Private mortgage finance system is the answer

As the US Congress prepares to debate how to replace Fannie Mae and Freddie Mac, those in politics and real estate who support a government-backed housing finance system are predicting calamity. Institutional investors, they say, will not buy U.S. mortgages or mortgage-backed securities unless they are guaranteed by the government. The numbers tell a different story, says Peter J. Wallison, a senior fellow at the American Enterprise Institute.

  • According to the Federal Reserve's flow of funds data, nonbank institutional investors had assets of $28 trillion in the fourth quarter of 2010.

  • About $13 trillion of this amount was invested in fixed-income or debt securities – but only $1.8 trillion was invested in U.S. government-backed securities issued by government agencies or the government-sponsored enterprises Fannie and Freddie.

  • Thus, less than one-seventh of the funds invested in debt securities by institutional investors were invested in government-backed mortgage securities.

  • By contrast, at the end of 2010, nonbank institutional investors had assets consisting of $2.6 trillion in both residential and commercial whole mortgages.

  • Whole mortgages are not guaranteed by Fannie and Freddie or the Federal Housing Administration.

  • This means that even after the financial crisis, institutional investors held a larger dollar amount of mortgages that are not backed by the government than the mortgages that are perceived as government-guaranteed.

    What all this shows is that institutional investors are not particularly interested in government-guaranteed assets. Thus, if we want U.S. and foreign institutional investors to invest in our mortgage market, we should be looking to a private system of mortgage finance, and not one run or backed by the government, says Wallison.

    Source: Peter J. Wallison, Government Mortgage Guarantees Are Unnecessary, The Wall Street Journal, April 21, 2011.

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    First published by the National Center for Policy Analysis, United States

    FMF Policy Bulletin/ 26 April 2011

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