Mortgage Securitization in the Era of COVID-19

While the rest of the economy struggles under the strain of the pandemic, the housing market remains strong. Reforms made in the Great Recession to the Government Sponsored Enterprises (GSEs)—Fannie Mae, Freddie Mac, and Ginnie Mae, which collectively account for nearly half of the $11 trillion market for home mortgages in the United States—have contributed to the housing market’s resilience. Nonetheless, defining the path forward for all three GSEs—and for Fannie Mae and Freddie Mac in particular, which have been under conservatorship for over a decade now—is widely considered the “last unfinished business of the financial crisis,” as the U.S. Treasury’s Housing Reform Plan put it in 2019.

A set of papers edited by Urban Institute Vice President Laurie Goodman and Penn IUR Co-Director Susan Wachter and recently published in Housing Policy Debate reflects on strategies to maintain and advance the reforms that have strengthened the GSEs. The peer-reviewed articles address both the current and future performance of the GSEs along several themes.

“GSEs: Their Viability as Public Utilities,” by Richard Cooperstein, Ken Fears, and Susan Wachter, offers a vision of the GSEs’ future as mortgage utilities. Already operating as de facto utilities, the paper posits that if the GSEs are privatized without prior agreement the maintenance of reforms will be in question. Alternatively, under a utility model, the authors demonstrate with a Monte Carlo-type analysis, the GSEs can remain profitable and can maintain rates low enough to promote broad access to the 30-year fixed-rate mortgage.

Two papers, “FHFA’s Capital Rule is a Step Backwards,” by Jim Parrott, Bob Ryan, and Mark M. Zandi, and “Analysis of the Proposed 2020 FHFA Rule on Enterprise Capital,” by Edward Golding, Laurie Goodman, and Jun Zhu, also address privatization and critique the proposed 2020 capital rule that has been put forth in contemplation of this. Parrott, Ryan, and Zandi say that the FHFA’s proposal misapplies the Basel-like bank capital regime in a way that would undermine the purpose of the GSEs, unnecessarily leading to higher mortgage rates and a less stable housing finance system. Goodman, Golding, and Zhu agree that such a regime is the wrong approach to GSE capital and offer a package of special adjustments that will better align capital with risk.

While the combination of Federal Reserve policy, the CARES Act, and enhanced loss mitigation efforts has helped stabilize mortgage markets during COVID-19, more can be done. One effective tool in the 2008 Financial Crisis could be implemented as a more effective policy intervention: streamlined refinancing. The refinance market in particular has benefited borrowers in this low rate environment. Two papers, “The Mortgage Market as a Stimulus Channel in the COVID-19 Crisis,” by Edward Golding, Laurie Goodman, Richard Green, and Susan Wachter, and “Evaluating the Benefits of a Streamlined Refinance Program,” by Kristopher Gerardi, Lara Loewenstein, and Paul Willen, present benefits of further streamlining the refinancing process, designed to improve the transmission of monetary policy through the mortgage market and better position borrowers to reduce the long-term risk of mortgage default.

The papers in this special volume help to move discussion forward on the fate of the GSEs, collectively taking a step closer to resolving the unfinished business of the financial crisis. As another step to continue this discussion, these papers and their discussant comments will be the subject of an upcoming event hosted by Penn IUR. The papers are available online at Housing Policy Debate and on the Penn IUR website.