BibTeX
@MISC{Scharfstein11harvardbusiness,
author = {David Scharfstein and Adi Sunderam},
title = {Harvard Business School and NBER},
year = {2011}
}
Share
 |
 |
 |
 |
||
OpenURL
Abstract
This paper analyzes the two leading types of proposals for reform of the housing finance system: (i) broad-based, explicit, priced government guarantees of mortgage-backed securities (MBS) and (ii) privatization. Both proposals have drawbacks. Properly-priced guarantees would have little effect on mortgage interest rates relative to unguaranteed mortgage credit during normal times, and would expose taxpayers to moral-hazard risk with little benefit. Privatization reduces, but does not eliminate, the government’s exposure to mortgage credit risk. It also leaves the economy and financial system exposed to destabilizing boom and bust cycles in mortgage credit. Based on this analysis, we argue that the main goal of housing finance reform should be financial stability, not the reduction of mortgage interest rates. To this end, we propose that the private market should be the main supplier of mortgage credit, but that it should be carefully regulated. This will require new approaches to regulating mortgage securitization. Moreover, we argue that while government guarantees of MBS have little value in normal times, they can be valuable in periods of significant stress to the financial system, such as in the recent financial crisis. Thus, we propose the creation of a government-owned corporation that would play the role of “guarantor-of-last-resort ” of newly-issued (not legacy) MBS during periods of crisis. We thank our former colleagues at the U.S. Treasury Department and National Economic Council for sharing with us their many insights on housing finance reform. The views expressed in this paper are our own and should in no way be construed as reflecting their views or those of the Treasury or NEC. We are grateful to Martin Baily, Sam Hanson, and Jeremy Stein for very valuable discussions as we worked on this paper. We thank Toomas Laarits for excellent research assistance and the Harvard Business School Division of Research for financial support. This paper is forthcoming in The Future of Housing Finance,
Keyphrases
mortgage credit harvard business school mortgage interest rate housing finance reform government guarantee financial system normal time little value significant stress financial support mortgage credit risk properly-priced guarantee bust cycle valuable discussion financial stability privatization reduces u.s. treasury department mortgage securitization housing finance system excellent research assistance toomas laarits recent financial crisis harvard business school division jeremy stein moral-hazard risk martin baily many insight housing finance sam hanson private market government-owned corporation main supplier mortgage-backed security new approach main goal little effect government exposure former colleague national economic council little benefit
