While the cost of an accelerated exit may be to

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sales to private market participants. While the cost of an accelerated exit may be to affect prices adversely, the benefit is to minimize the risk to the tax payer that stems from declines in the value of the mortgage portfolio when interest rates increase from their historically low levels.
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108 The only goal of the GSE RTC would be to wind down the portfolio in a fashion that minimizes the present value of losses to tax payers. The above analysis also suggests a way for the Federal Reserve to act in a likewise manner. As we explained in Chapter 6, the Federal Reserve now owns $1.25 trillion in GSE MBS and $175 billion of Agency debt. As with the retained mortgage portfolio, an accelerated sale of these holdings would prevent future losses due to rising mortgage rates but doing it in an unfavorable environment would further depress MBS prices. To avoid depressing MBS prices too much, a measured pace of divestment seems to be the best course of action. An additional argument for a faster rather than a slower divestment is that monetary policy should not be influenced by the Fed’s holdings of MBS. It is easy to imagine a scenario where interest rates are kept too low for too long in order to avoid losses on the MBS portfolio held by the GSEs or by the Fed itself. Such considerations fly in the face of sound monetary policy, which should focus on overall price stability in the economy. This last consideration makes the Federal Reserve a less-than-ideal candidate to be the lender of last resort in U.S. housing markets. In Chapter 6 we proposed a new mortgage liquidity facility at the Treasury Department instead. We also proposed that the Fed would pass on its purchases to such a facility shortly after purchase instead of warehousing mortgage assets. Since the facility would be pre-funded with an asset limit, once that limit is reached, the bailout would end. 8.2 The Guarantee Function of the GSEs The second main function of the GSEs, and arguably the most important one, is to guarantee the credit risk in the mortgage loans that are bundled and sold off as mortgage- backed securities to the public. While the GSEs do not own these mortgage loans, they are responsible for all losses that are due to mortgage borrowers’ defaults. Our second main recommendation is that the current guarantee function of the GSEs should be revisited, with the goal of better balancing systemic risk, efficient pricing, and market discipline. The government has not announced any formal plans for the future of the guarantee function of the GSEs. Before any discussion of various proposals, we need to address whether mortgage guarantees -- private or public – are really needed for secondary mortgage markets to function. There are other credit markets, most notably the corporate bond market, which function without such guarantees. What is special about mortgages? There are several features somewhat unique to mortgages. First, while mortgages certainly contain a number of standardized characteristics (such as loan-to-value, income-to-payment, FICO credit score, et cetera), mortgages and
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