Redesigning Housing Finance: Balancing Liquidity and Protection for Taxpayers

Strategic Insights -

A conference on the future of housing finance brought together experts to discuss the redesign of housing finance reform and its impact on broader financial markets. Treasury Secretary Timothy Geithner moderated the panel, which included Susan Wachter, Richard B. Worley, Ingrid Gould Ellen, Mark Morial, Barbara Desoer, and Bill Gross. The discussion centered on the role of government in the housing market and the need for a guarantee that balances liquidity and protects taxpayers.

Key Takeaways:

  • The current market excludes almost every new homeowner in America, making a government guarantee necessary to replace the private market balance sheet.
  • Ingrid Gould Ellen proposed a limited guarantee that covers catastrophic losses, allowing the private sector to take the first losses and the guarantee to kick in only after the reserve fund is exhausted.
  • The guarantee is critical for providing liquidity to the market, but it must be designed to balance liquidity and protection for taxpayers.
  • The private sector should be required to take the first hit, with the government role reserved for catastrophic events.
  • The redesign of the guarantee must focus on creating incentives for the private sector to take risks and for housing finance to be accessible in both boom and downturn periods.
  • Equity, mortgage-backed securities, and other forms of capital can be used to structure the guarantee and protect taxpayers.

Statistics:

  • The private sector should be required to take the first losses before the guarantee kicks in.
  • The reserve fund should be exhausted before the guarantee covers catastrophic losses.
  • The redesign of the guarantee must balance liquidity and protection for taxpayers.
  • The private sector should be incentivized to take risks and provide housing finance in both boom and downturn periods.

Sources:

  • Federal News Service, Inc.
  • University of Pennsylvania's Wharton School
  • American Enterprise Institute
  • Wagner Graduate School, New York University
  • National Urban League
  • Bank of America Home Loans
  • PIMCO