Federal Credit and Insurance Programs: Housing

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Federal Credit and Insurance Programs Housing

• By John M. Quigley
• University of California
• Berkeley

Federal Reserve Bank of St. Louis October
20-21-2005
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Federal Housing Policy

• Direct Renter Assistance
• Supply
• Public Housing
• Tax Credit Payments
• Demand
• Shelter Allowances
• Indirect Homeowner Assistance
• Tax Expenditures
• Credit, Guarantees, Insurance

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Homeowner Assistance

• Guarantees and Insurance
• Federal Housing Administration
• Department of Housing and Urban Development
• Veterans Administration
• Department of Veterans Affairs
• Farm Service Administration
• Department of Agriculture
• Credit
• Ginnie Mae
• Department of Housing and Urban Development
• Fannie Mae
• Private Firm, Federally Chartered
• Freddie Mac
• Private Firm, Federally Chartered

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Guarantees and Insurance

• 1920s Small Mortgage Market
• Short Term, Non Amortizing Mortgages, Contract
  Purchase
• 1929 No Mortgage Market
• Credit Contraction, Foreclosure
• 1934 FHA
• Mortgage Insurance against Default

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FHA builds the mortgage market

• Guarantees and Insurance
• Low Interest Rates
• 20 Year Term
• Self Amortizing
• Standardization
• Appraisals
• Credit History
• Financial Capacity
• Key Insurance Device
• Mutual Mortgage Insurance Fund
• actuarially sound
• Small Transfers
• Widely Available

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VA Home Loans

• 1944 GI Bill
• Temporary readjustment is transformed to a
  permanent program
• Low interest rates, no down payments
• Key Guarantee Device
• Federally subsidized guarantee for 60 percent of
  the face value of a veterans mortgage

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ECONOMIC RATIONALE

1. Racial Discrimination and Minority Access
2. Continuing Demonstration
3. Increased Homeownership and Housing Consumption

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Effects on Homeownership

• HUD Studies of Mortgages
• Bunce, 1995
• Simulations using Standard Data Sets
• SIPP
• AHS
• NLSY
• PSID
• Econometric evidence from IPUMS
• Monroe, 2001
• Increase in homeownership
• White households 0.6
• Black households 1.4

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Mortgage Credit

• 1932 short term loans to thrifts through FHLBs
• 1938 Federal purchase of FHA and VA mortgages
  through FNMA
• 1968 FNMA reconstituted as GSE
• 1970 FHLMC formed as GSE

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GSE and Fundamental Change in Secondary Market

• 1960s James Stewart Model
• 1970s Decentralization and Specialization
• Origination
• Investment
• Servicing
• 1980s Technology

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Lines of Business of GSEs

1. Issuance of MBS guaranteed by the agency
2. Investment in whole mortgages and MBS by the
   agency

Subsidies Provided to GSEs

• Exemption from S and L Taxes
• Treasury has authority to purchase GSE
• securities
• GSEs securites are Government Securities
• Federal Reserve is Fiscal Agent
• No insolvency procedures in place

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Subsidy Provided by implicit Guarantee?

• Yield Spread between GSE and Comparable firms
• benchmark?
• comparison
• with indexes?
• at issue?

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ECONOMIC EFFECTS

• Housing Market
• Lower Mortgage Rates
• HUD Goals
• Broader Issues
• Stability of Mortgage and Construction Markets
• Investment in Other Forms of Capital?

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Effects of Imposition of Goals

• Ambrose and Thibodeau, 2004
• Ambrose and Pennington-Cross, 2000
• Gyourko and Hu, 2002
• Bostic and Gabriel, 2005

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Broader Issues

• Aaron, 1972!
• Peek and Wilcox, 2003, 2004
• Lehnert, et al, 2005
• Perli and Sack, 2003

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Why do Any of This?

• Create Missing Markets
• Mortgages
• Tradeable Liquid Mortgage Securities
• Done
• Encourage Homeownership
• Externalities
• Boehm and Scholottman, 2002
• DiPasquale and Glaeser, 1999
• Haurin, et al, 2002

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Encourage Homeownership?

• FHA may increase homeownership by a point or so
• GSEs may reduce mortgage interest rates by 0.20
  or 0.25
• percent
• FHA insurance for
• 173,000 anywhere
• 312,000 where housing prices are high
• 469,000 in Maui
• GSE purchase of Mortgage for
• 360,000 anywhere
• 540,000 in Maui
• 270,000 for second home in Maui

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and the cost?

• Annual Cost is 19,600,000,000
• (CBO, 2004)
• Total Subsidy is 106,000,000,000
• (Passmore, 2005)
• Contingent Liability is 288,000,000,000
• (Frame White, 2005)
• Annual Insurance 7,900,000,000
• Value is
• (Lucas McDonald, 2005)

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What to do?

• Target Marginal Homebuyers
• Freeze Limits on Size
• Limit to First Time Buyers
• Increase Target Goals
• Eliminate Portfolio Holdings
• Slowly
• Saves Monitoring
• Increases Diversification
• Charge for Free Disaster Insurance