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Reason Foundation

Restoring Trust in Mortgage-Backed Securities

How the Private Sector Can Return to Mortgage Finance

Marc Joffe and Anthony Randazzo
May 3, 2012

The mortgage finance market has leaned heavily on government support over the past few years. More than 90 percent of mortgages originated in 2011 were securitized by government entities using taxpayer funds to guarantee investors against default risk. This support cannot continue forever. The status quo perpetuates many of the policies that contributed to the housing bubble and consequently promotes an unstable mortgage market. In order to avoid another crisis, the government must exit mortgage finance and private capital must shoulder mortgage default risk.

Policy proposals from both Republicans and Democrats, a white paper from the Treasury Department and the Department of Housing and Urban Development, and a host of research groups and academics have almost all focused on reform ideas that view the private sector as the foundation for the housing market. Despite this uniform focus, a number of roadblocks severely limit the pace and scope of mortgage finance risk to the private sector:

The proposed rating-agency changes in Dodd-Frank are not enough to overcome this distrust. What we propose instead to overcome private sector skepticism is a series of legislative policy reforms, industry led reforms, and regulatory reforms:

These proposals would encourage investor due diligence and facilitate the availability of third-party analysis. By increasing access to information and insight, they should encourage investors to buy private-label RMBS, enabling the government to scale back its involvement in residential mortgage finance without precipitating a collapse in home prices. Attracting private capital to residential mortgage finance is challenging. But perpetuating government control of housing finance in today’s era of high deficits is unaffordable.


Marc Joffe is Research Associate

Anthony Randazzo is Director of Economic Research

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