While our focus has been on single family mortgages

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While our focus has been on single-family mortgages, the GSEs have also played an important role in financing multi-family mortgages in the U.S. These multi-family mortgages are important for the creation of rental housing. Currently, the GSEs hold 35 percent of total outstanding multifamily mortgage debt and are providing nearly 90 percent of all mortgage capital to the market. The majority of these mortgages are held in portfolio, either because it is profitable to do so (similar to the single-family mortgage argument that we made before), or because they are harder to securitize than are single-family housing. We propose that support for the multi-family market segment be transferred to the FHA, and be confined to low-income housing. The standardization efforts of the GSEs should be preserved so that the private sector can become a larger multi-family player.
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134 One fear of reducing the blanket housing subsidies that are offered through the GSEs is that households will face steeply higher mortgage interest rates, which in turn will trigger a decline in housing markets. New research by Favilukis, Ludvigson, and Van Nieuwerburgh (2010) and Glaeser, Gottlieb, and Gyourko (2010) shows that the link between interest rates and house prices may be weaker than is conventionally assumed. 77 This implies that the impact of policies that reduce housing subsidies may not be as dramatic as feared. 9.3 What about the Federal Home Loan Bank System? Although we have mentioned the Federal Home Loan Bank System as another sizable GSE a number of times in this book, Fannie Mae and Freddie Mac have been our major focus of attention. Nevertheless, the FHLB System deserves attention as well. Perhaps the most important reason for this is that fixing Fannie and Freddie will not suffice if some other GSE takes on their functions (even though that is not on the table just as yet). This is a serious risk, for instance, with respect to the FHLB System. This is another GSE – in fact an early GSE formed in the 1930s – that was originally supposed to support housing via the S&Ls. After 1989 the System expanded support to almost all depository institutions, with its mission expanded to helping “community development”. And, in the crisis of 2007-09, the System became a significant lender-of-last-resort to depository institutions that were experiencing problems with their mortgage portfolios (including institutions that eventually failed, such as Washington Mutual and Countrywide). The FHLB System thus far has not generated the financial trauma that has been caused by Fannie and Freddie. Although some of the individual banks in the twelve-bank FHLB System have had financial difficulties, none has approached insolvency; and the joint-and-several liability structure of the System’s debt obligations reduces the likelihood that a federal government rescue will be needed.
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