Home owners be allowed to tap into their home equity

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home owners be allowed to tap into their home equity only as long as the combined LTV ratio (first and second mortgage, and home equity loan/line of credit) does not exceed 80%. In such a scenario, the borrower always bears the first 20% of the risk of house price declines. Finally, we recommend that full documentation (for example, income verification) be the norm for lending. 8.2.1. Nationalization One option is to fully nationalize the guarantee business for conforming loans. Because the government owns 79.5% of the GSEs through conservatorship and because virtually all mortgages originated in 2009 and 2010 were conforming mortgages, this option is a formalization of the current situation. Under this plan, the GSEs would effectively become a government-run utility company , strictly regulated, and with a fixed dollar budget. Because their budget would be on the government’s books, this would end the current regime of the GSEs as off-balance sheet special purpose vehicles of the U.S. government. CEO pay would be comparable to that of other high-ranking government servants, such as the chairman of the Federal Reserve or the Secretary of the Treasury, or perhaps the head of Ginnie Mae. The rationale for such nationalization is that in the next large mortgage crisis, the government would inevitably bail out any private securitization firm -- say, the re-privatized Freddie Mac or Fannie Mae. The advantage of the nationalization approach is that the tax payer would not only bear the costs of the next housing market downturn and foreclosure wave, but also earn the profits (the guarantee fees) in good times. In contrast to the pre-2008 situation, the government would at least earn the insurance premium for the insurance that it provides for the next earthquake in the U.S. housing market. The other advantage of this approach is that there would be no disruption in the provision of mortgage credit -- not during the initial transition nor in the next housing downturn. However, there are several downsides of this approach. First, and foremost, no market information is available to ensure that the government receives the correct guarantee fee and that the guarantee function remains economically viable. The current guarantee fee of about 0.22% is clearly too low and needs to be recalibrated in case this option is employed. The history of governments’ charging fees on this scale is not good. Consider deposit insurance, the other major government guarantee program. Leading up to the S&L crisis in the 1980s and the financial crisis of 2007-2009, there is general agreement that deposit institutions were subsidized by below market FDIC deposit insurance, creating moral hazard. In fact, because the FDIC’s reserve fund was viewed as well-capitalized, many FDIC-insured institutions were not
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112 charged at all from 1995-2005. Moreover, due to the bait-and-switch issue described above, moral hazard likely remains even if the fee pricing problem were solved.
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