Reforming the U.S. Mortgage Market Through Private Market Incentives

“Past, Present, and Future of the Government Sponsored Enterprises,” Federal Reserve Bank of St. Louis

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Date Published 2010
Version Conference Draft: November 15, 2010
Primary Author Dwight M. Jaffee
Other Authors
Country United States


The first part of the paper evaluates the achievements of the government sponsored enterprises (GSEs, Fannie Mae and Freddie Mac) in mitigating mortgage market failures in comparison with the taxpayer costs they have created. Assembled data show the GSEs playing a major role in expanding the subprime crisis, thus confirming other evidence that GSE costs far exceed their realized and possible future benefits. The second part of the paper evaluates a mortgage market reform proposal to abolish the GSEs and substitute privative market incentives for mortgage originators, securitizers, and investors, while retaining the FHA and HUD programs in support of lower-income and first-time homebuyers. Evidence that stable housing and mortgage activity can be sustained with minimal governmental intervention is provided from assembled data showing the success of European housing and mortgage markets.

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