversely, securitization is not a major source of mortgage funding for any of these countries. Thus, it makes no sense to focus on guarantees for securitization, while ignoring guarantees for these bank obligations, when considering whether European governments provide support to their residential mortgage markets. What does make sense is to examine the ways in which European governments do guarantee residential mortgage funding, both explicitly and implicitly. This issue brief will do just that — detailing the several ways the U.S. government guarantee on residential mortgages works and then comparing those processes with the very different but equally important government role in guaranteeing home mortgages across Europe.

Foreclosure Mitigation Efforts in the United States

Home foreclosure rates have risen in the United States to the highest levels since the Great Depression. With house prices falling, lending standards tightening, unemployment rising, and interest rate resets in the pipeline, foreclosures are projected to go even higher. While most of the time a foreclosure is a suboptimal resolution of a distressed mortgage, a number of features of the mortgage finance system often prevent loan modifications. This paper reviews the impediments to successful mortgage restructuring and proposes a number of ways to improve the situation. The proposals build on the recognition that the key problem is a combination of negative housing equity and unaffordable debt service, and a successful loan modification scheme should address both issues. Given the key role foreclosures play in the adverse housing market dynamics, and several market failures that the paper identifies, the burden of mortgage debt restructuring should be shared by the taxpayer.

The Global House Price Boom and its Unwinding: An Analysis and a Commentary

The unprecedented rises in house prices across much of the industrialized world during the period 1997–2006 have been closely linked to the massive global credit expansion of the past decade. They have also coincided with the highest rates of growth of the global economy on record. The downturn of house prices in the US that began in late 2006 has been the trigger for the US sub-prime crisis, itself the catalyst for the broad financial crisis that began in August 2007 which by September 2008 had become the worst US financial crisis since 1929. As a result, the structure of the highly influential US mortgage finance system has already changed fundamentally. These US problems will lead to a thorough review of mortgage securitization processes and of the wholesale funding of mortgage finance across the world. However, housing markets and housing finance systems differ significantly between countries and will channel the shocks originating from the US with varying intensity. Given the interdependence of the global economy, the quality of the US policy response and its impact on the depth and duration of the US recession will influence house price downturns in all other countries. This paper, written in the midst of the US crisis, looks to our understanding of fundamental economic and financial relationships: first, to describe the key features of the house price boom; second, to examine the likely impacts of the unwinding of that boom; and, finally, to bring out implications for affordability, the provision of housing credit and the most appropriate forms of tenure for higher risk households.

Imperfect information and the housing finance crisis: A descriptive overview

We now know that the subprime market presented consumers with sub-optimal choices that they took, and that it contained many market imperfections. The interesting question, then, is what were the sources of imperfections. In the spirit of providing an introduction for this special issue of the Journal of Housing Economics, this paper g discusses possible sources of market failure. Market imperfections in the Mortgage Finance System are classic: asymmetric information and agency problems. But we argue that the asymmetries and agency problems were not one-sided, but rather involved a multiple set of problems that need to be addressed.

Comments at the Wharton School Conference on 'Fixing the Housing Finance System'

What is the low-cost efficient way of providing housing finance? In introductory economics we learn that competitive firms with no government subsidies will through competition reach the low-cost efficient outcome. But those theorems rarely hold for financial intermediaries. We have learned that banks are special and that federal deposit insurance and a central bank are acceptable government interventions. But would I argue that they are not the only acceptable form of government intervention. Both theory and empirical evidence suggest that government sponsored enterprises (GSEs) are an important supplement to the banking system. The mortgage finance system is too important to be left to one set of institutions.

A Critical Analysis of Housing Finance Reform in a 'Super' Home-ownership State: The Case of Armenia

Communist countries in central and eastern Europe commonly lacked market-based mortgage finance systems. The establishment of such systems is generally regarded as being a crucial part of the transition process across the region, even though the emphasis placed on home-ownership varies greatly. A framework for analysing the adequacy of the housing reform process is applied to Armenia as an example of a 'super' home-ownership state. The housing, economic and political context suggests that, even if an efficient mortgage finance system were to be established, the housing needs of large sections of the population would remain unmet. This is because they would still be unable to afford to access finance or because of the nature of their housing need. Such is the prevalence of housing need and poverty that conventional subsidy programmes, no matter how well designed, are unlikely to fill the gap. Instead, there is a need to draw on examples from development literature, such as micro-finance, whereby relatively small loans aimed at improving the quality of often self-built housing without full legal title are made available. The system of micro-finance relies on connecting individuals with the formal financial system usually through an NGO and can be combined with the provision of core housing units for low- to moderate-income households. In the case of Armenia, if confidence in the banking system is not restored, it would still be necessary to create a formal financial sector, quite possibly on the principles of low-risk retail operations. A large challenge would remain to 'collectivise' micro-finance for use in multifamily apartments. While the need for sources of finance outside the formal system remains especially acute in Armenia, these solutions may be relevant to other transition economies, especially those with large home-owner sectors, self-built housing and widespread poverty