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- Title
HOW GOVERNMENT GUARANTEES PROMOTE HOUSING FINANCE STABILITY.
- Authors
MIN, DAVID
- Abstract
In the aftermath of the financial crisis, major reforms of the U.S. housing fi-nance system are likely. One of the key issues facing policy makers in this area is whether and to what extent the federal government should maintain its current role in the residential mortgage markets. Since the New Deal, the federal gov-ernment has guaranteed the primary sources of housing finance in the United States--bank and thrift deposits, and the obligations of the mortgage securitiza-tion conduits Fannie Mae, Freddie Mac, and Ginnie Mae The prevailing view of government guarantees is that they increase finan-cial instability because they encourage excessive risk-taking and reduce market discipline. But this perspective fails to explain why such guarantees have been closely correlated with stability in the housing finance system through our na-tion 's history. Incorporating historical and economic analyses, this Article challenges the conventional wisdom around government guarantees in U.S. housing finance, and argues that these guarantees actually help to promote stability in several important ways: they prevent banking panics, they limit the formation of credit bubbles, and they promote the origination of consumer-friendly loans that are less likely to default. The Article concludes with the counterintuitive proposition that the positive stabilizing effects of U.S. mortgage guarantees outweigh any destabilizing effects they may have, which is why guarantees have been so closely tied to financial stability.
- Subjects
UNITED States; HOUSING finance laws; FINANCIAL crises; FEDERAL government; SECONDARY mortgage market; BANKING laws; MORTGAGE guarantee insurance laws
- Publication
Harvard Journal on Legislation, 2013, Vol 50, Issue 2, p438
- ISSN
0017-808X
- Publication type
Article