Why the US Mortgage Market Will Remain Heavily Dependent on Government Support
from Naked Capitalism:
Why the US Mortgage Market Will Remain Heavily Dependent on Government Support
In Senate Banking Committee testimony today, Georgetown law professor Adam Levitin explains why the private label (non-government guaranteed) mortgage market is a textbook case of what Nobel prize winning economist George Akerloff called a market for lemons. While that conclusion is not news to those whove been following the financial crisis and its aftermath, Levitin reaches a second conclusion that many policymakers have been keen to finesse: that the US mortgage market, even if private mortgage securitizations were reformed (which they have not been), is bound to remain heavily dependent on Federal guarantees. Even under generous assumptions, Levitin concludes:
The implication is that the pet dream of Republicans, to kill the GSEs, isnt realistic unless they want to kill the housing market as it goes through a brutal transition period to more on-balance sheet bank lending. The reason is not simply securitization allowed for mortgages to be issued much more cheaply due to eliminating the cost bank equity and FDIC insurance. A bigger reason is that the 30 year fixed interest rate mortgage with an unrestricted borrower right of prepayment would never exist absent government support.
So it should be no surprise that the various mortgage insurance reform programs are simply to have supposedly better GSEs replace Fannie and Freddie but still wield a government guarantee (remember that the perverse structure of having private sector entities run a government guarantee program is to avoid consolidating the debt related to this mortgage insurance activity). ............(more)
The complete piece is at: http://www.nakedcapitalism.com/2013/10/why-the-us-mortgage-market-will-remain-heavily-dependent-on-government-support.html#ZKWfKkeVXJwdV6qg.99