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Reason Foundation

New Paper: No Government Guarantees for Mortgages

Anthony Randazzo
February 4, 2011, 9:00am

This morning Reason published a new policy brief outlining ten reasons that an explicit (or implicit) government guarantee for the housing sector would be a bad idea. The report is timely in the Fannie Mae & Freddie Mac reform debate as the Washington Post ran a story this month suggesting that even the Treasury Department is looking at reducing the role of government in the housing industry. My new paper argues that "whether by the sale of insurance on mortgage-backed securities or a public utility model replacing Fannie Mae and Freddie Mac with new government-sponsored enterprises, this would be a tragic mistake, repeating the errors of history, and putting taxpayers and the housing industry itself at risk." 

Here are the 10 Arguments in short:

  1. Government guarantees always underprice risk.
  2. Guarantees eventually create instability.
  3. Guarantees inflate housing prices by distorting the allocation of capital investments.
  4. Guarantees degrade underwriting standards over time.
  5. Guarantees are not necessary to ensure capitalization of the housing market.
  6. Guarantees are not necessary for homeownership growth.
  7. Guarantees drive mortgage investment in unsafe markets.
  8. Guarantees are not necessary to preserve the “To Be Announced” market for selling mortgage-backed securities.
  9. Guarantees are not needed to prevent “vicious circles” that drive down prices.
  10. Even a limited guarantee on just mortgage-backed securities targeted at protecting against the tail risk will slowly distort credit allocation and investment standards, ultimately destabilizing the market and forcing the need to rely on the guarantee.

There is a one page summary version of these arguments, available here

If you would like to step into some of the data and reasoning behind these arguments, there is a 4-page policy summary and a full 16-page policy brief with more data, charts, and historical information.


Anthony Randazzo is Director of Economic Research


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