Press Release

New York Fed Releases Report Providing an In-Depth Look at the Role of Government in U.S. Mortgage Markets

December 07, 2018

NEW YORK – The Federal Reserve Bank of New York today released a special issue of its Economic Policy Review that focuses on the government’s role in the U.S. mortgage markets. The nine research papers in the issue were developed from presentations given at "The Workshop on the Appropriate Government Role in U.S. Mortgage Markets," held at the Bank in April 2017. The workshop was organized in association with the Board of Governors, the Federal Reserve Bank of Atlanta, the Anderson School of Management at the University of California–Los Angeles, and the Wharton School of the University of Pennsylvania. Opinions expressed in the articles are those of the authors and do not necessarily reflect the views of any of the organizing institutions.

The volume is divided into four broad topics:

  • the use of explicit government guarantees;
  • the structure of secondary market institutions;
  • the sourcing of private capital through credit risk transfer; and
  • affordable housing and program evaluation.

Specifically, the papers in this volume:

  • assess implicit and explicit government guarantees for government-sponsored enterprises (GSEs) and recommend steps to limit systemic risk in housing markets, such as the adoption of certain types of mortgages that allow homeowners to better weather economic downturns;
  • examine the connection between government mortgage programs, such as the Federal Housing Administration/Veterans Affairs and GSE mortgage lending, and economic outcomes during and after the financial crisis;
  • introduce a method for estimating and valuing the government’s exposure to credit risk through its loan and guarantee programs, and argue that the overall capital reserve that the government must hold to insulate taxpayers from losses can be reduced;
  • describe the key features of the Danish mortgage finance system and compare and contrast them with those of the U.S. system, including features that mitigate refinancing frictions during periods of falling home prices and instability;
  • summarize and evaluate the credit risk transfer (CRT) programs, showing how they have reduced the GSEs’ exposure to mortgage credit risk without disrupting the liquidity or stability of mortgage secondary markets;
  • draw lessons from the failure of mortgage-backed security pricing to reveal the growing credit risk leading to the global financial crisis of 2007-09, and apply these lessons to the use of credit risk transfers to price credit risk in the future;
  • recommend areas where economic research is needed to guide federal policymakers addressing the challenge of improving housing affordability by helping them to evaluate risk and understand trade-offs between different policy objectives, and;
  • propose metrics for evaluating the degree to which the Federal Housing Administration fosters sustainable homeownership using data from the New York Fed’s Consumer Credit Panel.

The nine papers in the volume are:

"Introduction to the Issue," by W. Scott Frame and Joseph Tracy

Explicit Government Guarantees

  • "GSE Guarantees, Financial Stability, and Home EquityAccumulation," by Wayne Passmore and Alexander H. von Hafften
  • "The FHA and the GSEs as Countercyclical Tools in the Mortgage Market," by Wayne Passmore and Shane M. Sherlund
  • "Pricing Government Credit: A New Method for Determining Government Credit Risk Exposure," by Brent W. Ambrose and Zhongyi Yuan

Structure of Secondary Market Institutions

  • "Peas in a Pod? Comparing the U.S. and Danish Mortgage Finance Systems," by Jesper Berg, Morten Baekmand Nielsen, and James Vickery

Sourcing of Private Capital through Credit Risk Transfer

  • "Credit Risk Transfer and De Facto GSE Reform," by David Finkelstein, Andreas Strzodka, and James Vickery
  • "Credit Risk Transfer, Informed Markets, and Securitization," by Susan Wachter

Affordable Housing and Program Evaluation

  • "Housing Affordability: Recommendations for New Research to Guide Policy," by Jane Dokko
  • "Long-Term Outcomes of FHA First-Time Homebuyers," by Donghoon Lee and Joseph Tracy
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