Federal Credit and Insurance Programs: Housing By John M. Quigley University of California Berkeley Federal Reserve Bank of St. Louis October

Federal Housing Policy Direct: Renter Assistance  Supply Public Housing Tax Credit Payments  Demand Shelter Allowances Indirect: Homeowner Assistance  Tax Expenditures  Credit, Guarantees, Insurance

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

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

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

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 veteran’s mortgage

ECONOMIC RATIONALE 1. Racial Discrimination and Minority Access 2. “Continuing Demonstration” 3. Increased Homeownership and Housing Consumption

Effects on Homeownership 1. HUD Studies of Mortgages Bunce, Simulations using Standard Data Sets SIPP AHS NLSY PSID 3. Econometric evidence from IPUMS Monroe, 2001 Increase in homeownership White households 0.6% Black households 1.4%

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

GSE and Fundamental Change in Secondary Market 1960s: James Stewart Model 1970s: Decentralization and Specialization  Origination  Investment  Servicing 1980s: Technology

Lines of Business of GSEs 1. Exemption from S and L Taxes 2. Treasury has authority to purchase GSE securities 3. GSE’s securites are “Government Securities” 4. Federal Reserve is Fiscal Agent 5. No insolvency procedures in place 1. Issuance of MBS guaranteed by the agency 2. Investment in whole mortgages and MBS by the agency Subsidies Provided to GSEs

Subsidy Provided by implicit Guarantee? Yield Spread between GSE and Comparable firms benchmark? comparison with indexes? at issue?

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

Effects of Imposition of Goals Ambrose and Thibodeau, 2004 Ambrose and Pennington-Cross, 2000 Gyourko and Hu, 2002 Bostic and Gabriel, 2005

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

Why do Any of This? 1. Create Missing Markets Mortgages Tradeable Liquid Mortgage Securities Done 2. Encourage Homeownership Externalities Boehm and Scholottman, 2002 DiPasquale and Glaeser, 1999 Haurin, et al, 2002

Encourage Homeownership? 1. FHA may increase homeownership by a point or so 2. GSEs may reduce mortgage interest rates by 0.20 or 0.25 percent 3. FHA insurance for $173,000anywhere $312,000where housing prices are high $469,000in Maui 4. GSE purchase of Mortgage for $360,000anywhere $540,000in Maui $270,000for second home in Maui

and the cost? 5. 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)

What to do? 1. Target Marginal Homebuyers Freeze Limits on Size Limit to First Time Buyers Increase Target Goals 2. Eliminate Portfolio Holdings Slowly Saves Monitoring Increases Diversification 3. Charge for Free Disaster Insurance