A New Housing Finance System for the United States

Implicit in most of the proposals for reforming the U.S. housing finance system is the idea that mortgage-backed securities (MBS) backed by U.S. mortgages cannot be sold unless they are issued by a government-sponsored enterprise (GSE), a U.S. government agency, or are otherwise guaranteed by the U.S. government. This paper argues that continuing U.S. government involvement in the housing finance system will inevitably involve serious losses for the taxpayers, and that a U.S. housing finance system would function well without GSEs or any other form of government financial support simply by ensuring that the mortgages allowed entry into the securitization system are of good quality.