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US Residential Mortgage Finance in a Post-GSE World
The insolvencies and conservatorships of Fannie Mae and Freddie Mac in September 2008 have clearly established the inappropriateness of the “government-sponsored enterprise” (GSE) model for residential mortgage finance in the U.S. Two-and-a-half years later, however, the “$5 trillion question”—how to replace their presence in the secondary mortgage market—remains an open question.
The insolvencies and conservatorships of Fannie Mae and Freddie Mac in September 2008 have clearly established the inappropriateness of the “government-sponsored enterprise” (GSE) model for residential mortgage finance in the U.S. Two-and-a-half years later, however, the “$5 trillion question”—how to replace their presence in the secondary mortgage market—remains an open question.
The paper lays out a vision for how private markets would—if given the opportunity—replace the GSEs and provide a fully functioning secondary market for residential mortgages. In the event that the private sector is deemed inadequate for the task, this paper also proposes a “side-by-side” private/government form of mortgage guarantee that would be superior to the “tail risk” or “catastrophe” government insurance proposals that have circulated as alternatives to the GSEs.