Can the U.S. Government Extricate Itself from the Mortgage Market?

As Floyd Norris reports, the prospect for a federal government withdrawal from the mortgage market is facing long odds.

“'For the foreseeable future, there is simply not enough capacity on the balance sheets of U.S. banks to allow a reliance on depository institutions as the sole source of liquidity for the mortgage market,' stated a report on the American housing market this week, issued by a group that was filled with members of the housing establishment."

“Given the size of the market and capital constraints on lenders, the secondary market for mortgage-backed securities must continue to play a critical role in providing mortgage liquidity,” added the report, issued by a housing commission formed by the Bipartisan Policy Center, a group that was begun by former Senate majority leaders from both parties. The group thinks investors will not be willing to finance enough mortgages — particularly 30-year fixed-rate loans — without a government guarantee."

"In the end," concludes Norris, "we can have a government-dominated mortgage system, with the risks inherent in that — risks that we saw in the need to bail out Fannie and Freddie. Or we can abandon the 30-year fixed-rate mortgage, leaving homeowners at risk when rates rise, as they are in much of the world. But it is hard to see how we can have it both ways."