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Finally the desirability of the public mission of

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Finally, the desirability of the public mission of funding home ownership is debatable. The United States has more programs subsidizing home ownership than any other developed country, yet (and, arguably, therefore) its housing bust was worse than almost anywhere else. These programs have ultimately failed to deliver higher homeownership or housing affordability, relative to other countries where government interference in housing markets is
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9 smaller. Fundamentally, these subsidies distort the relative price of housing and lead to over- investment and over-consumption of housing, ultimately subtracting from economic growth. Regardless of which position one takes in the debate about encouraging home ownership, it seems clear that the GSEs’ way of subsidizing home ownership through un-funded government guarantees is not an effective approach. Academic research has cast serious doubts on the ability of the GSE guarantees to help low-income households, arguing that in fact they have mostly lowered mortgage payments for the rich. To the extent that housing subsidy programs must exist, we believe that they are better housed -- and in much smaller size – in the Federal Housing Administration (FHA) and/or some other agency within the Department of Housing and Urban Development (HUD). This would make their costs explicitly an on-balance sheet fiscal item, providing transparency to the taxpayer. Any future architecture of housing finance in America should contemplate that more housing credit and construction are not the answer to the current-day economic challenges. Of course, fixing and unwinding Fannie and Freddie will not be enough if they are simply replaced by other government-sponsored enterprises. The spirit of our reform proposals concerns all government-sponsored enterprises: We even suggest limits on un-funded Federal Reserve interventions in markets, and provide a broadly applicable blueprint of how to organize publicly financed utilities, keep their excesses in check, and always have reasonable exit strategies. Likewise, fixing and unwinding Fannie and Freddie will not be enough if they are simply replaced by other systemically risky private-sector institutions that are ultimately too-big-to-fail or too-interconnected-to-fail. Any redesign of the mortgage market must enforce competition in mortgage originations and securitization and proper capital requirements for all firms involved. If mortgage guarantees that are provided by private firms largely remain off-balance sheet or unfunded, then these firms would be the Fannie and the Freddie of the future but in a new guise, and we can be sure that their risks in the end would be borne by the taxpayer. One argument against doing anything radical to change the GSEs – or at least, against doing anything soon – is the perception that the private sector has abandoned the mortgage market. As of the first-half of 2010, the Fannie and Freddie plus the FHA were buying or guaranteeing over 90% of all residential mortgages that were originated. However, what we may be observing is the mortgage version of “Catch 22”: When the mortgage securitization market
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